Question 72 pts You will use this information for the next two questions: Consid

Question

Question 72 pts

You will use this information for the next two questions:

Consider a situation in which banks, terrified by recent defaults on loans, cut back drastically on who qualifies for home and business lending (this may sound familiar...). In the short run we would see _______ and as we move to the long run we would see ________.

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Question 82 pts

Consider again the scenario from the previous question. The overall long-run effect of this scenario would be

Explanation / Answer

AD Right, SRAS Left becuase in short run people will tend to raise money and banks will only lend if they pay higher interest rates hence SRAS will tend to move towards left due to limited supply with respect to demand.

It will create inflationary pressure and a decrease in the natural rate of output.

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