When a financial friction is added to the short-run model, it shifts the MP curve up.

Name: When a financial friction is added to the short-run model, it shifts the MP curve up.
Brand: Quizplus
Rating: 4.8 (30 reviews)

Question

Quizplus · Accepted Answer

Adding financial friction means that firms have more difficulty accessing credit or financing, which results in a higher cost of borrowing and a higher lending rate. This increases the cost of investment, which means firms will invest less at every interest rate level, shifting the MP curve up.

When a Financial Friction Is Added to the Short-Run Model