The effectiveness of monetary policy in increasing or decreasing GDP is at the heart of the debate as to the role of the Fed in fighting off recessions and unsustainable booms. It is your job to explain what the role of the central bank can have in stabilizing the economy and whether its policies in booms and recessions are symmetrical. Using both the graphs of Ap as well as IS-LM, explain under what conditions a central bank can do much and under what conditions a bank can do little to nothing to make spending and real GDP rise. Then, use the IS-LM model to illustrate and explain a hypothetical move by the Fed at its next meeting to raise short-term interest rates. Will the effect on GDP be small, large, or zero? Once you have done both a hypothetical rise and fall in rates, do you conclude that the Fed's policy is symmetrical, i.e., it works the same in both directions?

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