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 causing a negative inflation gap
C) The AD curve likely shifted left followed by an downward movement along the MP curve to a lower equilibrium interest rate in the short run
D) all of the above
E) none of the above

Question

Quizplus · Accepted Answer

The disruption in financial markets likely caused a decrease in aggregate demand (AD), shifting the AD curve left, leading to a negative output gap and potentially a negative inflation gap. Additionally, the central bank may have lowered interest rates to stimulate the economy, causing a downward movement along the monetary policy (MP) curve.

Many Borrowers Defaulted on Subprime Mortgages Ultimately Disrupting Financial Markets