In the IS-MP framework,when the Fed __________ the federal funds rate in the aftermath of the decline in housing prices,the __________ caused a(n)__________ in the real interest rate.
A)raised;higher inflation rate;fall
B)held constant;Okun effect;decline
C)lowered;risk premium;increase
D)manipulated;Fisher effect;increase
E)raised;unemployment rate;fall

Question

Quizplus · Accepted Answer

According to the IS-MP framework, when the Fed lowers the federal funds rate, the risk premium increases, causing an increase in the real interest rate. This is because lowering the federal funds rate reduces the return on financial assets, which increases the risk premium investors demand to hold those assets. As a result, the real interest rate increases, which can reduce aggregate demand in the economy. Therefore, option C is the only choice that correctly identifies the impact of the Fed's actions on the real interest rate.

In the IS-MP Framework,when the Fed __________ the Federal Funds