In 1991, the Fed lowered its interest rate target, helping to bring the recession of that year to a rapid end. Make two copies of Figure 14(a) on a sheet of paper. Add curves to illustrate your answer to question (a) on one copy and question (b) on the other:
a. What would have happened in the years after 1991 if the Fed had done nothing and the economy had relied solely on the self-correcting mechanism to return to full employment?
b. What did happen as a result of the Fed bringing down the interest rate to end the recession?
c. Is there a difference in the behavior of the price level during the recovery in these two cases? Explain.