How is asymmetric information related to asset-price bubbles?
What will be an ideal response?
If it were possible for saver-lenders to know the true value of financial assets, they would never be tempted to pay more than the asset is truly worth. In reality, though, savers know too little and must make the best of the available information. When the prices of certain assets are rising, savers may interpret this as a signal that the assets' fundamental value is rising. Because savers know that they and other savers don't know for sure whether the fundamental value is rising nor how high the price might go, they may expect to profit from the price increase. Asymmetric information forces lenders to extend credit on the basis of "creditworthiness," rather than unobservable and/or unverifiable aspects of the specific purpose of the loan. An increase in asset prices, regardless the cause, enhances the creditworthiness of holders of such assets. Moreover, the belief — shared by lender and borrower alike — that possession of high-value assets reduces the probability of default may inspire the latter to choose risky behaviors and the latter to remain ignorant or complacent. So long as financial markets reward holders of rising-price assets, the price will continue to rise.
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Starting from long-run equilibrium, a decrease in autonomous investment results in ________ output in the short run and ________ output in the long run.
A. lower; potential B. higher; higher C. higher; potential D. lower; higher
If the labor force participation rate in an economy is 50%, and there are 100 million potential adult workers in the economy, the size of the labor force in the economy will equal:
A) 10 million. B) 2 million. C) 100 million. D) 50 million.
Suppose a goldsmith (banker) received an additional number of gold coins to put in his safe and had stopped making loans. What would be happening to his reserve ratio?
A. It would be rising. B. It would be falling. C. It would stay the same. D. There is not enough information to answer this question.
The foreign purchases, interest rate, and real-balances effects explain why the:
A. Aggregate demand curve is downward-sloping B. Aggregate demand curve may shift to the left or right C. Economy will adjust towards equilibrium D. Aggregate expenditures schedule may shift up or down