Quantitative easing is an unconventional monetary policy where a central bank purchases securities to increase the flow of credit in financial markets when nominal interest rates are near zero. If quantitative easing is successful in making it easier for firms to obtain credit, the premium that firms pay above the federal funds rate would fall. In an IS-LM diagram, quantitative easing would cause a shift of the IS curve to the right, representing increased aggregate demand and output as access to credit improves.

1. Uncoventional monetary policy: financial policy and quantitative easing Suppose that the IS and
LM relations are IS: Y=C(YT)+1(Y,r+)+GLMir=r^ Interpret the interest rate as the federal funds
rate adjusted for expected inflation, the real policy interest rate of the Federal Reserve. Assume
that the rate at which firms can borrow is much higher than the foderal funds rato, equivalently
that the premium x, in the is equation is high. Faced with a zero nominal interest rate, suppose
the Fed decides to purchase securities directly to facilitate the flow of credit in the financial
markets. This policy is called quantitative easing. If quantitative easing is suctussful, so that it
becomes easier for financial and nonfinancial firms to obtain credit, what is likely to happen to
the premium? Show the eflect of quantitative easing in an IS.LM diagram. Use the line drawing
tool to show show the effect. Property label your line. Carefully follow the instructions above,
and only draw the required object.