Refer to the following figure when answering
Figure 14.2: IS-MP Curve
-Consider the IS-MP model in Figure 14.2 above. Starting from the long-run equilibrium, the burst of the housing bubble and the appropriate Fed response, WITHOUT a financial friction, can be shown as a movement from point ________ to point ________, and the economy is in ________.
A) c; e; its long-run equilibrium
B) d; b; its long-run equilibrium
C) b; a; an expansion
D) a; d; a recession
E) a; d; an expansion

Question

Refer to the following figure when answering  
Figure 14.2: IS-MP Curve 
-Consider the IS-MP model in Figure 14.2 above. Starting from the long-run equilibrium, the burst of the housing bubble and the appropriate Fed response, WITHOUT a financial friction, can be shown as a movement from point ________ to point ________, and the economy is in ________.
A) c; e; its long-run equilibrium 
B) d; b; its long-run equilibrium 
C) b; a; an expansion 
D) a; d; a recession 
E) a; d; an expansion

Quizplus · Accepted Answer

The burst of the housing bubble would initially shift the IS curve leftward, moving the economy from point d to point b. The Fed's appropriate response would be to lower interest rates, moving the economy back to its long-run equilibrium.

Refer to the Following Figure When Answering