When using the Fed model to diagnose the economy, if a shock causes the real interest rate to rise, then the economy has been hit by _____ shock.
A)an inflation
B)a financial
C)a supply
D)a spending

Question

Quizplus · Accepted Answer

The Fed model is a tool used to diagnose the state of the economy by comparing the earnings yield on stocks to the real interest rate. In this context, if the real interest rate rises due to a shock, it indicates that financial conditions have tightened, meaning that it is likely a financial shock. Inflation and supply shocks could also impact the economy, but they may affect the nominal interest rate rather than the real interest rate, making B the best choice. Spending shocks could also impact the economy, but they may not necessarily lead to a rise in interest rates.

When Using the Fed Model to Diagnose the Economy, If