Consider the economy described in Figure 9-9 in the textbook, and suppose that the IS and LM relations are: IS: Y = C(Y

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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.
Faced with a zero nominal interest rate, suppose the Fed decides
to purchase securities directly to facilitate the flow of credit in
financial markets. This policy is called quantitative easing. If
quantitative easing is successful, so that it becomes easier for
financial and non-financial firms to obtain credit, what is likely
to happen to the premium? If quantitative easing has some effect,
is it true that the Fed has no policy options to stimulate the
economy when the federal funds rate is zero? Graph the results of
this policy.