The Chairwoman of the Federal Reserve has announced in her last conference that if the labor market continues to show signs of improvement they will continue with the tapering process and eventually the increase in the benchmark interest rate. If this monetary policy will apply, explain what is going to happen in the market for real money balances.
How the real interest rate is going to be affected in the interbank market and what about the real interest rate in the final market? Use graphics and explain b. Use the IS-LM framework to determine the consequences for the economy in the short run (level of income).