In the Example with Credit Market Imperfections in General Equilibrium

question 29

Multiple Choice

In the example with credit market imperfections in general equilibrium, if the borrowing constraint binds

• A)a reduction in government debt has no effect on the market interest rate.
• B)a reduction in government debt lowers the market interest rate.
• C)a reduction in government debt has no effect on the consumption of lenders.
• D)a reduction in government debt is a Pareto improvement.
• E)a reduction in government debt raises the market interest rate.

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Definitions:

Social Value

The total benefit to society from producing or providing a good or service, including both private benefits and any external benefits to the wider community.

Subsidy

Financial assistance granted by the government to support or lower the cost of goods and services.

Market Equilibrium

The condition in a market where the quantity of a product supplied is equal to the quantity demanded, often resulting in an equilibrium price.

Output Level

The quantity of goods or services produced by a company, industry, or economy within a specified period.