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

Question 1

Limited commitment means

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.

Answer 1

one cannot credibly promise something.

Question 2

A default premium is the interest rate premium

A) under normal market circumstances.
B) when there are no market fluctuations.
C) covering the default risk.
D) for government debt.

Answer 2

covering the default risk.

Question 3

When there are credit market frictions,Ricardian equivalence may not hold because

A) consumers cannot understand the implications of the government budget constraint.
B) a tax cut in the present with a future increase in taxes works effectively like a loan.
C) an increase in government saving is matched one-for-one by a decrease in private saving.
D) social security is fully-funded.

Answer 3

a tax cut in the present with a future increase in taxes works effectively like a loan.

Question 4

In the two-period model with asymmetric information,the presence of bad borrowers who always default

A) makes good borrowers better off.
B) matters only for the loan interest rate faced by bad borrowers.
C) affects the equilibrium profits of banks.
D) affects good borrowers adversely.

Question 5

In the two-period model with asymmetric information,a bank

A) creates money.
B) keeps money safely.
C) multiplies reserves.
D) borrows and lends.

Question 6

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

A) irrational behavior.
B) a credit market imperfection.
C) a vast banking conspiracy.
D) the burden of public debt.

Question 7

If the proportion of bad borrowers increases,

A) the lending interest rate increases.
B) the lending interest rate decreases.
C) the borrowing interest rate increases.
D) the borrowing interest rate decreases.

Question 8

In the two-period model,the budget constraint is kinked for all of these reasons,except

A) the real interest rate is greater than zero.
B) there are costs to banks from lending and borrowing.
C) there is asymmetric information in the credit market.
D) there is limited commitment in the credit market.

Question 9

In the two-period model with limited commitment,if the collateral constraint binds

A) increases in the present value of collateral increase current consumption and reduce future consumption.
B) increases in the present value of collateral increase current consumption one-for-one.
C) increases in the present value of collateral decrease current consumption and increase future consumption.
D) increases in the present value of collateral increase current consumption less than one-for-one.

Question 10

Collateral is used in all of the following credit arrangements,except

A) repurchase agreements.
B) automobile loans.
C) credit card lending.
D) mortgage lending.

Question 11

In the two-period model with asymmetric information,a one-unit increase in the real rate of interest on bank deposits

A) causes the real loan interest rate to increase by more than one unit.
B) causes the real loan interest rate to increase by less than one unit.
C) cause the real loan interest rate to decrease by less than one unit.
D) causes the real loan interest rate to decrease by more than one unit.

Question 12

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

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.

Question 13

The negative impact of the loss of value of collateralized assets is due to

A) asymmetric information.
B) Ricardian Equivalence.
C) limited commitment.
D) financial intermediation through banks.

Question 14

Collateralizable wealth is

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.

Question 15

An interest rate spread is

A) the difference between long-term and short-term interest rates.
B) the difference between nominal and real interest rates.
C) the difference between lending and borrowing interest rates.
D) the difference between public and commercial interest rates.

Question 16

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

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.

Question 17

When there are credit-market imperfections,an increase in government debt may be advantageous because it

A) discourages credit-constrained consumers from borrowing too much.
B) allows credit-constrained consumers to consume more.
C) eliminates the problems that cause credit-market imperfections.
D) encourages more private saving.

Question 18

Asymmetric information means

A) some market participants have more information than others.
B) some news are more important than others.
C) some market participants interpret news differently.
D) the impact of news on economic outcomes depends on the context.

Question 19

If a consumer borrows at an interest rate greater than the interest rate at which he or she can lend,then

A) banks cannot make a profit.
B) the budget constraint has a kink at the endowment point.
C) the consumer must be a lender.
D) this makes no difference for consumer behavior.

Question 20

Which of the following is not a reason for studying credit market frictions?

A) explaining features of financial crises.
B) explaining key elements of financial market behavior.
C) understanding why Ricardian equivalence may not work.
D) explaining why collateral does not matter.

Question 21

In a frictionless world

A) Fully funded social security must necessarily make everyone better off, as it provides for retirement.
B) Fully-funded social security is a constraint on private saving behavior, and therefore cannot make anyone better off.
C) Fully funded social security is always preferred to pay-as-you-go social security.
D) Fully funded social security is more efficient, because it is a private program instead of a government program.

Question 22

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

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.

Question 23

In a fully-funded social security program

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 24

If there is limited commitment and the government is no better at collecting on its debts than is the private sector,then

A) Ricardian equivalence holds.
B) the private sector can benefit from a government loan program.
C) Ricardian equivalence does not hold.
D) the Fisher relation does not hold.

Question 25

Pay-as-you-go social security

A) can never improve economic welfare for everyone.
B) can improve welfare for everyone if the population growth rate is large enough.
C) is always inefficient.
D) is not used by any countries in the world.

Question 26

For a consumer not bound by the collateral constraint,a reduction in the price of the collateral leads to

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.

Question 27

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

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.

Question 28

In the United States

A) Social security is bankrupt.
B) Social security is implemented through individual savings accounts.
C) Social security is fully-funded.
D) Social security is pay-as-you-go.