Refer to the following figure when answering the following questions.
Figure 12.2: IS-MP Curve
-Consider Figure 12.2. If housing prices drop 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) a to d; recession; lowers interest rates; d to c
C) c to b; bubble; raises interest rates; b to c
D) d to c; recession; lowers interest rates; c to b
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 housing prices drop 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) a to d; recession; lowers interest rates; d to c 
C) c to b; bubble; raises interest rates; b to c 
D) d to c; recession; lowers interest rates; c to b 
E) Not enough information is given.

Quizplus · Accepted Answer

If housing prices drop sharply, the economy moves from point d to point c, resulting in a recession. To prevent a further worsening of the situation, the Fed lowers interest rates, leading to an increase in investment spending and consumption. This shift takes the economy from point c to point b. Therefore, the correct answer is D.

Refer to the Following Figure When Answering the Following Questions