monetary policy financial policy and quantitative easing Suppose that the IS and LM relations are IS Y=C(Y-T)+1(Y.r+x)+G LM:r=r Interpret the interest rate as the federal funds rate adjusted for expected inflation, the real policy interest rate of the Federal Reserve. Assume that the rate at which firms can borrow is much higher than the federal funds rate, equivalently that the premium x. in the IS equation is high Faced with a zero nominal interest rate, suppose the Fed decides to purchase securities directly to facilitate the flow of credit in the financial markets. This policy is called quantitative easing. If quantitative easing is successful, so that it becomes easier for financial and nonfinancial firms to obtain credit, what is likely to happen to the premium? Show the effect of quantitative easing in an IS-LM diagram. Use the line drawing tool to show show the effect Property label your line. Carefully follow the instructions above, and only draw the required object. If quantitative easing has some effect, then the Fed has policy options to stimulate the economy even when the federal funds rate is zero. OA. True OB. False We will see later in the course that one argument for quantitative easing is that increases expected inflation. Assume quantitative easing does increase expected inflation and the nominal policy rate is constant. How does that affect the LM in the to the right? It would Interest rate, Output, Y
monetary policy financial policy and quantitative easing Suppose that the IS and LM relations are IS Y=C(Y-T)+1(Y.r+x)+G LM:r=r Interpret the interest rate as the federal funds rate adjusted for expected inflation, the real policy interest rate of the Federal Reserve. Assume that the rate at which firms can borrow is much higher than the federal funds rate, equivalently that the premium x. in the IS equation is high Faced with a zero nominal interest rate, suppose the Fed decides to purchase securities directly to facilitate the flow of credit in the financial markets. This policy is called quantitative easing. If quantitative easing is successful, so that it becomes easier for financial and nonfinancial firms to obtain credit, what is likely to happen to the premium? Show the effect of quantitative easing in an IS-LM diagram. Use the line drawing tool to show show the effect Property label your line. Carefully follow the instructions above, and only draw the required object. If quantitative easing has some effect, then the Fed has policy options to stimulate the economy even when the federal funds rate is zero. OA. True OB. False We will see later in the course that one argument for quantitative easing is that increases expected inflation. Assume quantitative easing does increase expected inflation and the nominal policy rate is constant. How does that affect the LM in the to the right? It would Interest rate, Output, Y
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:Suppose that the IS and LM relations are
IS: Y=C(Y-T)+1(Y, r+x)+G
LM: r=r
netary policy: financial policy and quantitative easing
Interpret the interest rate as the federal funds rate adjusted for expected inflation, the real policy interest rate of the Federal
Reserve. Assume that the rate at which firms can borrow is much higher than the federal funds rate, equivalently that the
premium x. in the IS equation is high
Faced with a zero nominal interest rate, suppose the Fed decides to purchase securities directly to facilitate the flow of credit in
the financial markets. This policy is called quantitative easing.
If quantitative easing is successful, so that it becomes easier for financial and nonfinancial firms to obtain credit, what is likely to
happen to the premium?
Show the effect of quantitative easing in an IS-LM diagram.
Use the line drawing tool to show show the effect Property label your line.
Carefully follow the instructions above, and only draw the required object.
If quantitative easing has some effect, then the Fed has policy options to stimulate the economy even when the federal funds rate
is zero.
O A True
OB. False
We will see later in the course that one argument for quantitative easing is that it increases expected inflation.
Assume quantitative easing does increase expected inflation and the nominal policy rate is constant. How does that
affect the LM in the to the right?
It would
Interest rate,
IS
Output, Y
-LM
Q
G
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