2. Determine the likely effects of the following hypothetical news items on outp

Question

2. Determine the likely effects of the following hypothetical news items on output, interest rates, output, stock prices, and bond prices (for each: up/down/unchanged/ambiguous). Explain briefly.
a. Congress and the President agree on a major tax cut. The Fed keeps real interest rates stable.
b. Housing starts are unexpectedly low, indicating a decrease in housing investment. The Fed is worried about a recession and will do whatever it can to prevent a reduction in output.
c. New data show that the government has overestimated recent productivity gains. The data show that the economy is operating above potential output and that the Fed will have to do something to prevent a rise in inflation.
d. A survey of telecom equipment producers indicates that capital investment is likely to grow by 10%. Prior to the survey, analysts had expected that capital investment would grow by 20%. Assume the Fed

Explanation / Answer

a. Congress and the President agree on a major tax cut. The Fed keeps real interest rates stable output : increases interest rates : decrease stock prices : increases bond prices : increases b) output : decreases interest rates : no chnage stock prices : no change bond prices : no change c) output:increases interest rates :no change stock prices : ambiguous bond prices : ambiguous d) output:increases interest rates: decreases stock prices : ambiguous bond prices : ambiguous

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