According to real business cycle theory, an increase in financial fric

According to real business cycle theory, an increase in financial frictions might lead to ________, if ________.

A) a decrease in output; the rise in the credit spread causes a leftward shift of aggregate demand
B) a decrease in inflation; the disruption of capital markets results in a leftward shift of long-run aggregate supply
C) a decrease in output; the disruption of capital markets results in a leftward shift of long-run aggregate supply
D) a decrease in output; a decline in expected output causes a leftward shift of aggregate demand

ANSWER

C