Suppose an economy is affected by a shock that reduces consumer wealth and simultaneously increases the financial friction (risk premium). Considering the short-run model, which of the following would characterize the outcome just after the shock but before any policy intervention by the central bank? Select one: O a. Short-run output will rise, and the real interest rate will fall. b. Short-run output will rise, and the real interest rate will rise. O c. Short-run output will fall, and the real interest rate will rise. O d. Short-run output will fall, and the real interest rate will fall.
Suppose an economy is affected by a shock that reduces consumer wealth and simultaneously increases the financial friction (risk premium). Considering the short-run model, which of the following would characterize the outcome just after the shock but before any policy intervention by the central bank? Select one: O a. Short-run output will rise, and the real interest rate will fall. b. Short-run output will rise, and the real interest rate will rise. O c. Short-run output will fall, and the real interest rate will rise. O d. Short-run output will fall, and the real interest rate will fall.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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![Suppose an economy is affected by a shock that reduces consumer wealth and simultaneously increases
the financial friction (risk premium). Considering the short-run model, which of the following would
characterize the outcome just after the shock but before any policy intervention by the central bank?
Select one:
O a.
Short-run output will rise, and the real interest rate will fall.
O b. Short-run output will rise, and the real interest rate will rise.
O c.
Short-run output will fall, and the real interest rate will rise.
O d. Short-run output will fall, and the real interest rate will fall.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fcebec56c-a365-43a2-abbb-e8c519d9a097%2F651e784b-9b02-4ad4-8640-28970c728a38%2Fiq2999r_processed.jpeg&w=3840&q=75)
Transcribed Image Text:Suppose an economy is affected by a shock that reduces consumer wealth and simultaneously increases
the financial friction (risk premium). Considering the short-run model, which of the following would
characterize the outcome just after the shock but before any policy intervention by the central bank?
Select one:
O a.
Short-run output will rise, and the real interest rate will fall.
O b. Short-run output will rise, and the real interest rate will rise.
O c.
Short-run output will fall, and the real interest rate will rise.
O d. Short-run output will fall, and the real interest rate will fall.
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