An increase in financial frictions causes the IS curve to shift ________ and the aggregate demand curve to shift ________.
A) left; left
B) left; right
C) right; left
D) right; right

Question

Quizplus · Accepted Answer

An increase in financial frictions, such as higher borrowing costs or tighter credit standards, reduces investment and consumption, causing the IS curve to shift leftward. This decrease in aggregate demand also shifts the aggregate demand curve to the left.

An Increase in Financial Frictions Causes the IS Curve to Shift