Question

In order to minimize the negative impact of the corona virus on financial markets, the Fed cut the federal funds rate multiple times in last couple of weeks. Interpret this development along the lines of the IS-LM model.   

Answer 1

Coronavirous is an infectious disease that cause human respiratory tract infections. It is life threatning. It can affect many investment and Saving a slows drown the economic growth in o.s. economy. The us Federal Reserve cuts the funds drate. The consumers are advised to stay at home so they are buying less which have a devasting impacts In food movekets. restaurants & hotels Fed cats interest rates because economy is facing recessions. Fed cats interest rates to stimulate economic growth, because it encoweage investors to invest as they can af borrow money from banks at lower interest mates. It is a monetary palecy. When Ifed cats funds rate it will control money supply in the economy. It smooths the torea shwey securities markets. Corona virous Spread in u.s. economy seems dangerous, so sed cat the rates that many consumers who suters, hey can get loan at low interest rates and recovere from bad time. The IS-LM model shows. that economy in balance by equilibrium of money supply vees us interest we know ove Gonent inoreares ad estment erest rates slows down. When interest rates talls Consumer Spends more on goods. GDP increases through inves So economy recoverstromi recessions. Fed lowers interest rates to acheire maximum employment employment and polee stabilety.

Interest rate LM1 LM2 lowering money supply increase interest rates -IS y Yo GDP routputy Therease output