Exam 14: The Great Recession and the Short-Run Model

In the IS/MP framework, when the Fed ________ the federal funds rate in the aftermath of the decline in housing prices, the financial friction gave rise to a(n) ________ in the real interest rate, which caused a(n) ________.

In the aftermath of the financial crisis that began in 2008, the Fed's assets and liabilities on its balance sheet:

The financial friction:

When a financial friction is added to the short-run model it:

Moral hazard in the banking system can occur because:

If is the federal funds rate, R is the market interest rate, and Is the financial friction, what is the equation for the market interest rate?

If the rate of inflation is-2 percent, the output gap is -5 percent, the nominal interest rate is 5 percent, and the unemployment rate is 8 percent, the real interest rate is 3 percent.

In the IS/MP framework, when the Fed ________ the federal funds rate in the aftermath of the decline in housing prices, the ________ caused a(n) ________ in the real interest rate.

The Fisher equation is given by:

The effect of the subprime loan crisis pushed the ________. In Figure 14.3, this is shown as a movement from point ________ to point ________.

________ encourage banks to ________, which ________.

If the rate of inflation is -2 percent, the output gap is -5 percent, the nominal interest rate is 5 percent, and the unemployment rate is 8 percent, what is the real interest rate?