50) Many borrowers defaulted on subprime mortgages ultimately disrupting financi

Question

50) Many borrowers defaulted on subprime mortgages ultimately disrupting financial markets by August 2007. Which of the following is a likely result of this financial disruption?

A) The AD curve likely shifted left which caused a negative output gap

B) The AD curve likely shifted left which caused a positive inflation gap

C) The AD curve likely shifted left which caused an upward movement along the MP curve to a higher general equilibrium interest rate

D) The AD curve likely did not shift

E) none of the above

4) Referring to the graph, a movement from point H to point I might represent ________.

A) the increase in the inflation rate that occurs when the real interest rate rises

B) the automatic response of monetary policy to an increase in the inflation rate

C) an autonomous tightening of monetary policy

D) any of the above

E) none of the above

Explanation / Answer

C) The AD curve likely shifted left which caused an upward movement along the MP curve to a higher general equilibrium interest rate

A) the increase in the inflation rate that occurs when the real interest rate rises

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