Suppose that consumers and firms lose their confidence about the future of the econ- omy and they consume and invest less.
a. What would you expect to happen to the money demand curve in this case? If there is no change in other policy variables, what happens to the level of aggregate demand?
b. If the Fed took no action, what would happen to interest rates?
c. If the Fed wants to keep the interest rate stable, describe and show graphically how the Fed can ensure that this.