The effect of the subprime loan crisis pushed the ________. This pushed the MP curve ________ and the AD ________.
A) financial friction up; up; down
B) inflation rate up; up; down
C) unemployment rate down; down; up
D) risk-free interest rate up; down; up
E) federal funds rate to zero; down; down

Question

Quizplus · Accepted Answer

The subprime loan crisis increased financial frictions, leading to tighter credit conditions. This caused the monetary policy (MP) curve to shift up as central banks responded by tightening monetary policy to stabilize the financial system. Consequently, the aggregate demand (AD) curve shifted down due to reduced spending and investment.

The Effect of the Subprime Loan Crisis Pushed the ________