Question 1

Limited commitment means

Accepted Answer

A)  one cannot credibly promise something. 
B)  one saves only part of what is optimal. 
C)  only some households are allowed to save. 
D)  there is rationing on the credit market. 
E)  only governments can borrow. 
A)  one cannot credibly promise something. 
B)  one saves only part of what is optimal. 
C)  only some households are allowed to save. 
D)  there is rationing on the credit market. 
E)  only governments can borrow. A

Question 2

Why do consumers benefit from pay-as-you-go social security?

Accepted Answer

A)  It keeps inflation in check as money is redistributed. 
B)  It is a better way than taxes to finance the government. 
C)  It forces people to save more than they would otherwise. 
D)  With sufficiently high population growth, many young contribute to the benefits of the old. 
E)  With sufficiently low population growth, the young can perpetually contribute more. 
A)  It keeps inflation in check as money is redistributed. 
B)  It is a better way than taxes to finance the government. 
C)  It forces people to save more than they would otherwise. 
D)  With sufficiently high population growth, many young contribute to the benefits of the old. 
E)  With sufficiently low population growth, the young can perpetually contribute more. D

Question 3

Consumer choice theory predicts that, with identical consumers, pay-as-you-go social security

Accepted Answer

A)  always makes all generations worse off. 
B)  makes some generations better off, and cannot make any generation worse off. 
C)  may make some generations worse off and cannot make any generation better off. 
D)  may be Pareto improving. 
E)  always makes all generations worse off compared to a fully-funded system. 
A)  always makes all generations worse off. 
B)  makes some generations better off, and cannot make any generation worse off. 
C)  may make some generations worse off and cannot make any generation better off. 
D)  may be Pareto improving. 
E)  always makes all generations worse off compared to a fully-funded system. D

Question 4

Collateralizable wealth is

Accepted Answer

A)  wealth in non-tangible assets. 
B)  any asset that can be used to obtain a loan. 
C)  wealth that increases and income increases. 
D)  wealth based on mortgage lending. 
E)  any increase in wealth from lending. 
A)  wealth in non-tangible assets. 
B)  any asset that can be used to obtain a loan. 
C)  wealth that increases and income increases. 
D)  wealth based on mortgage lending. 
E)  any increase in wealth from lending.

Question 5

If the value of collateral falls for a consumer,

Accepted Answer

A)  current consumption must fall. 
B)  current consumption must rise. 
C)  future consumption must fall. 
D)  current consumption falls only if the collateral constraint binds. 
E)  current consumption falls only if the collateral constraint does not bind. 
A)  current consumption must fall. 
B)  current consumption must rise. 
C)  future consumption must fall. 
D)  current consumption falls only if the collateral constraint binds. 
E)  current consumption falls only if the collateral constraint does not bind.

Question 6

If the proportion of bad borrowers increases,

Accepted Answer

A)  the lending interest rate increases. 
B)  the lending interest rate decreases. 
C)  the borrowing interest rate increases. 
D)  the borrowing interest rate decreases. 
E)  the borrowing and lending interest rates are equal. 
A)  the lending interest rate increases. 
B)  the lending interest rate decreases. 
C)  the borrowing interest rate increases. 
D)  the borrowing interest rate decreases. 
E)  the borrowing and lending interest rates are equal.

Question 7

In a pay-as-you-go system,

Accepted Answer

A)  the young transfer resources to the old. 
B)  there is no opportunity for saving. 
C)  young households pay for their retirement directly. 
D)  the government pays for retirement. 
E)  the old receive income from assets purchased when they were young. 
A)  the young transfer resources to the old. 
B)  there is no opportunity for saving. 
C)  young households pay for their retirement directly. 
D)  the government pays for retirement. 
E)  the old receive income from assets purchased when they were young.

Question 8

A collateral constraint captures the idea that

Accepted Answer

A)  there is asymmetric information in credit markets. 
B)  assets may be of no use. 
C)  consumers need incentives not to abscond on their debts. 
D)  Ricardian equivalence always holds. 
E)  the budget constraint is irrelevant. 
A)  there is asymmetric information in credit markets. 
B)  assets may be of no use. 
C)  consumers need incentives not to abscond on their debts. 
D)  Ricardian equivalence always holds. 
E)  the budget constraint is irrelevant.

Question 9

If there are fewer bad borrowers in the population when there is asymmetric information

Accepted Answer

A)  the interest rate spread declines. 
B)  the interest rate spread increases. 
C)  the value of collateral increases. 
D)  banks make positive profits. 
E)  good borrowers are worse off. 
A)  the interest rate spread declines. 
B)  the interest rate spread increases. 
C)  the value of collateral increases. 
D)  banks make positive profits. 
E)  good borrowers are worse off.

