Use the IS-LM model to analyse the short-run effect of a financial crisis and assume that the economy is initially at a medium-run equilibrium, Y 0 and i0. In the event of a rise in the credit default risk premium, what happens to the economy when the central bank maintains the money supply?
Select one:
a. Both the IS and LM curves shift to the left and a fall in output.
b. a leftward shift in the IS curve and a fall in output
c. a leftward shift in the LM curve and a fall in output.
d. None of the above.
