Economic activity in the United States peaked in March 2001 and then began to decline with the NASDAQ crash resulting from the collapse of the dot-com bubble. The terrorist attacks on the United States on September 11, 2001 worsened the recession.
a. Use the IS–MP model to show the position of the economy in late 2001.
b. What actions would you expect the Fed to have taken in this situation?
c. Use your IS–MP graph from part a, to show the effect of the Fed’s actions.