Many Borrowers Defaulted on Subprime Mortgages Ultimately Disrupting Financial Markets

question 75

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 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:

Prime Interest Rate

The interest rate that banks charge their most creditworthy customers, often used as a benchmark for setting rates on various types of loans and credit.

Interest Rates

The cost of borrowing money or the reward for saving, usually expressed as a percentage of the principal amount annually.

Balloon Note

A type of loan that has a large or "balloon" payment due upon maturity, typically after a series of lower regular payments.

Maturity

The final payment date of a loan or financial instrument at which point the principal (and all remaining interest) is due to be paid.