Suppose that banks are less able to raise funds and so lend less. Consequently, because people and households are less able to borrow, they spend less at any given price level than they would otherwise. The crisis is persistent so lending should remain depressed for some time. Suppose instead that the Federal Reserve responded to the financial crisis to move GDP and prices back toward potential. What action would they take and which curve would shift in what direction?

ENGR.ECONOMIC ANALYSIS
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Chapter1: Making Economics Decisions
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Suppose that banks are less able to raise funds and so lend less. Consequently, because people and households are
less able to borrow, they spend less at any given price level than they would otherwise. The crisis is persistent so
lending should remain depressed for some time.
Suppose instead that the Federal Reserve responded to the financial crisis to move GDP and prices back toward
potential. What action would they take and which curve would shift in what direction?
Decrease money supply lowering interest rates. AD right
Increase money supply lowering interest rates. AD right
Increase money supply lowering interest rates. AD left
Decrease money supply lowering interest rates. AD left
9
Transcribed Image Text:Suppose that banks are less able to raise funds and so lend less. Consequently, because people and households are less able to borrow, they spend less at any given price level than they would otherwise. The crisis is persistent so lending should remain depressed for some time. Suppose instead that the Federal Reserve responded to the financial crisis to move GDP and prices back toward potential. What action would they take and which curve would shift in what direction? Decrease money supply lowering interest rates. AD right Increase money supply lowering interest rates. AD right Increase money supply lowering interest rates. AD left Decrease money supply lowering interest rates. AD left 9
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