1. Corporate bond interest rates are a good measure of the interest rate facing firms planning investments. Before the financial crisis, this rate was about 2% higher than the fed funds rate. At the peak of the crisis in October 2008, the Baa rated bond rate was almost 9 percent higher than the fed funds rate. a) Suppose the economy begins in steady state, and there is a shock to the interest spread füí. Use the IS-MP and AS/AD diagrams to show and explain how the economy reacts if the Fed follows the simple monetary rule and does not change its inflation target.

1. Corporate bond interest rates are a good measure of the interest rate facing firms planning investments. Before the financial crisis, this rate was about 2% higher than the fed funds rate. At the peak of the crisis in October 2008, the Baa rated bond rate was almost 9 percent higher than the fed funds rate. a) Suppose the economy begins in steady state, and there is a shock to the interest spread füí. Use the IS-MP and AS/AD diagrams to show and explain how the economy reacts if the Fed follows the simple monetary rule and does not change its inflation target.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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