Suppose that there is a global pandemic. The US federal response alternates between denying its severity, advocating for unsafe/unproven measures, and blaming others. One result is that the US remains a pandemic hot spot, while most other developed counties largely have the pandemic in check. A second result is that more than 6 months after the start of the pandemic the unemployment rate is 8.6%, as compared to 3.5% before the pandemic. Use the Liquidity Preference framework to answer the following:
Show graphically what happens to the money demand curve. Explain the rationale.
The Federal Reserve has made large amounts of emergency credit available, and in so doing, expanded the money supply. Show graphically what happens to the money supply curve.
What will happen to the equilibrium interest rate? Explain.
(2)[10 points] Suppose that there is an increase in the relative risk of bonds. Use the Portfolio Theory framework to answer the following:
Show graphically what happens to the bond demand curve. Explain the rationale.
Show graphically what happens to the equilibrium bond price and quantity. Explain.
What will happen to the equilibrium interest rate? Explain.
(b)Show graphically what happens to the bond supply curve. Explain the rationale.