1. In 1992, the U.S. experienced a substantial budget deficit. By the end of his time in office, President Bill Clinton (together with the U.S. Congress) reduced government spending and increased taxes. Based on the closed-economy model discussed in class: a) What would you predict happened to the government budget deficit? Explain. Explain the effect of this policy on national savings. b) c) Use the graph of savings/investment to show the impact of this policy on national savings and the real interest rate. d) What does the model predict about the level of investment? Explain. 2. Some members of Congress are advocating for the pursuit of a 'balanced federal budget', i.e., keeping T and G on the same level. Assume that Congress balances the federal budget. Suppose that the following year Congress increases taxes by $200 billion dollars and that government spending is increased by the same amount (i.e., G is increased by $200 billion). Use the closed-economy model discussed in class: a) What would be the effect on the federal budget balance? Explain. b) What would happen to national savings? Explain. c) What would happen to interest rates? Explain.