During the 2007-2009 financial crisis, many households found themselves with negative wealth (debts to repay) and a binding borrowing constraint. Describe the income and substitution effects of a decrease in the real interest rate
What will be an ideal response?
With a binding borrowing constraint, a decrease in the real interest rate does not cause a substitution effect, because the MRS remains greater than 1 + r. However, there is an income effect, because the decrease in the interest cost of debt raises the value of lifetime resources. Thus, both current and future consumption rise.
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Why do societies face a tradeoff between the size of the economic pie and the degree of equality with which it is shared?
What will be an ideal response?
Decisions by depositors to increase their holdings of ________, or of banks to hold ________ will result in a smaller expansion of deposits than the simple model predicts
A) deposits; required reserves B) deposits; excess reserves C) currency; required reserves D) currency; excess reserves
A new technological innovation would increase
a. the labor force. b. labor hours worked. c. labor productivity. d. population growth.
When a bank accepts a checkable deposit from a customer, its deposits will increase and its excess reserves will:
A. Increase by the same amount as deposits B. Increase by less than the deposits C. Increase by more than the deposits D. Decrease