Question

Suppose the trade conflict between the United States and China intensifies.

a)What are the tools that the Fed can use to adjust the interest rate? list both conventional and unconventional tools.

b)Using the ADAS and ISLM diagrams, illustrate short-run effects of the Fed's policy action on the U.S. economy and describe how and why the new equilibrium is different from the old one. Label all curves, axes, and equilibria. Write formulas for each of the curves. Note: you don't have to draw a LRAS curve.

c)Next, U.S. Congress is concerned by a record high public debt level and decides to cut funding of military and national parks. Illustrate effect of these actions on the same ADAS and ISLM diagrams that you draw for part (b) and label the new equilibrium. Describe how and why the new equilibrium is different from the previous equilibrium.

d)If U.S. households spend 90% of every extra dollar of income they earn, how much would the national income change if the Congress cuts spending in Part (c) by $100 billion per year? show your calculations.