In the IS/MP framework, when the Fed ________ the federal funds rate in the aftermath of the decline in housing prices, the ________ caused a(n) ________ in the real interest rate.
A) raised; higher inflation rate; fall
B) held constant; Okun effect; decline
C) lowered; financial friction; increase
D) manipulated; Fisher effect; increase
E) raised; unemployment rate; fall

Question

Quizplus · Accepted Answer

According to the IS/MP framework, when the Fed lowers the federal funds rate, it causes a decrease in the real interest rate. This is because a lower federal funds rate leads to lower borrowing costs for banks, which in turn leads to lower interest rates on loans for businesses and consumers. This increase in borrowing and spending leads to an increase in aggregate demand and a decrease in the real interest rate. Lowering the federal funds rate can also help reduce financial frictions in the economy, which can further stimulate spending and increase aggregate demand. Therefore, when the Fed lowered the federal funds rate in the aftermath of the decline in housing prices, it caused an increase in the real interest rate, which helped stimulate economic growth and reduce unemployment.

In the IS/MP Framework, When the Fed ________ the Federal