The effect of the subprime loan crisis pushed the risk premium up.This pushes the MP curve up and the AD down.

Question

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The subprime loan crisis increased the risk premium, which in turn caused the cost of borrowing to increase. This pushes the MP (monetary policy) curve up, indicating a contractionary monetary policy as the central bank raises interest rates to combat inflationary pressures. The higher interest rates reduce consumption and investment expenditure, leading to a decrease in aggregate demand (AD), pushing it down. Therefore, both the MP curve and AD curve shift upwards due to the subprime loan crisis.

The Effect of the Subprime Loan Crisis Pushed the Risk