The text points out that there is an inverse relationship between the fiscal cost of a bank crisis and real GDP growth. What are some of the reasons that can explain this inverse relationship?
What will be an ideal response?
One obvious cost is that funds that have to be used to "clean-up" the crisis must be diverted from some other use, so there is the opportunity cost that is faced. Another reason is that the process of channeling funds from savers to borrowers is disrupted or inefficient. If savers become leery of banks, they may not save or they may not channel these funds through banks so the economy is not as efficient as it could be. Also, investment projects that should be funded will not be, and those that shouldn't be may receive funding since financial intermediation is not working as it should. Another, and perhaps the largest cost, is that if investment is curtailed the ability to produce output in the future will be harmed leading to a lower standard of living not just for the current year but for many years.
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Normative economics
A) predicts the consequences of alternative actions. B) answers the question "What ought to be?" C) answers the question "What is?" D) is the focus of most modern economic reasoning.
A voting procedure in which the alternative that receives the most votes wins, even if that alternative does not receive a majority of the votes, is known as the
A) Borda-count method. B) Condorcet method. C) instant runoff method. D) plurality-rule method
In the Solow growth model, a change in the capital-labor ratio is equal to
A) (saving - investment). B) saving + depreciation). C) (investment - depreciation). D) (capital stock - labor force).
A monopolist maximizes profit when the total revenue curve is furthest above the total cost curve
a. True b. False Indicate whether the statement is true or false