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Assume that the current interest rate is 2.0% and the economy is in a mild recession somewhat below YN. Using the model of Liquidity Preference,
Assume that the current interest rate is 2.0% and the economy is in a mild recession somewhat below YN. Using the model of Liquidity Preference, illustrate with a graph and short explanation how that equilibrium rate of 2.0% is determined. Now, assume the next move by the Fed is to raise the target rate of interest by 25 basis points out of a fear of future inflation. Illustrate this contractionary monetary policy graphically, first through liquidity preference, and then via IS-LM. Could this contractionary move by the Fed result in full employment? Why or why not
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