Suppose the economy begins with output equal to its natural level. Then, there is a reduction in income taxes.

c) What happens to output, the interest rate, and the price level in the short and in the medium run? What happens to government spending, consumption and investment in the short and in the medium run?

d) Is there any crowding out effect associated to the tax reduction?

e)In terms of short-term effects. i.e increase Y in the short term, what would you recommend a fiscal expansion based on increasing government expending or one based on decreasing taxes?