Webpages useful for teachers of intermediate macroeconomics:

Federal Reserve Reaction to the Terror Attack on the World Trade Center

2001-10-21

Powerpoint Version

The terror attack on the World Trade Center on September 11, 2001 caused a fall in consumer confidence: consumers have cut back on their spending on durables. It also caused a fall in businesses’ willingness to invest: many businesses are cutting back on investment and other spending as they wait to learn more about what the future will be.

How large are these shifts? Nobody knows. Everybody agrees that these consequences of the terror attack have shifted the IS curve back to the left. Nobody knows by how far—nobody knows what the position of the IS curve next summer will be. However, any policy changes that the government wants to put in place to affect the state of the economy in late 2002 need to be put into place now, or they will not have time to have an impact on the state of the economy until 2003.

The Shock Shifts the IS Curve Back to the Left

Thus from the central bank’s perspective, its task is (a) to assess how large the leftward shift in the IS curve is; (b) to reduce interest rates so as to move the economy down and to the right along the IS curve and so offset the shift in the IS curve, keeping the economy near full employment; and (c) to perform this reduction in interest rates now, before there is enough information to assess the magnitude of the shift in the IS curve.To say the least, this is a difficult task.


Previous Handouts

2001-10-14: Why a Stimulus Package Might Be Desireable (Chapter 13: Stabilization Policy. Chapter 10: The IS Curve.)


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