1. How do increases in interest rates play a role in promoting financial crises?
Answer: Students should discuss the increase in adverse selection, the decline in lending, the decline in investment and aggregate economic activity, and the effects on cash flow.
Diff: 2 Type: SA Page Ref: 183
Skill: Recall
1 Discuss the factors that lead to financial crises
2. Assume that your economics professor announces to your class that after thirty years of giving exams only on scheduled dates, this semester she will give only surprise quizzes. What is the rational expectation response to this new policy? Why does your self-interest require that you change your behavior? What would the consequences be for students who changed their expectations about exams adaptively?
Objective List: 7.2 Determine how information in the market affects asset prices
If fiat money has no value apart from its use as money, how can it be used as a medium of exchange?