When a risk premium is added to the short-run model it:
A)shifts the MP curve up.
B)shifts the IS down.
C)shifts the AD curve down.
D)is represented by a movement along the MP curve.
E)c and a

Question

Quizplus · Accepted Answer

Adding a risk premium to the short-run model will increase the cost of borrowing and thus shift the MP curve upward. This will result in a decrease in investment and a decrease in output and income, shifting the IS curve downward. As a result, the AD curve will shift downward as well. Therefore, both options A and B are correct, making choice E the best answer.

When a Risk Premium Is Added to the Short-Run Model