Quiz #16

• 1. In the modern parlance, a liquidity trap occurs when
• banks have excess reserves from budget deficits which means low interest rates do not stimulate the economy.
• banks do not have enough cash to lend which means that low interest rates do not stimulate the economy.
• banks cannot find any credit-worthy borrowers which means that low interest rates do not stimulate the economy.
• 2. Consider this logic: (a) Atoms are not visible to the naked eye; (b) Humans are made up of atoms; (c) Therefore, humans are not visible to the naked eye. This logical flaw is demonstrated in macroeconomics by
• the paradox of thrift.
• the Government Budget Constraint.
• the Gold Standard.
• 3. If a household saves a higher proportion of their income they will have higher future consumption possibilities. Therefore if all households save a higher proportion of their income then all households will have higher future consumption possibilities. This logic is
• is only true if taxation is held constant.
• is only true if government increases its deficit in line with the saving increase.
• is only true if interest rates rise and deliver higher returns on the saving.
• 4. Rising government bond yields for new issues indicate
• that bond prices are falling in response to demand.
• that government spending is becoming more expensive.
• that government spending is increasing the cost of borrowing for private investors.
• 5. In a "balanced sheet recession", aggregate demand falls
• because businesses and households start saving to reduce the debt exposure they created in the boom.
• because government creates fiscal drag by running budget surpluses.
• because businesses become pessimistic about future rates of return and stop investing.

Quiz #16 answers

• 1. In the modern parlance, a liquidity trap occurs when

Answer: banks cannot find any credit-worthy borrowers which means that low interest rates do not stimulate the economy.

Explanation: Please read Balance sheet recessions and democracy for more information or post a comment if you are unsure.

• 2. Consider this logic: (a) Atoms are not visible to the naked eye; (b) Humans are made up of atoms; (c) Therefore, humans are not visible to the naked eye. This logical flaw is demonstrated in macroeconomics by

Answer: the paradox of thrift.

Explanation: Please read Balance sheet recessions and democracy for more information or post a comment if you are unsure.

• 3. If a household saves a higher proportion of their income they will have higher future consumption possibilities. Therefore if all households save a higher proportion of their income then all households will have higher future consumption possibilities. This logic is

Answer: is only true if government increases its deficit in line with the saving increase.

Explanation: Please read Balance sheet recessions and democracy for more information or post a comment if you are unsure.

• 4. Rising government bond yields for new issues indicate

Answer: that bond prices are falling in response to demand.

Explanation: Please read Time for a reality check on debt - Part 1 for more information or post a comment if you are unsure.

• 5. In a "balanced sheet recession", aggregate demand falls

Answer: because businesses and households start saving to reduce the debt exposure they created in the boom.

Explanation: Please read Balance sheet recessions and democracy for more information or post a comment if you are unsure.