Many Borrowers Defaulted on Subprime Mortgages Ultimately Disrupting Financial Markets

Multiple Choice

Many borrowers defaulted on subprime mortgages ultimately disrupting financial markets by August 2007.Which of the following is a likely result of this increase in financial frictions?

A) The AD curve likely shifted left which caused a negative output gap.
B) The AD curve likely shifted left causing a negative inflation gap.
C) The AD curve likely shifted left followed by an downward movement along the MP curve to a lower equilibrium interest rate in the short run.
D) all of the above
E) none of the above