In 2008, problems in the financial sector led to a drying up of credit around th

Question

In 2008, problems in the financial sector led to a drying up of credit around the country: home-buyers were unable to get mortgages, students were unable to get student loans, car-buyers were unable to get car loans, and so on.

True or False:

1. When people can’t get credit to finance their purchases, they will be unable to spend money. This will weaken the economy, and as others see the economy weaken, they will also cut back on their spending in order to save for future bad times. As a result, the credit shortfall will spark a compounding effect through the economy as people cut back their spending, making the economy worse, leading to more cutbacks in spending, and so on.

2. If you believe the economy is self-regulating, then you would advocate policy makers doing nothing in response to the slump.

3. If you believe in Keynesian economics, you would advocate that policy makers undertake monetary and fiscal policies to stimulate spending in the economy.

Explanation / Answer

Ans

A true. Pessimism and ASSYMETRIC information leads to this whole problem

B True. Self correcting economy doesn't need intervention

C True. It advocates fiscal policy more than monetary policy but early Keynesians and new Keynesians do not consider monetary policy unimportant

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