The Clinton-Greenspan policy mix

As described in this chapter, during the Clinton admin- istration the policy mix changed toward more contractionary fiscal policy and more expansionary monetary policy. This question explores the implications of this change in the policy mix, both in theory and fact.

a. Suppose G falls, T rises, and M increases and that this combination of policies has no effect on output. Show the effects of these policies in an IS-LM diagram. What hap- pens to the interest rate? What happens to investment?

b. Go to the Web site of the Economic Report of the President (www.gpoaccess.gov/eop/). Look at Table B-79 in the sta- tistical appendix. What happened to federal receipts (tax revenues), federal outlays, and the budget deficit as a per- centage of GDP over the period 1992 to 2000? (Note that federal outlays include transfer payments, which would be excluded from the variable G, as we define it in our IS-LM model. Ignore the difference.)

c. The Federal Reserve Board of Governors posts the recent his- tory of the federal funds rate at http://www.federalreserve. gov/releases/h15/data.htm. You will have to choose to look at the rate on a daily, weekly, monthly, or annual in- terval. Look at the years between 1992 and 2000. When did monetary policy become more expansionary?

d. Go to Table B-2 of the Economic Report of the President and collect data on real GDP and real gross domestic in- vestment for the period 1992 to 2000. Calculate investment as a percentage of GDP for each year. What happened to investment over the period?

e. Finally, go to Table B-31 and retrieve data on real GDP per capita (in chained 2005 dollars) for the period. Calculate the growth rate for each year. What was the average annual growth rate over the period 1992 to 2000? In Chapter 10 you will learn that the average annual growth rate of U.S. real GDP per capita was 2.6% between 1950 and 2004. How did growth between 1992 and 2000 compare to the Post World War II average?