Describe optimal fed policy under the given scenarios

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Question: Suppose during some war in the future, military expenditures increased by 3% of GDP. Describe optimal Fed policy under the following scenarios. (Hint: what happens to consumer and capital spending after the war starts?)

(A) The government pays for the war with a tax increase.

(B) The deficit rises by the full amount of the increase in defense spending.

(D) The war causes oil prices to double.

Reference no: EM132127735

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