Question 10

The phenomenon that some consumers pay a higher interest rate when they borrow than the interest rate they receive when they lend is best described as an example of

Accepted Answer

A)  irrational behaviour. 
B)  a credit market imperfection. 
C)  a vast banking conspiracy. 
D)  the burden of public debt. 
E)  predatory lending practices. 
A)  irrational behaviour. 
B)  a credit market imperfection. 
C)  a vast banking conspiracy. 
D)  the burden of public debt. 
E)  predatory lending practices.

Question 11

In a simple model of credit imperfections, when consumers borrow and lend at different interest rates, the budget line is kinked because

Accepted Answer

A)  the consumer cannot consumer more than disposable income in any period. 
B)  taxes exceed income. 
C)  the consumer lends at a higher rate than they borrow. 
D)  the consumer lends at a lower rate than they borrow. 
E)  income exceeds taxes. 
A)  the consumer cannot consumer more than disposable income in any period. 
B)  taxes exceed income. 
C)  the consumer lends at a higher rate than they borrow. 
D)  the consumer lends at a lower rate than they borrow. 
E)  income exceeds taxes.

Question 12

Social security is most likely to present political problems when

Accepted Answer

A)  moving from pay-as-you-go to fully-funded and when population growth is low. 
B)  moving from pay-as-you-go to fully-funded and when population growth is high. 
C)  moving from fully-funded to pay-as-you-go and when population growth is low. 
D)  moving from fully-funded to pay-as-you-go and when population growth is high. 
E)  moving from pay-as-you-go to fully-funded and when the government funds benefits for the current old generation. 
A)  moving from pay-as-you-go to fully-funded and when population growth is low. 
B)  moving from pay-as-you-go to fully-funded and when population growth is high. 
C)  moving from fully-funded to pay-as-you-go and when population growth is low. 
D)  moving from fully-funded to pay-as-you-go and when population growth is high. 
E)  moving from pay-as-you-go to fully-funded and when the government funds benefits for the current old generation.

Question 13

In the two-period model, the nature of the asymmetric information is that

Accepted Answer

A)  only the bank knows who the bad borrowers are. 
B)  only borrowers know whether they are bad or not. 
C)  only borrowers know the value of their collateral. 
D)  only banks can value the collateral. 
E)  only consumers know their income when it is received. 
A)  only the bank knows who the bad borrowers are. 
B)  only borrowers know whether they are bad or not. 
C)  only borrowers know the value of their collateral. 
D)  only banks can value the collateral. 
E)  only consumers know their income when it is received.

Question 14

Asymmetric information in the credit market means that

Accepted Answer

A)  the bank cannot distinguish bad borrowers from good borrowers. 
B)  the bank cannot prevent consumers from defaulting on their loans. 
C)  the default rate on loans is excessively high. 
D)  borrowers can borrow from financial institutions other than banks. 
E)  consumers can only borrow from banks. 
A)  the bank cannot distinguish bad borrowers from good borrowers. 
B)  the bank cannot prevent consumers from defaulting on their loans. 
C)  the default rate on loans is excessively high. 
D)  borrowers can borrow from financial institutions other than banks. 
E)  consumers can only borrow from banks.

Question 15

The default premium increases when there is a(n)

Accepted Answer

A)  decrease in the fraction of good borrowers. 
B)  increase in the fraction of good borrowers. 
C)  increase in the bank profits. 
D)  decrease in risk. 
E)  increase in liquidity. 
A)  decrease in the fraction of good borrowers. 
B)  increase in the fraction of good borrowers. 
C)  increase in the bank profits. 
D)  decrease in risk. 
E)  increase in liquidity.

Question 16

In a fully-funded social security program

Accepted Answer

A)  the young pay for the benefits of the old. 
B)  the young are forced to save for their own retirement. 
C)  the young have to buy bonds for the old. 
D)  the young are forced to save for the retirement of the old. 
A)  the young pay for the benefits of the old. 
B)  the young are forced to save for their own retirement. 
C)  the young have to buy bonds for the old. 
D)  the young are forced to save for the retirement of the old.

Question 17

Moral hazard represents a problem for fully-funded social security because

Accepted Answer

A)  the government is likely to never pay out promised benefits. 
B)  households invest in assets that are too safe. 
C)  population growth remains below the real interest rate. 
D)  households would invest retirement savings in risky assets. 
E)  population growth exceeds the real interest rate. 
A)  the government is likely to never pay out promised benefits. 
B)  households invest in assets that are too safe. 
C)  population growth remains below the real interest rate. 
D)  households would invest retirement savings in risky assets. 
E)  population growth exceeds the real interest rate.

Question 18

If consumers face higher interest rates when their savings is positive than when their savings is negative,

Accepted Answer

A)  Ricardian equivalence holds. 
B)  there is no asymmetric information. 
C)  the government may be able to increase welfare by cutting taxes. 
D)  the size of the government should be reduced. 
E)  the economy can do without collateral. 
A)  Ricardian equivalence holds. 
B)  there is no asymmetric information. 
C)  the government may be able to increase welfare by cutting taxes. 
D)  the size of the government should be reduced. 
E)  the economy can do without collateral.

