Financial frictions and how they enter in the IS/MP and AD/AS model.

Question

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Answer 1

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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Answer 2

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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Answer 3

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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Answer 4

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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Answer 5

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.

Answer 6

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.

Answer 7

Chapter 14, Problem 1RQ

To determine

Financial frictions and how they enter in the IS/MP and AD/AS model.

Answer 8

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.