Suppose our IS/LM model from class is adjusted so that y = c (y
– T, confidence) + I (I + premium, confidence) + G m/p= L (i, y) i
= Federal Funds rate
Suppose the government takes action to improve the solvency of
the financial system. Assume that there is an unusually high
premium added to the federal funds interest rate when firms borrow
at the moment. If the government action is successful, and banks
become more willing to...