Deck 10: Credit Market Imperfections: Credit Frictions, Financial Crises, and Social Security

Question 1

A default premium is the interest rate premium

A) under normal market circumstances.
B) when there are no market fluctuations.
C) covering the default risk.
D) for government debt.
E) a borrower receives after defaulting.

Answer 1

covering the default risk.

Question 2

When there are credit-market imperfections,an increase in government debt may be advantageous because it

A) discourages credit-constrained consumers from borrowing too much.
B) allows credit-constrained consumers to borrow more.
C) eliminates the problems that cause credit-market imperfections.
D) encourages more private saving.

Answer 2

allows credit-constrained consumers to borrow more.

Question 3

For a consumer not bound by the the collateral constraint,a reduction in the price of the collateral leads to

A) nothing.
B) an increase in current consumption and a decrease in future consumption.
C) a decrease in current consumption and no change in future consumption.
D) a decrease in current and future consumption.
E) no change in current consumption and a decrease in future consumption.

Answer 3

a decrease in current and future consumption.

Question 4

The 1990-1992 recession was unlikely to be associated with financial factors since

A) there was little change in interest rates.
B) consumption did not drop.
C) interest spreads increased right from the start.
D) interest rates for lending and borrowing went up.
E) profits in the banking sector increased.

Question 5

If the collateral constraint does not bind,then in response to a decrease in the price,p,of the asset

A) the consumer increases both current and future consumption.
B) the consumer decreases current consumption and future consumption is unchanged.
C) the consumer leaves current consumption unchanged and increases future consumption.
D) the consumer increases current consumption and decreases future consumption.
E) the consumer decreases both current and future consumption.

Question 6

The phenomenon that some consumers pay a higher interest rate when they borrow than the interest rate they receive when they lend is best described as an example of

A) irrational behavior.
B) a credit market imperfection.
C) a vast banking conspiracy.
D) the burden of public debt.
E) predatory lending practices.

Question 7

In the two-period model,a bank

A) creates money.
B) keeps money safely.
C) multiplies reserves.
D) borrows and lends.
E) is generally unecessary.

Question 8

The default premium increases when there is a(n)

A) decrease in the fraction of good borrowers.
B) increase in the fraction of good borrowers.
C) increase in the bank profits.
D) decrease in risk.
E) increase in liquidity.

Question 9

Limited commitment means

A) one cannot credibly promise something.
B) one saves only part of what is optimal.
C) only some households are allowed to save.
D) there is rationing on the credit market.
E) only governments can borrow.

Question 10

Asymmetric information means

A) some market participants have more information than others.
B) some news are more important than others.
C) some market participants interpret news differently.
D) the impact of news on economic outcomes depends on the context.
E) consumers do not understand completely their own preferences.

Question 11

If consumers use their house as collateral for lending and the value of housing in general falls,then

A) lending is unchanged and future consumption increases.
B) borrowing increases further to maintain current consumption.
C) lending and aggregate consumption decrease.
D) lenders prefer to become borrowers.
E) lending and aggregate consumption increase.

Question 12

Asymmetric information in the credit market means that

A) the bank cannot distinguish bad borrowers from good borrowers.
B) the bank cannot prevent consumers from defaulting on their loans.
C) the default rate on loans is excessively high.
D) borrowers can borrow from financial institutions other than banks.
E) consumers can only borrow from banks.

Question 13

In a simple model of credit imperfections,when consumers borrow and lend at different interest rates,the budget line is kinked because

A) the consumer cannot consumer more than disposable income in any period.
B) taxes exceed income.
C) the consumer lends at a higher rate than they borrow.
D) the consumer lends at a lower rate than they borrow
E) income exceeds taxes.

Question 14

In a pay-as-you-go system,

A) the young tranfer resources to the old.
B) there is no opportunity for saving.
C) young households pay for their retirement directly.
D) the government pays for retirement.
E) the old receive income from assets purchased when they were young.

Question 15

If the proportion of bad borrowers increases,

A) the lending interest rate increases.
B) the lending interest rate decreases.
C) the borrowing interest rate increases.
D) the borrowing interest rate decreases.
E) the borrowing and lending interest rates are equal.

