Suppose that investor confidence falls, and the Fed is aware of this fact. Using the model presented

Question:

Suppose that investor confidence falls, and the Fed is aware of this fact. Using the model presented in this chapter, show (a)–

(c) below graphically:

a. How a fall in investor confidence affects the schedule for intended investment.

b. What the Fed could do, influencing the federal funds market, to try to counteract this fall in investor confidence.

c. The effect on AD and output if the Fed is able to perfectly counteract the fall in business confidence.

d. Is the Fed likely to be as accurate as assumed in part (c)? Why, or why not?

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