In the early eighties, under the Reagan administration, macroeconomic policies in the United States were characterized by relatively expansionary fiscal policy (fueled by increased defense spending and tax cuts) and very tight monetary policy. Compared to an alternative policy mix which produced the same level of Y using more expansionary monetary policy and more contractionary fiscal policy. Contrast the two different policy mixes graphically and in words. Explain what affects you would expect such policy mixes to have on each of the following:

a.Interest rates in the United States.

b.The real exchange rate of the U.S. dollar.

c.The current account of the U.S. balance of payments.