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Question 1. This question will compare the policies of the federal government and the Federal Reserve and their likely effects on interest rates, exchange rates,

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Question 1. This question will compare the policies of the federal government and the Federal Reserve and their likely effects on interest rates, exchange rates, output, and the trade balance during the mid to late 1970s. a. President Lyndon Johnson and Congress passed large increases in government spending to nance Great Society programs and the Vietnam War. Explain briey how such spending affects the trade balance. (1 point) b. Beginning in the mid-1970s, Federal Reserve chairman Arthur Burns sought to lower unemployment below its rll employment level by decreasing interest rates. Does this require a monetary expansion or a contraction? (1 point) c. Illustrate the effects of the scal and monetary policies mentioned previously using the ISLMFX market diagram. [Note the change in interest rates observed in [b}.] [1.5 point} d. State the effects of these policies on the following variables: output, interest rate, nominal exchange rate, consumption, investment, and the trade balance. (0.5 point)

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