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Uncoventional 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. Suppose the government takes action to improve the solvency of the financial system. If the government's action is successful, and banks become more willing to lend, what is likely to happen to the premium? It will lower the premium Show the effect of the government's solvency action in an IS-LM diagram. Use the line or curve drawing tool to show show the effect. Properly label your line or curve. Carefully follow the instructions above, and only draw the required object. This example shows that financial policy can be a kind of macroeconomic policy. A. True OB. False

Uncoventional 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. Suppose the government takes action to improve the solvency of the financial system. If the government's action is successful, and banks become more willing to lend, what is likely to happen to the premium? It will lower the premium Show the effect of the government's solvency action in an IS-LM diagram. Use the line or curve drawing tool to show show the effect. Properly label your line or curve. Carefully follow the instructions above, and only draw the required object. This example shows that financial policy can be a kind of macroeconomic policy. A. True OB. False

ENGR.ECONOMIC ANALYSIS
ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN:9780190931919
Author:NEWNAN
Publisher:NEWNAN
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Interest rate, r IS Output, Y IS₂ N LM O U
Transcribed Image Text:Interest rate, r IS Output, Y IS₂ N LM O U
K Uncoventional 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. Suppose the government takes action to improve the solvency of the financial system. If the government's action is successful, and banks become more willing to lend, what is likely to happen to the premium? It will lower the premium Show the effect of the government's solvency action in an IS-LM diagram. Use the line or curve drawing tool to show show the effect. Properly label your line or curve. Carefully follow the instructions above, and only draw the required object. This example shows that financial policy can be a kind of macroeconomic policy. OA. True OB. False
Transcribed Image Text:K Uncoventional 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. Suppose the government takes action to improve the solvency of the financial system. If the government's action is successful, and banks become more willing to lend, what is likely to happen to the premium? It will lower the premium Show the effect of the government's solvency action in an IS-LM diagram. Use the line or curve drawing tool to show show the effect. Properly label your line or curve. Carefully follow the instructions above, and only draw the required object. This example shows that financial policy can be a kind of macroeconomic policy. OA. True OB. False
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