Question 19

For a consumer bound by the collateral constraint, a reduction in the price of the collateral leads to

Accepted Answer

A)  nothing. 
B)  an increase in current consumption and a decrease in future consumption. 
C)  a decrease in current consumption and no change in future consumption. 
D)  a decrease in current and future consumption. 
E)  an increase in current and future consumption. 
A)  nothing. 
B)  an increase in current consumption and a decrease in future consumption. 
C)  a decrease in current consumption and no change in future consumption. 
D)  a decrease in current and future consumption. 
E)  an increase in current and future consumption.

Question 20

A default premium is the interest rate premium

Accepted Answer

A)  under normal market circumstances. 
B)  when there are no market fluctuations. 
C)  covering the default risk. 
D)  for government debt. 
E)  a borrower receives after defaulting. 
A)  under normal market circumstances. 
B)  when there are no market fluctuations. 
C)  covering the default risk. 
D)  for government debt. 
E)  a borrower receives after defaulting.

Limited commitment means

Why do consumers benefit from pay-as-you-go social security?

Consumer choice theory predicts that, with identical consumers, pay-as-you-go social security

Collateralizable wealth is

If the value of collateral falls for a consumer,

If the proportion of bad borrowers increases,

In a pay-as-you-go system,

A collateral constraint captures the idea that

If there are fewer bad borrowers in the population when there is asymmetric information

The phenomenon that some consumers pay a higher interest rate when they borrow than the interest rate they receive when they lend is best described as an example of

In a simple model of credit imperfections, when consumers borrow and lend at different interest rates, the budget line is kinked because

Social security is most likely to present political problems when

In the two-period model, the nature of the asymmetric information is that

Asymmetric information in the credit market means that

The default premium increases when there is a(n)

In a fully-funded social security program

Moral hazard represents a problem for fully-funded social security because

If consumers face higher interest rates when their savings is positive than when their savings is negative,

For a consumer bound by the collateral constraint, a reduction in the price of the collateral leads to

A default premium is the interest rate premium

Introduction

Measurement

Business Cycle Measurement

Consumer and Firm Behaviour: The Work–Leisure Decision and Profit Maximization

A Closed-Economy One-Period Macroeconomic Model

Search and Unemployment

Economic Growth: Malthus and Solow

Income Disparity among Countries and Endogenous Growth

A Two-Period Model: The Consumption–Savings Decision and Credit Markets

A Real Intertemporal Model with Investment

A Monetary Intertemporal Model: Money, Banking, Prices, and Monetary Policy

Business Cycle Models with Flexible Prices and Wages

New Keynesian Economics: Sticky Prices

Inflation: Phillips Curves and Neo-Fisherism

International Trade in Goods and Assets

Money in the Open Economy

Money, Inflation, and Banking: A Deeper Look

Filters

Exam 10: Credit Market Imperfections: Credit Frictions, Financial Crises, and Social Security

Limited commitment means

Why do consumers benefit from pay-as-you-go social security?

Consumer choice theory predicts that, with identical consumers, pay-as-you-go social security

Collateralizable wealth is

If the value of collateral falls for a consumer,

If the proportion of bad borrowers increases,

In a pay-as-you-go system,

A collateral constraint captures the idea that

If there are fewer bad borrowers in the population when there is asymmetric information

The phenomenon that some consumers pay a higher interest rate when they borrow than the interest rate they receive when they lend is best described as an example of

In a simple model of credit imperfections, when consumers borrow and lend at different interest rates, the budget line is kinked because

Social security is most likely to present political problems when

In the two-period model, the nature of the asymmetric information is that

Asymmetric information in the credit market means that

The default premium increases when there is a(n)

In a fully-funded social security program

Moral hazard represents a problem for fully-funded social security because

If consumers face higher interest rates when their savings is positive than when their savings is negative,

For a consumer bound by the collateral constraint, a reduction in the price of the collateral leads to

A default premium is the interest rate premium

Introduction

Measurement

Business Cycle Measurement

Consumer and Firm Behaviour: The Work–Leisure Decision and Profit Maximization

A Closed-Economy One-Period Macroeconomic Model

Search and Unemployment

Economic Growth: Malthus and Solow

Income Disparity among Countries and Endogenous Growth

A Two-Period Model: The Consumption–Savings Decision and Credit Markets

A Real Intertemporal Model with Investment

A Monetary Intertemporal Model: Money, Banking, Prices, and Monetary Policy

Business Cycle Models with Flexible Prices and Wages

New Keynesian Economics: Sticky Prices

Inflation: Phillips Curves and Neo-Fisherism

International Trade in Goods and Assets

Money in the Open Economy

Money, Inflation, and Banking: A Deeper Look

Filters