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

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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