1.) When a “bubble” arises, asset prices are driven by: Select one: a. policymak
ID: 1155479 • Letter: 1
Question
1.) When a “bubble” arises, asset prices are driven by:
Select one:
a. policymakers.
b. changes in aggregate demand and aggregate supply.
c. shifts in money growth rate.
d. shifts in market psychology and successive waves of irrational exuberance.
2.) The bandwagon effect causes investment to be:
Select one:
a. evenly distributed over time.
b. unevenly distributed over time.
c. more responsive to monetary policy changes during recessions.
d. more responsive to monetary policy changes during expansions.
3.) In 2011, most of the 2009 federal stimulus package had been spent, but the unemployment rate remained exceptionally high at nearly 10%. This is an example of the:
Select one:
a. recognition lag.
b. legislative lag.
c. implementation lag.
d. effectiveness lag.
Explanation / Answer
Question 1. When a bubble arises, asset prices are driven by--
Answer: Shifts in market psychology and successive waves of irrational exuberance.
Explanation: A bubble is said to occur when the price of a particular financial asset rises above its original value. Keynesian perspective suggests that it is 'animal spirits' that influence asset prices during an economic bubble. It is widely accepted that it is the human emotions and expectations that drive the asset prices while the cause of the economic bubble may be due to policy failures.
Question 2: The Bandwagon effect causes investment to be--
Answer: Unevenly distributed over time
Explanation: The bandwagon effect is the mentality of people to indulge in a particular action simply because others are doing the same. This effect when applied to investment causes an uneven distribution of investment because at a particular time a group of investors may prefer a particular stock or sector for investment purposes and at a future date may move on to other stocks or sectors. This causes the investment to be unevenly distributed over time as investment decisions are based on human emotions or decision that change from time to time based on several factors.
Question 3.In 2011, most of the 2009 federal stimulus package had been spent, but the unemployment rate remained exceptionally high at nearly 10%. This is an example of the:
Answer: Effectiveness lag
Explanation: Since the federal stimulus package introduced in 2009 was almost fully spent and there was still high unemployment rate it can be said that it was due to the effectiveness lag. When a policy is framed and implemented it takes time for it to become effective or display results. This takes a year or two to fully become effective. The statistics revealed by the bureau of labor reveals that in 2012 the unemployment rate fell by 1 % from 9.3 in 2011 to 8.0 in 2012 and the successive years indicate a further decrease in unemployent levels.
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