Refer to the following figure when answering the following questions.
Figure 14.2: IS-MP Curve
-Consider Figure 14.2. Starting from the long-run equilibrium, the burst of the housing bubble and the appropriate Fed response, WITHOUT a financial friction, can be shown as a movement from point ________ to point ________, and the economy is in ________.
A) c; e; its long-run equilibrium
B) d; b; its long-run equilibrium
C) b; a; an expansion
D) a; d; a recession
E) a; d; an expansion

Question

Refer to the following figure when answering the following questions.
Figure 14.2: IS-MP Curve 
-Consider Figure 14.2. Starting from the long-run equilibrium, the burst of the housing bubble and the appropriate Fed response, WITHOUT a financial friction, can be shown as a movement from point ________ to point ________, and the economy is in ________.
A) c; e; its long-run equilibrium 
B) d; b; its long-run equilibrium 
C) b; a; an expansion 
D) a; d; a recession 
E) a; d; an expansion

Quizplus · Accepted Answer

Starting from a long-run equilibrium and experiencing a burst of the housing bubble, the economy would initially move into a recession. However, with an appropriate Federal Reserve (Fed) response and without financial frictions, the economy can be steered back to its long-run equilibrium, which is depicted by moving from point d to point b.

Refer to the Following Figure When Answering the Following Questions