Apply the IS/LM graphical framework to explain the following question (show using the IS/LM graphs). In the early1980’s, to combat the recessionary forces, President Ronald Reagan used expansionary fiscal policy by lowering (marginal) tax rates to combat the recession. Concurrently, Paul Volcker, Chairman of the Federal Reserve Board of Governors, reduced the rate of growth of the money supply (reduction in the money supply) to combat inflation. Explain the total effect of these policies on real gross domestic product, interest rates, employment and inflation.

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To analyze the effects of these policies using the ISLM framework lets start with the initial equilibrium in the economy 1 Initial Equilibrium In the ... View the full answer