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On September 11, 2001, terrorists hijacked two airplanes and crashed them into the World Trade Center towers in New York City. Another set of terrorists
On September 11, 2001, terrorists hijacked two airplanes and crashed them into the World Trade Center towers in New York City. Another set of terrorists hijacked an airplane and crashed it into the Pentagon building (the headquarters of the United States Department of Defense) near Washington, D.C. A fourth plan was hijacked and started toward Washington, D.C. but passengers on board that plane managed to overcome the hijackers and crash-land the plane in a field in Pennsylvania. The attacks caused widespread fear in the U.S., and there were concerns that those fears would reduce consumer confidence, and that consumers would thus reduce their spending. So the Federal Reserve immediately bought government bonds. a. Explain the effect of an open market purchase by the Fed on interest rates. b. Use Aggregate Demand-Aggregate Supply analysis to explain the effects of this change in interest rates on GDP, unemployment, and inflation. c. Given your answer to part b, explain why the Fed bought bonds in September 2001. d. Explain what problems might be created by the Fed's open market purchase
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