You work for a company in the United States. The company wants to expand its production facilities and is pondering borrowing money two months from now to invest and start producing six months from now. The CEO of the company asks you to write a report about the consequences of macroeconomic developments over the next year for the project. You examine the project and conclude that if the current trends in the economy continue, the project will be profitable. However, you also learn from economic analysts that the Fed is likely to reduce the US money supply during the current year starting two months from now and then return the money supply to its current path next year.

Assuming that all other policies, expectations, and exogenous factors remain the same and assuming that the price level is exogenously given, how would you describe the impact of this temporary change in monetary policy on:

The LM curve in the US economy this year?

The IS curve of the US economy?

The equilibrium interest rate?

The equilibrium GDP?

The profitability of your company's project during the current year?

Answer rating: 100% (QA)

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