Refer to the following figure when answering
Figure 14.2: IS-MP Curve
-Consider the IS-MP model in Figure 14.2 above. Starting from the long-run equilibrium, the burst of the housing bubble and the appropriate Fed response, with a large, positive financial friction, can be shown as a movement from point ________ to point ________, and the economy is in ________.
A) d; b; its long-run equilibrium
B) b; a; an expansion
C) d; f ; a recession
D) d; c; its long-run equilibrium
E) e; f ; a recession

Question

Refer to the following figure when answering  
Figure 14.2: IS-MP Curve 
-Consider the IS-MP model in Figure 14.2 above. Starting from the long-run equilibrium, the burst of the housing bubble and the appropriate Fed response, with a large, positive financial friction, can be shown as a movement from point ________ to point ________, and the economy is in ________.
A) d; b; its long-run equilibrium 
B) b; a; an expansion 
C) d; f ; a recession 
D) d; c; its long-run equilibrium 
E) e; f ; a recession

Quizplus · Accepted Answer

The movement from point d to point f indicates a recession, and a large, positive financial friction implies that the Fed's response will be to lower interest rates, shifting the MP curve from its initial position to its lower position, resulting in a new long-run equilibrium at point f.

Refer to the Following Figure When Answering