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:

Goals

Objectives or desired outcomes that an individual or organization aims to achieve.

Random Variable

A variable linked to numerical outcomes produced by random effects.

Expected Number

The mean or average outcome of a random variable in a probability distribution.

Catch Fish

The act of capturing fish as a form of aquatic animal harvesting for food, sport, or commercial purposes.