Many Borrowers Defaulted on Subprime Mortgages Ultimately Disrupting Financial Markets

question 60

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 financial disruption?

• A) The AD curve likely shifted left which caused a negative output gap
• B) The AD curve likely shifted left 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

---

Definitions:

Straight-Line Depreciation

An approach to evenly spread the cost of a tangible asset throughout its period of use.

Time Period Assumption

The accounting principle that allows the business operations to be divided into specific time periods such as months, quarters, or years for reporting purposes.

Accrual Basis Accounting

An accounting method where revenue and expenses are recorded when they are earned or incurred, regardless of when the cash transaction actually takes place. This method provides a more accurate picture of a company's financial condition than cash basis accounting.

Expense Recognition

The accounting principle that expenses should be recorded in the period in which they are incurred, matching them with the revenues they help to generate.