Question

Without the Federal Reserve acting as a lender of last resort during the financial crisis:

a) the AD curve would have shifted left as borrowing and investment spending fell, but the AS curve would have shifted right as the price level and wages fell.

b) neither AD nor AS would have shifted, but the price level and output would still have decreased as housing prices fell.

c) both AD and AS would shift leftward because investment spending would have declined (AD), reducing advances in new technology and the aquisition of productive assets (AS).

d) both AD and AS would shift leftward because investment spending would have declined (AS), reducing advances in new technology and the aquisition of productive assets (AD).

Answer 1

"A"

At the time of the recession in the market, the demand will decrease and that will shift the aggregate demand curve to the left and cause a recession, further in the long run, the SRAS will shift to the right as the wages have fallen and it will act as a positive supply shock, the answer is "A".

Answer 2

Answer:

The correct choice is (c). Here's the reasoning:

1. Without the Fed as lender of last resort, financial markets would have frozen, leading to a sharp decline in borrowing and investment spending (a component of Aggregate Demand, AD). This would cause the AD curve to shift leftward.

2. 
   

3. The collapse in investment would also reduce funding for new technology and productive assets, harming long-term productivity. This would decrease Aggregate Supply (AS), shifting the AS curve leftward as well.

4. 
   

5. Why not the others?

• (a) Incorrect because AS would not shift right (wages and prices falling doesn't increase productive capacity).

• (b) Incorrect because both AD and AS would be affected.

• (d) Incorrect because it reverses the roles of AD and AS in the explanation.

• 
  

Answer:

Option (c) is correct: Both AD and AS would shift leftward due to reduced investment spending (AD) and lower productivity (AS).