This appendix demonstrates why the IS–LM
model accurately represents movements in the
real interest rate and the output gap during the
Great Depression.
a. Review the discussion of the 2007–2009
financial crisis in the chapter. Use the IS–LM
model to show the approximate movements
of the real interest rate and the output gap
during that period.
b. Recommend a change in monetary policy
that would have prevented the change in the
output gap.