Refer to the following figure when answering
Figure 12.2: IS-MP Curve
-Consider the economy presented in Figure 12.2. If housing prices drop sharply, there is a loss in consumer and investor confidence and the economy moves from ________. To prevent a ________, the Fed ________, and the economy moves from ________.
A) point a to d; recession; lowers interest rates; point d to b
B) point a to d; recession; lowers interest rates; point d to c
C) point c to b; bubble; raises interest rates; point b to c
D) point d to c; recession; lowers interest rates; point c to b
E) Not enough information is given.

Question

Refer to the following figure when answering  
Figure 12.2: IS-MP Curve 
-Consider the economy presented in Figure 12.2. If housing prices drop sharply, there is a loss in consumer and investor confidence and the economy moves from ________. To prevent a ________, the Fed ________, and the economy moves from ________.
A) point a to d; recession; lowers interest rates; point d to b 
B) point a to d; recession; lowers interest rates; point d to c 
C) point c to b; bubble; raises interest rates; point b to c 
D) point d to c; recession; lowers interest rates; point c to b 
E) Not enough information is given.

Quizplus · Accepted Answer

A sharp drop in housing prices would cause a negative shock to the economy, leading it from point d to c. To prevent a recession, the Fed can lower interest rates, which would shift the IS curve to the right and move the economy from point c to b. Choice A is incorrect because the shift from point a to d does not occur due to a housing price drop. Choice B is incorrect because the economy does not move from point d to c due to a bubble. Choice C is incorrect because a bubble would cause an increase in prices, not a drop.

Refer to the Following Figure When Answering