IS-LM curves of equilibrium income and interest rate
If the Federal Reserve where ready to cut interest rates next week and officials indicated today that a quarter-point cut in federal funds remains firmly on the table, despite market expectations of a half-point cut.
Please answer the following showing all of your work:
1) Before the Fed’s action the equilibrium income and interest rate are Yo and ro. Use IS-LM curves to compare the new equilibrium income and interest rate for a quarter-point cut and a half-point cut in the federal funds rate.
2) Suppose that in the days leading to the Fed decision on the interest rate that the government issues a warning about a potential new disease outbreak. Under these circumstances, which rate cut (.25 or .5) is the Fed more likely to take? Please explain your answer and show it using the IS-LM curves.