chp12 Flashcards
(41 cards)
what are financial frictions?
when there’s a disruption to efficient capital allocations
what type of information is involved with financial frictions?
assymetric information
assymetric information
adverse selection and moral hazard
why is it unclear if loans will be paid back?
banks don’t know if they are loaning money to a high or low risk person
what do banks do if they can’t decide whether a person is high or low risk to give a loan to?
not loan out any funds at all
if banks don’t give out loans (because they’re being cautious) what will happen?
inefficient number of loans being made, affecting general levels of
consumption for items such as houses and cars. This is an example of a financial friction.
banks don’t give out loans to be cautious. Less loans mean consumption of things are affected. what is this an example of?
financial friction
financial crisis
when economic activity suffers from an information problem
what does a financial crisis cause?
tremendous financial frictions
name the 3 stages involved in a financial crisis (IBD)
initial phase
banking crisis
debt inflation
What do we observe in the initial phase of a financial crisis? (Mr. A)
more uncertainty
reduction in the balance sheets of banks
asset-price decline.
what is a result of the initial phase of a financial crisis?
causes asymmetric information
leads to banking stage 2: crisis
what do we observe in the banking crisis stage of a financial crisis (W GF)
worsened asymmetric information.
general fall in economic activity (output or consumption)
fallout amongst banking institutions
What is a result of the banking crisis stage of a financial crisis?
leads to 3rd stage: debt inflation
what do we observe in the debt inflation stage of a financial crisis?
unexpected decline (negative shock) in price level (think about the opposite of inflation).
what is a result of the debt inflation stage of a financial crisis?
even worse asymmetric information and falls to economic activity occur.
what can we find from monetary policy for a financial crisis?
the Federal Reserve attempt to counteract the effects of financial crisis to reach a “steady-state” again.
what does the Federal Reserve try to do during a financial crisis?
counteract effects to reach a “steady- state”
(initial phase) define financial innovation
creating new forms of loans and financial products in an economy
(initial phase) define financial liberalisation
reducing and removing restrictions on banking institutions
explain financial innovation
banks offer loans with a new alternative collateral such as Calvin Klein hoodies. Josh now may be able to take out loans
by using hoodies as a guarantee for the loan in case of default.
explain financial liberalisation
If before a bank was only allowed to lend 80% of its total funds and now can instead lend up to 100%, then this reflects a change in the required reserves requirement. This gives
greater flexibility to banks to issue loans. This is a form of financial liberalization.
what is credit boom a possible side-effect of?
financial liberalisation
(initial phase) define credit boom
possible side-effect of financial liberalization in which banks choose to make many loans in comparison to a period before the removal of restrictions