which of the following shows the correct effect on the is-mp framework if there is a credit crunch the economy, meaning banks are unwilling to lend except at high interest rates?

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30-11-2022
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which of the following shows the correct effect on the is-mp framework if there is a credit crunch the economy, meaning banks are unwilling to lend except at high interest rates?

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sapanpandit sapanpandit · Answer 1 · 2022-12-03T06:42:58+01:00

Arrow is pointing up shows the correct effect on the IS-MP framework if there is a credit crunch the economy, meaning banks are unwilling to lend except at high interest rates

A sudden scarcity of funds causes a financial institution's lending activity to diminish, which is referred to as a credit crunch. A credit crunch, which is frequently an extension of a recession, makes it practically impossible for businesses to obtain money because lenders are wary about defaults or bankruptcies, which raises rates.

In the IS/MP Model, the monetary policy (MP) curve stands in for the LM curve in the IS/LM Model, and the nominal interest rate is now the vertical axis instead of the real interest rate. With these modifications, the IS/MP Model may now concentrate on monetary policy in terms of the rate of inflation rather than the level of prices.

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