During the Reagan administration, the US government increased military spending (dueto the Cold War) and at the same time pursued a tax cut policy.

During the Reagan administration, the US government increased military spending (dueto the Cold War) and at the same time pursued a tax cut policy. Use the classical modelfor a long-run closed economy (with a Keynesian consumption function that is insensitiveto the real interest rate) to answer the following questions.

Use the loanable funds market diagram to analyze the impact of such policies.