Non-traditional macroeconomic policy: financial policy and quantitative easing Consider the economy described in Figure

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Non-traditional macroeconomic policy: financial policy and
quantitative easing
Consider the economy described in Figure 9-9 in the textbook,
and suppose that the IS and LM relations are:
IS: Y = C(Y − T, confidence) + I(Y, confidence, i + premium) +
G
LM: M/P = Y L(i)
Interpret the interest rate as the cash rate, the policy
interest rate of the Reserve Bank of Australia. Assume that there
is a premium added to the cash rate when firms have to borrow to
invest.
Suppose that the government takes action to improve the solvency
of the financial system, forcing banks to increase their
precautionary reserve capital. This leads to an increase in
the premium. Explain what happens on the IS −LM diagram?
Faced with a zero (or maybe a just negative) nominal interest
rate, suppose the central bank decides instead to purchase
(unconventional) securities directly to facilitate the flow of
credit in financial markets. This policy is called quantitative
easing. If quantitative easing (QE) is successful, so that it
becomes easier for financial and nonfinancial firms to obtain
credit, what
is likely to happen to the premium? What effect will this have
on the equilibrium in the IS – LM diagram?
c. Which central banks have used QE in recent years? What other
policy options does the central bank have to stimulate the economy
when the cash rate has reached the zero (or just negative)
bound?