(25 marks) The graphs below illustrate interactions among the U.S.'s real GDP growth rate, total
public debt, nominal interest rate, and federal funds effective rate (real policy rate) in two
separate periods (i.e., 1985Q4 - 1987Q1 and 2009Q4 - 2011Q1). The total public debt decreased
in both periods, but real GDP responded differently. For example, although the total public debt
fell by around 4\% between 1985Q4 and 1987Q1 (Figure a), the real GDP growth rate remained
stable in the same period. However, between 2009Q4 and 2011Q1 (Figure b), the total public
debt fell by around 1.5\%, and the real GDP growth rate fell by more than 1%. Explain the above
observations based on your understanding of the IS-LM model. You are expected to use the
information provided in the graphs and draw appropriate diagram(s) to facilitate your
discussions.
Figure a: U.S. Macro Variables (1985Q4 - 1987Q1) Figure b: U.S. Macro Variables (2009Q4 -
2011Q1) Growth Rate of Real Gross Domestic Product (left axis) Growth Rate of Federal Debt:
Total Public Debt (left axis) Nominal Interest Rate (right axis) Data source:
https://fred.stlouisfed.org/. Data source: https://fred.stlouisfed.org/..
US GDP, Debt, Interest Rates 1985-1987 vs 2009-2011
1. (25 marks) The graphs below illustrate interactions among the U.S.'s real GDP growth rate, total
public debt, nominal interest rate, and federal funds effective rate (real policy rate) in two
separate periods (i.e., 1985Q4 - 1987Q1 and 2009Q4 - 2011Q1). The total public debt decreased
in both periods, but real GDP responded differently. For example, although the total public debt
fell by around 4% between 1985Q4 and 1987Q1 (Figure a), the real GDP growth rate remained
stable in the same period. However, between 2009Q4 and 2011Q1 (Figure b), the total public
debt fell by around 1.5%, and the real GDP growth rate fell by more than 1%. Explain the above
observations based on your understanding of the IS-LM model. You are expected to use the
information provided in the graphs and draw appropriate diagram(s) to facilitate your
discussions.
Figure a: U.S. Macro Variables (1985Q4 - 1987Q1) Figure b: U.S. Macro Variables (2009Q4 -
2011Q1) Growth Rate of Real Gross Domestic Product (left axis) Growth Rate of Federal Debt:
Total Public Debt (left axis) Nominal Interest Rate (right axis) Data source:
https://fred.stlouisfed.org/. Data source: https://fred.stlouisfed.org/.
