You are an economic adviser using the Fed model to analyze the economy. What is the effect of a rise in the risk premium in the economy?
A)a rise in the real interest rate, falling output, and unexpected deflation
B)a rise in the real interest rate, rising output, and unexpected inflation
C)a fall in the real interest rate, falling output, and unexpected deflation
D)a fall in the real interest rate, rising output, and unexpected inflation

Question

Quizplus · Accepted Answer

According to the Fed model, an increase in the risk premium in the economy leads to a rise in the real interest rate, which in turn causes a fall in investment and consumption, resulting in falling output. Additionally, a rise in the risk premium suggests investors are more concerned about potential losses, which can lead to unexpected deflation.

You Are an Economic Adviser Using the Fed Model to Analyze