Financial Recession: There has been a rise in mortgage defaults leading to an increase in the risk premium in the economy. (increase f).
a. UsingtheIS/LM model framework (investment function, goods market, money market and IS/LM) graph the increase in f. Assume the central bank is tar- geting an interest rate
b. In words, (no need to redraw graphs) explain what type of policy the central bank could take to correct any changes to the economy resulting from the increase in f.
c. Bonus: What could be a scenario where the monetary policy described in part (b) could not take place?