How do commercial banks solve asymmetric information problems? What will be an ideal response? ANSWER By collecting information to reduce the information asymmetry: screening loan applicants and monitoring borrowers once the loan is approved. Loan assets are retained, rather than sold to third parties, so information accumulates over time and, possibly, over several loans […]
Retail stores that dedicate one or more aisles to “seasonal” items are engaging in ________. A) just-in-time production B) production smoothing C) work in process D) first degree price discrimination ANSWER A
In a two-period model with production, an anticipated future increase in domestic total factor productivity A) increases domestic output and increases the current account surplus. B) increases domestic output and decreases the current account surplus. C) has no effect on domestic output and increases the current account surplus. D) has no effect on domestic output […]
The defining feature of business cycles is that they A) are inherently bad. B) represent the underlying trend of real GDP in the economy. C) are fluctuations about trend in real GDP. D) measure prospects for future growth in the economy. ANSWER C
A key concern of monetary policy makers is credibility. In particular, that people believe that inflation will not deviate far from a rate consistent with a healthy macroeconomy. How might credibility affect the slope of the monetary policy curve? What will be an ideal response? ANSWER Credibility implies that the monetary policy curve will […]
Screening and monitoring are costly activities. Why is it a bad idea to impose these costs on borrowers? What will be an ideal response? ANSWER Imposing extra costs on borrowers exacerbates the adverse selection problem, because “good” borrowers are most likely to feel that the costs are excessive and punitive, while “bad” borrowers — […]
In the new Keynesian model, the immediate effect on inflation of an anticipated aggregate demand shock is ________. A) less than if that event was unanticipated B) greater than if that event was unanticipated C) the same as would develop if that event was unanticipated D) independent of whether or not that event is anticipated […]
On the graph above, which pair of points best represents a scenario in which the nominal interest rate and expected inflation decline equally? A) I to H B) G to K C) I to J D) K to F E) J to H ANSWER D
In a two-period model with production, a permanent increase in domestic government spending A) increases domestic output and increases the current account surplus. B) increases domestic output and decreases the current account surplus. C) decreases domestic output and increases the current account surplus. D) decreases domestic output and decreases the current account surplus. ANSWER […]
Holdings of partially finished components involve inventories of ________. A) Tobin’s q B) work in process C) production smoothing D) stock-out components ANSWER B
