Many borrowers defaulted on subprime mortgages ultimately disrupting financial markets by August 2007. Which of the following is a likely result of this financial disruption?
A) The AD curve likely shifted left which caused a negative output gap
B) The AD curve likely shifted left which caused a positive inflation gap
C) The AD curve likely shifted left which caused an upward movement along the MP curve to a higher general equilibrium interest rate
D) The AD curve likely did not shift
E) none of the above

Question

Quizplus · Accepted Answer

The financial disruption likely led to a decrease in aggregate demand (AD), shifting the AD curve to the left, which typically results in a negative output gap where actual output is less than potential output.

Many Borrowers Defaulted on Subprime Mortgages Ultimately Disrupting Financial Markets