Assignment Overview -

Write a four hundred word essay that analyzes the macroeconomic impact of the September 11th

terrorist attack on the US economy and the policy responses by Congress

and the Federal Reserve to those shocks by using the IS-LM model.

Assignment Objective

- Using the IS-LM model, determine the macroeconomic impacts on interest rates and output

from a macroeconomic shock using the September 11 terrorist attacks as an example.

Background -

Assume the economy was in short and long-run equilibrium before the terrorist attacks.

Thus, ignore the fact that the stock market dotcom bubble busted a few months before

September 11th. Analyze the short-term macroeconomic impact on the economy of this

Shock and discuss alternative policy responses, identifying the resulting new

short-term equilibrium of the economy in the IS-LM diagram. The price level is

assumed fixed as we are focusing on the short-run impact.

Resources

- Mankiw N. G. (2019), Macroeconomics (10th edition): Case Study: The U.S.

Recession of 2001 (In Textbook Chapter 12, end of Section 1).

What needs to be done

1. Critically evaluate the response obtained. Highlight any portion of the LLM- generated response that is redundant or deficient and explain in numbered bullet points why it does not fully address the assignment prompts or is redundant information.

2. Create a Word document with your own original response to the 4 prompts as the

Main essay

Questions

1. Briefly describe the circumstances surrounding the macroeconomic shock. Your analysis

should identify which component of the economy (C, I, or Md) was directly affected by the

attacks. To exceed expectations, you need to consider the impact on C or I and Md.

You can consider one or more components. Your response to this requirement must

Be less than 100 words.

2. Create an IS-LM diagram, tracing the macroeconomic impacts of the shock within the

IS-LM framework. You should assume that the economy was in long- and short-term

equilibrium before the shock. Your essay needs to reflect your conclusions for

requirement 1 above. Your response to this requirement must include an IS/LM diagram

and be less than 100 words

3. Using the IS-LM diagram created in requirement 2 above, identify and evaluate

The government monetary and fiscal policy responses to the shock actually

implemented at the time and their effect on the short-run equilibrium of the economy.

You can consider only one policy response or two. To exceed expectations, you need

to consider two. The policy response should be traced within the IS-LM diagram leading

to a new short-run equilibrium. Your answer for this requirement must be less than 100

words. (Suggestion, use your textbook as a source of information on this historical

episode and focus on the quality of the analysis rather than the details of what

historically happened.)

4. Discuss the interaction between fiscal and monetary policy and state which policy mix

You would have recommended at the time and why. Your response to this requirement

must be less than 100 words.

Chat GPT Convo:

Assume the economy was in short and long-run equilibrium before the terrorist attacks.

Thus, ignore the fact that the stock market dotcom bubble busted a few months before

September 11th. Analyze the short-term macroeconomic impact on the economy of this

Shock and discuss alternative policy responses, identifying the resulting new

short-term equilibrium of the economy in the IS-LM diagram. The price level is

assumed fixed as we are focusing on the short-run impact.

1. Briefly describe the circumstances surrounding the macroeconomic shock. Your analysis

should identify which component of the economy (C, I, or Md) was directly affected by the

attacks. To exceed expectations, you need to consider the impact on C or I and Md.

You can consider one or more components. Your response to this requirement must

Be less than one hundred words.

The macroeconomic shock resulting from the terrorist attacks on September 11th directly

affected the component of investment (I) in the economy. The attacks led to a decline in

business confidence and increased uncertainty, causing firms to postpone or cancel their

investment plans. This resulted in a decrease in investment spending and a contraction in

the overall level of economic activity in the short run. Additionally, the attacks also had an

indirect impact on consumer spending (C) as individuals reacted to the heightened sense

of insecurity and uncertainty. The magnitude of the impact on consumption would depend

on the extent of the psychological effects on consumer sentiment. The shock did not directly

affect the component of money demand (Md).

2. Create an IS-LM diagram, tracing the macroeconomic impacts of the shock within the

IS-LM framework. You should assume that the economy was in long- and short-term

equilibrium before the shock. Your essay needs to reflect your conclusions for

requirement 1 above. Your response to this requirement must include an IS/LM diagram

and be less than one hundred words

Due to the terrorist attacks, investment (I) and potentially consumption (C) decrease,

shifting the IS curve to the left. The decrease in investment causes a decrease in output

and income, leading to a downward shift of the LM curve. The short-term equilibrium is at

a lower level of output and interest rates. The decrease in investment and potentially

consumption reduces aggregate demand, leading to a contraction in the economy.

The IS-LM diagram illustrates the short-term impact of the shock, showing a lower equilibrium

level of output (Y) and higher interest rates (r).

Note: Unfortunately, as a text-based AI model, I am unable to provide visual illustrations directly.

I have described the IS-LM diagram, and you can recreate it on a graph or refer to your textbook

for a visual representation.

3. Using the IS-LM diagram created in requirement 2 above, identify and evaluate

The government monetary and fiscal policy responses to the shock actually

implemented at the time and their effect on the short-run equilibrium of the economy.

You can consider only one policy response or two. To exceed expectations, you need

to consider two. The policy response should be traced within the IS-LM diagram leading

to a new short-run equilibrium. Your answer for this requirement must be less than one hundred

words. (Suggestion, use your textbook as a source of information on this historical

episode and focus on the quality of the analysis rather than the details of what

historically happened.)

In response to the shock, the government implemented both monetary and fiscal policy measures.

On the monetary side, the central bank reduced interest rates, shifting the LM curve to the right.

This accommodative monetary policy aimed to stimulate investment and consumption, thereby

increasing aggregate demand. On the fiscal side, the government implemented expansionary

fiscal policy, such as increased government spending or tax cuts, shifting the IS curve to the right.

These policy responses aimed to boost overall economic activity and counter the negative impact

of the shock. The combined effect of monetary and fiscal policy was to restore equilibrium at a

higher level of output and lower interest rates in the short run.

4. Discuss the interaction between fiscal and monetary policy and state which policy mix

You would have recommended at the time and why. Your response to this requirement

must be less than 100 words.

The interaction between fiscal and monetary policy during the post-9/11 shock was crucial in

stabilizing the economy. The combination of expansionary fiscal policy (increased government

spending or tax cuts) and accommodative monetary policy (reduced interest rates) helped

stimulate aggregate demand and restore equilibrium. In this scenario, the recommended policy

mix would depend on the severity of the shock. If the shock was relatively mild, a greater

emphasis on monetary policy could be effective in stimulating investment and consumption.

However, if the shock was severe and resulted in a significant contraction of economic activity,

a more balanced approach with a mix of fiscal and monetary policy measures would be advisable

to provide a stronger stimulus to the economy.