Draw a positively sloped yield curve and label it curve 1. On the same diagram draw a new yield curve labelled curve 2 if the expected rate of inflation both short and long term falls. Label ths axes carefully.

Assume that the current interest rate is 4.0% and the economy is in a mild recession somewhat below YN. Using the model of Liquidity Preference, illustrate with a graph and short explanation how that equilibrium rate of 4.0% is determined. Now, assume the next move by the Fed at its December meeting is to raise the target rate of interest by 50 basis points out of a fear of future inflation. Illustrate this contractionary monetary policy graphically, first through liquidity preference, and then via IS-LM. Could this contractionary move by the Fed result in full employment? Why or why not?

11. Figure: Negative Supply Shock Inflation rate, T 16% 12% 11% 9% 3% Opoint A. Opoint B. B O point X. Opoint V -3% -2% -1% 3% Reference: Ref 16-4 (35-4) (Figure: Negative Supply Shock) Refer to the figure. This economy initially begins at point A and a negative supply shock takes it to point Y. If the Fed reacts by increasing money growth by 3%, this would take the economy to: Real GDP growth rate

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