President Obama recently agreed in December with Republicans in Congress to extend existing tax cuts that were scheduled to expire December 31 and to create new tax cuts as well. Meanwhile, recent reports suggest that the economy may expand more than expected a couple of weeks ago and grow significantly in 2011, reducing unemployment.

(1)What does the tax agreement suggest about the possibility of crowding out in 2011 and beyond? Explain.

(2)Ben Bernanke is obviously an interested observer of all this. What should he and the Fed do in response to the tax cuts and the recent economic news? Explain. It may not be helpful in this regard to consider Mr. Bernanke's public statements.