Comparing the new equilibrium income and interest rate

Reference no: EM1369921

If the Federal Reserve where ready to cut interest rates next week and officials indicated today that a quarter-point cut in federal funds remains firmly on the table, despite market expectations of a half-point cut.

Please answer the following showing all of your work:

1) Before the Fed's action the equilibrium income and interest rate are Yo and ro. Use IS-LM curves to compare the new equilibrium income and interest rate for a quarter-point cut and a half-point cut in the federal funds rate.

2) Suppose that in the days leading to the Fed decision on the interest rate that the government issues a warning about a potential new disease outbreak. Under these circumstances, which rate cut (.25 or .5) is the Fed more likely to take? Please explain your answer and show it using the IS-LM curves.

Reference no: EM1369921

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