If a Nation Experiences an Output Shock and Wishes to Borrow

question 24

Multiple Choice

If a nation experiences an output shock and wishes to borrow to smooth consumption, how much of the loss is the nation able to borrow and still maintain the long-run budget constraint?

• A) 100% of the output shock
• B) 20% of the output shock
• C) a percentage of the shock to GDP equal to 1/(1 + r^*), where r^* is the world long-run real interest rate
• D) A nation in such a position is better off not to borrow because it might get into financial trouble.

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Definitions:

Investment Grows

The increase in the value of an investment over time through appreciation, dividends, or interest earnings.

Cumulative Voting

A voting system used in elections for directors of a company allowing shareholders to allocate all their votes to one candidate, enhancing minority shareholders' representation.

Dividend Yield

An economic ratio that illustrates the dividends a company pays out yearly in contrast to its stock price.

Voting Rights

The entitlement of shareholders to vote on certain corporate matters, such as electing the board of directors or approving major company decisions.