According to the IS-MP / AS-AD framework, the increase in risk premia for private sector borrowing...
According to the IS-MP / AS-AD framework, the increase in risk premia for private sector borrowing during the Great Recession caused _________ in aggregate demand, leading to __________ in output relative to potential output.
| a |
a reduction / a reduction |
|
| b |
a reduction / an increase |
|
| c |
an increase / a reduction |
|
| d |
an increase / an increase |
Homework Answers
Ans:d. an increase in aggregate demand, leading to an increase in output relative to potential output.
Reason: an increase in risk premium will induce more investment in the private sector, thus increasing the aggregate demand. This Rightward shift in aggregate demand will further cause an increase in the Real GDP or in simple words, output.
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