Many Borrowers Defaulted on Subprime Mortgages Ultimately Disrupting Financial Markets

question 43

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 positive inflation gap.
• B)The AD curve likely shifted right which caused a positive inflation gap.
• C)The AD curve likely shifted left which caused an upward movement along the MP curve to a higher general equilibrium interest rate.
• D)The AD curve likely did not shift.
• E)none of the above

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Definitions:

Adjusting Entries

Accounting entries made at the end of an accounting period to allocate revenue and expenses to the period in which they actually occurred.

Accounting Errors

Mistakes made in recording financial transactions or preparing financial statements.

Insurance Expense

It refers to the cost attributed to purchasing insurance policies for a business, which is typically considered an operational expense.

Insurance Policy

A legal contract between an insurer and the insured, where the insurer agrees to compensate the insured for specific losses in exchange for a premium.