Question: In 1998, Japanese real GDP fell 2½% in spite of a sharp decline in interest rates and massive increases in government spending. In terms of the IS/LM diagram, what factors must have shifted to offset the monetary and fiscal stimulus?
In the spring of 1980, the Federal funds rate fell from 17.6% to 9.0%, while real GDP declined at a 9.6% annual rate, the biggest one-quarter decline in history. Use the IS/LM diagram to show what factors caused this massive change. (Hint: that was the quarter the Fed imposed credit controls.)