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Investment, Asymmetric Information & Financial Cri


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Asymmetric Information
situation when one party doesn't know enough about the other party to make accurate decisions. This creates two kinds of problems:
borrowers
There is asymmetric information in the financial market. Banks are unable distinguish between good and bad _______.
Marginal product
Additional output produced as an input in increased by 1 unit, keeping other inputs constant
Loan
Money that the business owes to the bank
Default premium
_______ works like depreciation. It shifts the demand curve for investment to the left (or down).
medium of exchange
anything that is used to determine value during the exchange of goods and services
unit of account
a means for comparing the values of goods and services
store of value
Something that keeps its value if it is stored rather than used
Three things that make something money:
Medium of exchange, store of value, unit of account
demand, supply
In the labor market, _______ for labor by firm is equal to _______ of labor by consumer. The labor market clears.
lump-sum
The consumer pays_______ taxes 𝑇 to the government in the current period and 𝑇′ in the future period.
representative consumer
The _______ works and consumes in the current period and the future period.
M0
Notation: Monetary Base, Outside Money, Liabilities of the Fed in the form of currency and deposit at the Fed by banks.
M1
Notation: Currency circulated outside the Fed and the banking system (held by the public) plus travelers' checks and demand deposits (checking accounts).
M2
Notation: M1 + Saving accounts, small-denomination time deposits, retail money market mutual funds.
nominal interest rate, real interest rate
The Fisher Equation gives the relationship between the _______ and the _______.
1+R
A nominal bond that sells for one dollar in the current period pays for _______ dollars in the future. Thus, R is the rate of return in terms of money, or the nominal interest rate.
nominal interest rate
It is the rate of interest before adjustment for inflation. The real interest rate is the _______ minus inflation.
Real Interest Rate
The growth rate of purchasing power derived from an investment is the:
inflation
Real interest rate r accounts for the _______ effect.
nominal interest rate (R)
When _______ increases, consumer/firm is more willing to use credit balance, the equilibrium price in the credit card market increases, and credit balance increases.
neutrality
Money _______ means all real variables will stay the same but all nominal quantities change in proportion to the change in money supply.
purchases
The consumers know that the present value of government taxes (inflation tax or standard tax) is given by the present value of government _______.
aggregate demand and supply
Therefore the increase in money supply through the govt. reduction of taxes has no effect on _______.
Interest Rate
Cost of borrowing funds
money supply
all the money available in the United States economy
credit card
A card entitling its holder to buy goods and services based on the holder's promise to pay for these goods and services
long and variable lag
Friedman argued that money affects the real economy through a _______. It is thus very difficult to use money to fine tune the economy.
Taylor Rule
A rule that sets the federal funds rate at the equilibrium real interest rate (which he says in 2 percent a year) plus amounts based on the inflation rate and the output gap.