Financial Crisis Suppose That Banks Are Less Able to Raise Funds and Funds

question 104

Multiple Choice

Financial Crisis
Suppose that banks are less able to raise funds and so lend less. Consequently, because people and households are less able to borrow, they spend less at any given price level than they would otherwise. The crisis is persistent so lending should remain depressed for some time.
-Refer to Financial Crisis. Suppose the economy reaches long-run equilibrium without the Fed responding. Now suppose the financial crisis ends and the ability of banks to lend returns to normal. In which case is the price level lower compared to its value prior to the crisis?

• A) both after the economy reaches long-run equilibrium during the crisis and in the long-run equilibrium after the crisis is over
• B) after the economy reaches long-run equilibrium during the crisis but not in the long-run equilibrium after the crisis is over
• C) in the long-run equilibrium after the crisis is over but not after the economy reaches long-run equilibrium during the crisis
• D) neither after the economy reaches long-run equilibrium during the crisis nor in the long-run equilibrium after the crisis is over

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Definitions:

Efficient Use

Utilization of resources in such a way that maximizes the production of goods and services at lowest cost.

Coase Theorem

A principle stating that if trade in an externality is possible and there are no transaction costs, bargaining will lead to an efficient outcome regardless of the initial allocation of property.

Usage Fee

A charge imposed for using a particular service or facility, typically structured according to the extent or duration of use.

Efficient

Characterized by achieving a desired outcome with the least wasted effort or resources.