In the Real Business Cycle models including the one’s created by Kyland and Pres
ID: 1102566 • Letter: I
Question
In the Real Business Cycle models including the one’s created by Kyland and Prescott, what should policymakers do if the economy is hit by a massive financial crisis that pushes the economy to the brink of economic collapse?
1) Increase the level of liquidity within the financial system.
2)Provide low cost loans to producers to insure the market for inputs does not collapse.
3)Increase government spending in order to create jobs for the unemployed.
4)Co-ordinate macroeconomic policies with other countries in order to increase confidence.
5)Nothing, market will adjust and return to equilibrium once the shock has passed.
Explanation / Answer
During financial crisis situations of bank panics and bank runs develop and a situation of asset liability mismatch leads the financial institutions to liquidating there assets so as to pay out the liabilities of the depositors.
Thus the correct option is (a)
(b) is incorrect since no loans are available.
(c) this is a later on step.