Refer to the following figure when answering the following questions.
Figure 12.2: IS-MP Curve
-Consider Figure 12.2. If the stock market drops sharply, there is a loss in consumer and investor confidence and the economy moves from point ________. To prevent a ________, the Fed ________, and the economy moves from point ________.
A) a to d; recession; lowers interest rates; d to b
B) d to c; recession; lowers interest rates; c to b
C) c to b; bubble; raises interest rates; b to c
D) a to d; recession; lowers interest rates; d to c
E) Not enough information is given.

Question

Refer to the following figure when answering the following questions.
Figure 12.2: IS-MP Curve 
-Consider Figure 12.2. If the stock market drops sharply, there is a loss in consumer and investor confidence and the economy moves from point ________. To prevent a ________, the Fed ________, and the economy moves from point ________.
A) a to d; recession; lowers interest rates; d to b 
B) d to c; recession; lowers interest rates; c to b 
C) c to b; bubble; raises interest rates; b to c 
D) a to d; recession; lowers interest rates; d to c 
E) Not enough information is given.

Quizplus · Accepted Answer

If the stock market drops sharply, it implies a decrease in aggregate demand. The economy will move from point D to point C, which will result in a recession. To prevent a recession, the Fed lowers interest rates, which shifts the IS curve to the right. The economy moves from point C to point B, where output increases and unemployment decreases. Choice A is incorrect because the economy moves from D to C, not A to D. Choice C is incorrect because the economy moves from C to B, not B to C. Choice D is incorrect because the economy moves from D to C, not D to B.

Refer to the Following Figure When Answering the Following Questions