As a result of the fall of the “iron curtain” in 1989, many Americans felt less threatened by Russia and called for massive reductions in the defense budget as a “peace dividend”.

Suppose that the defense budget had been cut by one-third, or about $100 billion. If no other policy changes are enacted, use an adequate model to analyze what would happen to output and the interest rate. Illustrate the changes that would occur by graphing the adequate curves and indicating their shifts and their economic meaning.