When we add the financial friction to the AD curve it:
A) is represented by a downward movement along the AD curve.
B) is represented by a downward movement along the AS curve.
C) shifts the AD curve down.
D) shifts the AS curve up.
E) has no impact on the AD curve.

Question

Quizplus · Accepted Answer

Financial friction refers to any factors that impede the flow of funds in the economy. This can include things like higher interest rates, tighter lending standards, and increased uncertainty about future economic conditions. When these factors are present, it becomes more difficult for consumers and businesses to borrow and spend money, which can have a dampening effect on aggregate demand. Therefore, adding financial friction to the AD curve would shift it down, reflecting the lower level of spending that is likely to occur.

When We Add the Financial Friction to the AD Curve