Help analyze the macroeconomic impact of the September 11^th 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 - 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 11^th. 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 w are focusing on the short run impact.

Requirements

1.Briefly describe the circumstances surrounding the macroeconomic shock. Your analysis should identify which component of the economy (C, I, or M^d) was directly affected by the attacks.

2.Create an IS-LM diagram, tracing the macroeconomic impacts of the shock within the IS-LM framework. You can assume that the economy was in long- and short-term equilibrium before the shock. Your essay needs to discuss an initial shift of IS and/or LM which reflects your conclusion for requirement 1 above.

3.Using the IS-LM diagram created in require 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.The policy response should be traced within the IS-LM diagram leading to a new short run equilibium.

4.Discuss the interaction between fiscal and monetary policy, and state which policy mix you would have recommended at the time and why.