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Crisis occurs that permanently increases the risk premium

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Suppose a financial crisis occurs that permanently increases the risk premium attached to long-term interest rates relevant to households and business firms. What are the short-run and long-run effects of such an increase on inflation, output, and the real interest rate according to the AD-AS model? (5 points) What change in monetary policy would the Fed make if it wanted to offset this increase in the risk premium and how would this affect the AD-AS model? (5 points) Use diagrams to illustrate your reasoning but also include a written explanation.

Reference no: EM131728043

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