In the IS-MP framework,when the Fed __________ the federal funds rate in the aftermath of the decline in housing prices,the risk premium gave rise to a(n)__________ in the real interest rate which caused a(n)__________.
A)lowered;increase;deeper recession
B)raised;decline;commodity bubble
C)lowered;decline;expansion
D)held constant;economic "settling"
E)lowered;decrease;deeper recession

Question

Quizplus · Accepted Answer

According to the IS-MP framework, when the Fed lowers the federal funds rate (as mentioned in option A), it causes the risk premium to increase, which in turn leads to an increase in the real interest rate. This can lead to a deeper recession as it becomes more expensive for firms and individuals to borrow money and invest in the economy. Hence, option A is the best choice.

In the IS-MP Framework,when the Fed __________ the Federal Funds