A as an Economy Moves into a Recession, Income

Essay

a. As an economy moves into a recession, income falls. Illustrate graphically the impact of a decrease in income on the equilibrium interest rate using the theory of liquidity preference and the market for real money balances. Be sure fo label:
i. the axes
ii. the curves
iii. the initial equilibrivm values
iv. the direction the curve shifts
v. the terminal equilibrium values

b. Explain in words what happens to the equilibrium interest rate as a result of the fall in income.