What insights into the macroeconomic consequences of financial frictions arise from the new Keynesian model?
What will be an ideal response?
The new Keynesian model highlights the dependence of aggregate demand and short-run aggregate supply on expectations. When financial institutions seem to be dealing well with asymmetric information, the availability of low-cost credit inspires optimism. A disruption of financial markets causes a decrease in aggregate demand, due to an immediate widening of the credit spread and the expectation of reduced future output and a higher future real interest rate for households and businesses. Expected increases in aggregate supply might exacerbate the expectations-driven decreases in aggregate demand, unless the zero-lower-bound problem is addressed. With economic activity so heavily dependent on expectations, recovery from a financial-crisis-induced recession can be quite rapid.
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A) Estonia B) Belgium C) Finland D) United Kingdom
Common property
A) is owned by everyone. B) is owned by no one. C) Neither A nor B are correct. D) Both A and B are correct.
Administrative costs make small loans less profitable than large ones, other things equal
a. True b. False
A decrease in aggregate supply will cause the price level to
a. rise and real GDP to fall b. rise and real GDP to rise c. rise and the unemployment rate to fall d. fall and real GDP to rise e. fall and the unemployment rate to rise