EBK MACROECONOMICS (FOURTH EDITION)
4th Edition
ISBN: 9780393616125
Author: Jones
Publisher: YUZU
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Question
Chapter 14, Problem 1RQ
To determine
Financial frictions and how they enter in the IS/MP and AD/AS model.
Expert Solution & Answer
Explanation of Solution
Disruptions to the financial market are the reason for financial frictions. Financial frictions lead to shortage of liquidity and bankruptcy. The role of financial frictions in the financial crisis is evidenced in increasing spreads in yields between the financial securities.
The financial friction enters into the IS/MP diagram by making changes in the real interest rate. If the financial friction increases, the real interest rate would increase by shifting the MP schedule and reducing the short-run output. In the case of the AD/AS model, the increase in financial friction via increase in the interest rate leads to a leftward shift in the aggregate demand schedule.
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Chapter 14 Solutions
EBK MACROECONOMICS (FOURTH EDITION)
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