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ECON 202 > Exam 3 > Flashcards

Exam 3 Flashcards

1
Q

information asymmetry problems

A
  • adverse selection problems

- moral hazard

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2
Q

adverse selection problems (information asymmetry)

A
  • increases the probability that a potential borrower is a bad credit risk
  • lenders may refuse loans even when good credit risks exist in financial markets
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3
Q

differentiating bad from good credit risks

A

difficult and costly

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4
Q

moral hazard (information asymmetry)

A
  • when a borrower engages in activities that are undesirable from the perspective of the lender
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5
Q

moral hazard can also be called

A

agent problems or agency problems

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6
Q

agents and principals

A
  • stock brokers for their clients
  • investment bankers for firms whose stock offerings they underwrite
  • CEOs for a corporations shareholders
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7
Q

when do adverse selection problems occur

A
  • before transactions occur
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8
Q

when do moral hazard problems occur

A
  • they exist because there is a problem monitoring behavior after a transaction is already under way
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9
Q

adverse selection can lead to

A

credit rationing

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10
Q

how do bad credit risks effect interest rate

A

bad credit risks are interest rate inelastic

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11
Q

financial intermediarys

A

are important for solving information asymmetry problems and bringing savers and investors together

ex. commercial and investment banks
ex. stock and bond exchanges

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12
Q

% GDP relative to financial markets: Highest

A

switzerland

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13
Q

% GDP relative to financial markets: Lowest

A

ecuador

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14
Q

business cycle expansions

A

GDP grows faster than average

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15
Q

business cycle recessions

A

GDP growth becomes negative

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16
Q

what are business cycles

A
  1. variation in actual output relative to potential output
  2. short run changes in potential output
  • which one depends on if we believe Say’s law is true or not
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17
Q

Say’s Law

A
  • supply creates its own demand
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18
Q

John Maynard Keynes

A
  • in the long run we are all dead
  • Say’s Law: products always exchange for products
  • money is an important intermediary but can create problems
  • produce a good -> get money -> buy goods
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19
Q

why may prices or their growth rates be sticky

A
  1. there are physical costs associated with changing prices
  2. there are costs associated with informing customers about price changes (advertising)
  3. coordination problems can exist across competitors (pepsi & coke)
  4. nominal price increases upset customers (gas prices)
  5. unions can build nominal wage stickiness into wage contracts
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20
Q

aggregate demand

A
  • combinations of inflation and real growth that are consistant with a specific rate of spending growth
21
Q

equation

A

%∆M + %∆V = %∆P + %∆Y

money supply, velocity, price level, real growth

spending growth = inflation + real growth

22
Q

%∆M + %∆V

A

spending growth

23
Q

%∆P + %∆Y

A

inflation + real growth

24
Q

higher inflation rates yield

A

lower real growth rates

25
Q

lower inflation rates yield

A

higher real growth rates

26
Q

menu costs

A

if you want to change the menu then you have to buy all new menus. its not as simple as saying you have lower prices

27
Q

aggregate demand graph

A

relates peoples spending behavior to possible rates of inflation and real growth

28
Q

spending in the aggregate

A

must be consistent with how many good firms can and are willing to produce

29
Q

long run aggregate supply (LRAS)

A
  • solou growth curve

- represents the growth rate of potential output (what firms can sustainably produce)

30
Q

short run aggregate supply (SRAS)

A
  • represents what firms are willing to produce
31
Q

determine the sustainable long run growth for the economy

A
  • institutional quality
  • technology change
  • investments
32
Q

real “productivity” shocks

A

an unexpected change in the solou growth rate

33
Q

aggregate demand “nominal” shocks

A

unexpected changes in the spending growth rate

34
Q

π

A

inflation

y axis

35
Q

g

A

real growth rate

x axis

36
Q

every nominal spending growth rate has some inflation rate that is consistant with

A

the solou growth rate

37
Q

what if that particular inflation rate doesnt occur

A
  • then spending growth will be greater or less than the real potential growth rate
  • firms will want to produce consistent with actual spending growth
38
Q

if prices are sticky

A

then short run aggregate supply (SRAS) will be different than long run aggregate supply (LRAS)

39
Q

sluggish adjust

A

the short run is separated from the long run by the extent to which prices are sticky

40
Q

what determines the real potential growth rate

A
  • institutions
  • technological progress
  • increase in capital per worker
41
Q

changes in spending growth in the short run

A

lead to changes in both %∆P and the real growth

42
Q

Keynes on recessions

A

recessions correspond to increases in money demanded

43
Q

3 things people do with income

A
  1. spend it on goods
  2. make loans to others who spend it on goods
  3. hold onto it as money
44
Q

if prices do not adjust

A

spending growth can fall short of potential real growth

45
Q

if prices adjust fully

A

the economy can get back to potential growth and eventually will

46
Q

Keynesian type recession story

A

assume that consumers and firms become pessimistic about the future (their animal spirits become negative) %∆V decreases

people hold on to more money %∆C and %∆I decreases

47
Q

long run of Keynesian type recession

A

in the long run prices will adjust to this negative nominal shock

In the long run we are all dead

48
Q

why would prices remain sticky for so long while unemployment is high

A

policies that point to long run stickiness

  • minimum wage laws
  • union wage contracts
49
Q

can animal spirits and sticky prices account for the great depression

A
  1. sticky prices during 4 years of falling incomes and peak unemployment of 25%
  2. federal reserve decreased the money supply
  3. Smoot - Hawley Tariff put in place june 1930 which raised tariffs on 20,000 types of imported goods

ECON 202 (5 decks)

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