Question 16

Collateralizable wealth is

A) wealth in non-tangible assets.
B) any asset that can be used to obtain a loan.
C) wealth that increases and income increases.
D) wealth based on mortgage lending.
E) any increae in wealth from lending.

Question 17

In the two-period model,the nature of the asymmetric information is that

A) only the bank knows who the bad borrowers are.
B) only borrowers know whether they are bad or not.
C) only borrowers know the value of their collateral.
D) only banks can value the collateral.
E) only consumers know their income when it is received.

Question 18

For a consumer bound by the the collateral constraint,a reduction in the price of the collateral leads to

A) nothing.
B) an increase in current consumption and a decrease in future consumption.
C) a decrease in current consumption and no change in future consumption.
D) a decrease in current and future consumption.
E) an increase in current and future consumption

Question 19

An interest rate spread is

A) the difference between long-term and short-term interest rates.
B) the difference between nominal and real interest rates.
C) the difference between lending and borrowing interest rates.
D) the difference between public and commercial interest rates.
E) the difference between the interest rates on different stocks.

Question 20

When consumers lend at a lower rate than they borrow,a decrease in current taxes implies

A) current consumption increases by the amount of the tax cut.
B) current consumption remains unchanged.
C) both current and future consumption increase.
D) current savings increases by the amount of the tax cut.
E) current consumption decreases and future consumption increases.

Question 21

The committment problem that may make a forced savings social security program beneficial is best described by:

A) too much saving by households becasuse the government cannot committ to providing zero retirement assistance.
B) borrowers are unable to committ to a high real interest rate.
C) young households cannot committ to participating when they are old.
D) the government cannot commit to providing benefits when old.
E) under saving by households because the government cannot committ to providing zero retirement assistance.

Question 22

Social security is most likely to present political problems when

A) moving from pay-as-you-go to fully-funded and when population growth is low.
B) moving from pay-as-you-go to fully-funded and when population growth is high.
C) moving from fully-funded to pay-as-you-go and when population growth is low.
D) moving from fully-funded to pay-as-you-go and when population growth is high.
E) moving from pay-as-you-go to fully-funded and when the government funds benefits for the current old generation.

Question 23

Why do consumers benefit from pay-as-you-go social security?

A) It keeps inflation in check as money is redistributed.
B) It is a better way than taxes to finance the government.
C) It forces people to save more than they would otherwise.
D) With sufficiently high population growth, many young contribute to the benefits of the old.
E) With sufficiently low population growth, the young can perpetually contribute more.

Question 24

Consumer choice theory predicts that,with identical consumers,fully-funded social security

A) always makes all generations worse off.
B) makes some generations better off, and cannot make any generation worse off.
C) may make some generations worse off and cannot make any generation better off.
D) may be Pareto improving.
E) can potentially reduce welfare.

Question 25

Consumer choice theory predicts that,with identical consumers,pay-as-you-go social security

A) always makes all generations worse off.
B) makes some generations better off, and cannot make any generation worse off.
C) may make some generations worse off and cannot make any generation better off.
D) may be Pareto improving.
E) always makes all generations worse off compared to a fully-funded system.

Question 26

In a fully-funded social security program

A) the young pay for the benefits of the old.
B) the young are forced to save for their own retirement.
C) the young have to buy bonds for the old.
D) the young are forced to save for the retirement of the old.

Question 27

In a pay-as-you-go social security system,everyone can be made better off only if

A) the population growth rate exceeds the real interest rate.
B) the real interest rate remains higher than the population growth rate.
C) the number of old households exceeds the number of young households.
D) the interest rate for borrowers is sufficiently below that of lenders.
E) it is preceeded by a fully funded system.

Question 28

Moral hazard represents a problem for fully-funded social security because

A) the government is likely to never pay out promised benefits.
B) households invest in assets that are too safe.
C) population growth remains below the real interest rate.
D) households would invest retirement savings in risky assets.
E) population growth exceeds the real interest rate.