Suppose it is the year 2029, and both commercial and investment banks hold a significant proportion of their balance sheets in AA- and AAA-rated securities backed by a diversified portfolio of student loans. As a result, many people have gained access to higher education that otherwise might not have been able to go to school.

(A) If former students begin to default on these loans in large numbers, how might we expect the resulting shock to impact the inflation rate and level of real output in our AS-AD framework as presented in class?

(B) How might we expect the impact on prices and real output from part (A) to affect the nominal interest rate in the market for M1 money? (ignore any expected policy response)

(C) If financial lending companies that see the high default rates decide become less inclined to lend overall, what would we expect to happen to the long-term real interest rate and volume of lending in the market for loanable funds?