Midterm 1 Flashcards
What is Corporate Veil?
any change in corporate saving is fully offset by a change in the opposite direction in household saving, so that private saving remains unchanged
What is Ricardian Equivalence?
any change in government saving is fully offset by a change in the opposite direction in private saving, so that the national saving remains unchanged
In practice, if the government saves more, national saving will increase. T or F?
True
In theory, if the government saves more, national saving will increase. T or F?
False
In a Keynesian consumption function with zero autonomous consumption and a marginal propensity to consume equal to 0.7 then a consumer will not need to borrow to reach their consumption level. T or F?
True
Saving is good in the _____ run, and bad in the _____ run. Fill in blank.
long-run (bc of investment); short-run (less consumption and aggregate demand)
What is asymmetric information?
The borrower has more information than the lender and is willing to use it to obtain a rent at the expense of the latter
What is the formula for Government Saving?
Government saving = Taxes - Current Expenditures
What are forms of asymmetric information?
Adverse Selection
Moral Hazard
Monitoring Costs
What is adverse selection?
high risk applicants try to disguise themselves as low risk
What is moral hazard?
once the loan is disbursed, the borrower takes a riskier project than promised
What is monitoring costs?
once the project is finalized, the successful entrepreneur falsely declares default
What is the equation for Gross Investment?
Gross Investment = Net Investment + Depreciation
What is net investment?
additional productive capacity (ex. a new tractor)
What is depreciation?
repairing or replacing an existing capital (ex. tractor tires)
