Austrians - Intermediate Macro Exam 2

Question 1

According to the Austrian theory of business cycles, how does the central bank distort price signals?

Answer 1

By increasing inflation, the central bank causes interest rates to fall, falsely signaling an increase in consumer savings.

Question 2

According to the Austrian theory of business cycles, how does the boom part of the business cycle lead to the bust?

Answer 2

Malinvestments made in response to distorted price signals fail when met with insufficient consumer demand.

Question 3

What is the Austrian solution to business cycles?

Answer 3

Limited government that doesn’t interfere with market price signals.

Question 4

What are problems with the Austrian theory of business cycles?

Answer 4

It fails to explain why entrepreneurs don’t account for the distortions in price signals caused by the central bank.
It fails to explain why failed investments cause so much unemployment.

Question 5

Most economists agree with Austrians.
True or False

Answer 5

False

Question 6

What is the Paradox of Thrift?

Answer 6

Saving Increases, leading to a decrease in Investments, AD, and Real GDP.

Question 7

What did Austrians blame the Great Recession on?

Answer 7

Credit was way too high, leading to the housing bubble, and eventually malinvestments.

Question 8

What is a Double Disequilibrium?

Answer 8

When Investments Decrease (I): Savers saving LESS, and Borrowers borrowing MORE

Question 9

What are malinvestments?

Answer 9

Badly allocated business investments resulting from artificially low interest rates for borrowing and an unsustainable increase in money supply.