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, 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 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, 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 burst of a housing bubble typically leads to a recession due to decreased consumer wealth and spending, and increased financial frictions that make borrowing more difficult. The appropriate Federal Reserve (Fed) response to counteract these effects and stimulate the economy would involve monetary policy actions aimed at lowering interest rates to encourage borrowing and investment. However, with large, positive financial frictions, these actions might not be fully effective immediately, leading the economy into a recessionary state, represented by a movement from a long-run equilibrium point (d) to a recession point (f).

Refer to the Following Figure When Answering the Following Questions