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

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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.

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