Q2. The dot.com bubble in the U.S. was a stock market bubble caused by excessive speculation of Internet-related companies in the late 1990s. In a move to protect the economy from the overvalued stock market, the Federal Reserve raised interest rates six times between June 1999 and May 2000 (see Figure 1). The burst of the stock mar- ket bubble triggered a mild recession in the U.S. from March 2001. To help the econ- omy recover, the Federal Reserve aggressively reduced the interest rate. The recession soon ended in early 2002. Using the IS-LM framework, explain what happened to the interest rate and output (i) before, and (ii) after the burst of bubbles in March 2001. Furthermore, read the article by President Neel Kashkari of the Federal Reserve Bank of Minneapolis. Do you think the Federal Reserve should react to asset price bubbles? Why or why not? [6 marks] Effective federal funds rate 2 1990 1995 2000 2005 2010 2015 2020 Year Figure 1: Effective federal funds rate