Determine the macroeconomic impacts on interest rates and output from a macroeconomic shock using the September 11 terrorist attacks as an example.    Background - Assume the economy was in short and long-run equilibrium before the terrorist attacks. Thus, ignore the fact that the stock market dotcom bubble busted a few months before September 11th. Analyze the short-term macroeconomic impact on the economy of this shock and discuss alternative policy responses, identifying the resulting new short-term equilibrium of the economy in the IS-LM diagram. The price level is assumed fixed as we are focusing on the short run impact.   Briefly describe the circumstances surrounding the macroeconomic shock. Your analysis should identify which component of the economy (C, I, or Md) was directly affected by the attacks.   Create an IS-LM diagram, tracing the macroeconomic impacts of the shock within the IS-LM framework. You can assume that the economy was in long- and short-term equilibrium before the shock. Your essay needs to discuss an initial shift of IS and/or LM which reflects your conclusion for requirement 1 above.  Using the IS-LM diagram created in require 2 above, identify and evaluate the government monetary and fiscal policy responses to the shock actually implemented at the time, and their effect on the short-run equilibrium of the economy. The policy response should be traced within the IS-LM diagram leading to a new short run equilibrium.  Discuss the interaction between fiscal and monetary policy, and state which policy mix you would have recommended at the time and why.

ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN:9780190931919
Author:NEWNAN
Publisher:NEWNAN
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
icon
Related questions
Question

Determine the macroeconomic impacts on interest rates and output from a macroeconomic shock using the September 11 terrorist attacks as an example. 

 

Background - Assume the economy was in short and long-run equilibrium before the terrorist attacks. Thus, ignore the fact that the stock market dotcom bubble busted a few months before September 11th.   Analyze the short-term macroeconomic impact on the economy of this shock and discuss alternative policy responses, identifying the resulting new short-term equilibrium of the economy in the IS-LM diagram. The price level is assumed fixed as we are focusing on the short run impact.

 

  1. Briefly describe the circumstances surrounding the macroeconomic shock. Your analysis should identify which component of the economy (C, I, or Md) was directly affected by the attacks.  
  2. Create an IS-LM diagram, tracing the macroeconomic impacts of the shock within the IS-LM framework. You can assume that the economy was in long- and short-term equilibrium before the shock. Your essay needs to discuss an initial shift of IS and/or LM which reflects your conclusion for requirement 1 above. 
  3. Using the IS-LM diagram created in require 2 above, identify and evaluate the government monetary and fiscal policy responses to the shock actually implemented at the time, and their effect on the short-run equilibrium of the economy.  The policy response should be traced within the IS-LM diagram leading to a new short run equilibrium. 
  4. Discuss the interaction between fiscal and monetary policy, and state which policy mix you would have recommended at the time and why.  
Expert Solution
trending now

Trending now

This is a popular solution!

steps

Step by step

Solved in 4 steps with 2 images

Blurred answer
Knowledge Booster
Recession
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, economics and related others by exploring similar questions and additional content below.
Similar questions
  • SEE MORE QUESTIONS
Recommended textbooks for you
ENGR.ECONOMIC ANALYSIS
ENGR.ECONOMIC ANALYSIS
Economics
ISBN:
9780190931919
Author:
NEWNAN
Publisher:
Oxford University Press
Principles of Economics (12th Edition)
Principles of Economics (12th Edition)
Economics
ISBN:
9780134078779
Author:
Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher:
PEARSON
Engineering Economy (17th Edition)
Engineering Economy (17th Edition)
Economics
ISBN:
9780134870069
Author:
William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher:
PEARSON
Principles of Economics (MindTap Course List)
Principles of Economics (MindTap Course List)
Economics
ISBN:
9781305585126
Author:
N. Gregory Mankiw
Publisher:
Cengage Learning
Managerial Economics: A Problem Solving Approach
Managerial Economics: A Problem Solving Approach
Economics
ISBN:
9781337106665
Author:
Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher:
Cengage Learning
Managerial Economics & Business Strategy (Mcgraw-…
Managerial Economics & Business Strategy (Mcgraw-…
Economics
ISBN:
9781259290619
Author:
Michael Baye, Jeff Prince
Publisher:
McGraw-Hill Education