SOLVED

1) The difference between the interest rate on loans to households and firms and the interest rate on completely safe assets is known as ________. A) the fed funds rate. B) the discount rate. C) asymmetric information. D) the credit spread. 2) An increase in asymmetric information that increases financial frictions will tend to ________. A) increase the moral hazard and adverse selection problems in credit markets. B) decrease financial frictions. C) improve market efficiency. D) decrease the moral hazard problem. 3) In the absence of financial frictions, ________. A) interest rates for different borrowers move closely together B) all loans in the economy are transacted at a common interest rate C) the level of output is not affected by changes in the real interest rate D) an increase in inflation leads to a decrease in the real interest rate 4) The credit spread is countercyclical and coincident, suggesting that a sudden increase in financial frictions is most likely ________. A) when the economy has been expanding for some time B) after the economy has turned into a recession C) during the recovery phase of the business cycle D) when expected inflation is declining 5) An increase in financial frictions results in ________. A) an increase in output and inflation. B) a rise in the interest rate set by monetary policy. C) a decline in the real interest rates faced by households and firms. D) a decline in the interest rate set by monetary policy. 6) An increase in financial frictions results in ________. A) a movement to the left along the AD curve B) a leftward shift of the MP curve C) a decrease in output and increase in inflation D) a leftward shift of the IS curve 7) An increase in financial frictions results in ________. A) an increase in the federal funds rate B) a reduced supply of credit to households and businesses C) a decrease in short-run aggregate supply D) an upward shift of the monetary policy curve 8) The most direct and important consequence of an increase in asymmetric information problems is ________. A) a decrease in the probability of loan repayment B) inability to assess the probability of loan repayment C) unwillingness of borrowers to accept the market rate of interest D) inability of creditors to acquire enough funds to meet borrowers’ demand 9) According to real business cycle theory, an increase in financial frictions might lead to ________, if ________. A) a decrease in output; the rise in the credit spread causes a leftward shift of aggregate demand B) a decrease in inflation; the disruption of capital markets results in a leftward shift of long-run aggregate supply C) a decrease in output; the disruption of capital markets results in a leftward shift of long-run aggregate supply D) a decrease in output; a decline in expected output causes a leftward shift of aggregate demand 10) According to new Keynesian theory, an increase in financial frictions might lead to ________, if ________. A) a smaller decrease in output; expected inflation is reduced B) a larger decrease in output; expected inflation rises C) a decrease in inflation; the disruption of capital markets results in a leftward shift of long-run aggregate supply D) a smaller decrease in output; a decline in expected output causes a leftward shift of aggregate demand 11) When the credit spread rises, an effective policy response might be to ________. A) lower the real interest rate on safe assets B) prevent the real federal funds rate from falling below zero C) pursue nonconventional monetary policies to restore the functioning of financial markets D) announce swift and stern action against those responsible for the financial disruption 12) The bankruptcy of Lehman Brothers in September 2008 ________. A) sparked a sharp widening of the credit spread B) signalled the success of the policy response to the financial crisis C) reduced some of the uncertainty that had paralyzed financial markets D) resulted from the federal funds rate having fallen below zero 13) What insights into the macroeconomic consequences of financial frictions arise from the new Keynesian model? 14) How might the globalization of financial markets affect the role of financial frictions in business fluctuations?