Question #53433

Following a rise in uncertainty leading to a fall in investment, what would be the FEDs appropriate monetary policy response assuming they want to hold interest rates constant? Demonstrate this using the IS LM model.
Does this mean interest rates must increase to previous levels using contraction policy?

Expert's answer

Following a rise in uncertainty leading to a fall in investment, the FEDs appropriate monetary policy response assuming they want to hold interest rates constant will be open market operations - the FED will sell new treasury bills.

This mean interest rates must increase to previous levels using contraction policy.

This mean interest rates must increase to previous levels using contraction policy.

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