Reference no: EM131449182

Suppose Congress and the Trump administration pass a large tax cut, a defense spending increase and an increase in infrastructure spending, but do not manage to reduce the growth in transfer payments (entitlement spending). Consider the current condition of the economy, as described in the statement and in the data table. What would likely happen in the economy, and what would be the Fed's countercyclical policy response?

a. Unemployment would rise, input costs would rise, and inflation would decrease. The Fed would increase the federal funds rate.
b. Unemployment would rise, input costs would fall, and inflation would decrease. The Fed would decrease the federal funds rate.
c. Unemployment would fall, input costs would rise, and inflation would increase. The Fed would increase the federal funds rate.
d. Unemployment would fall, input costs would fall, and inflation would increase. The Fed would decrease the federal funds rate.