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(20 pts) The Early 1980’s: The early 1980s were an exciting time for the economy. President Reagan was Enter question
attempting a tax cut revolution while the Federal Reserve, under Chairman Paul Volcker, was attempting to
control in ation. Note: in both parts (a) and (b) explain the effects in all markets (Keynesian Cross, Money
Market, and the IS-LM diagram itself).
(10 pts) President Reagan’s tax policies were a crucial part of his economic plan. The most important policy
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tool was a massive tax cut (30 percent in three years). Use an IS-LM diagram to show how tax cuts would
affect the economy. Assume that monetary policy does not change in this question. 16 questions remaining

(10 pts) Now say that President Reagan’s scal policies were expansionary (as in part a) while Volcker’s
monetary policy was contractionary (lower money supply). How would these two contemporaneous
policies be represented in a single IS-LM diagram? Can you say anything de nitive about how output and
interest rates would change? Snap a photo from you
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