Financial Accelerator: Framework and Application
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Financial Accelerator: Framework and Application

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Questions and Answers

The 'financial accelerator' framework is primarily used for thinking about which of the following?

  • Environmental impact on financial markets
  • Linkages between financial markets and macroeconomy (correct)
  • Microeconomic decision-making
  • International trade and financial policies

    • Who are the main developers of the 'financial accelerator' framework mentioned in the text?

  • Friedman, Lucas, and Sargent
  • Keynes, Marx, and Smith
  • Ricardo, Malthus, and Mill
  • Bernanke, Gertler, and Gilchrist (correct)

    • The 'credit constraint' analysis mentioned in the text is associated with which of the following decisions?

  • Investment decisions by firms
  • Monetary policy decisions by central banks
  • Consumption/savings decisions by consumers (correct)
  • Government spending decisions by policymakers

    • What are the three types of markets through which firms interact, as mentioned in the text?

    <p>Goods markets, labor markets, and capital/asset markets</p> Signup and view all the answers

    Which major idea underlies the Financial Accelerator Framework as outlined in the text?

    <p>The relevance of stock and bond assets for firms' ability to purchase physical assets</p> Signup and view all the answers

    In the context of macroeconomic outcomes, which sector interacts with monetary and fiscal policy according to the text?

    <p>Private sector</p> Signup and view all the answers

    In the financial accelerator framework, what is the key building block?

    <p>Quantity of physical capital firms can purchase</p> Signup and view all the answers

    What is the nominal interest rate on bonds denoted by in the text?

    <p>q</p> Signup and view all the answers

    What does the real interest rate on stocks represent?

    <p>Nominal return on stock</p> Signup and view all the answers

    What does the quantity of physical capital firms can purchase depend on?

    <p>The market value of their financial assets</p> Signup and view all the answers

    What do the events during period 1 in the enriched basic firm theory involve?

    <p>Using existing capital, hiring labor, choosing stocking holdings, and choosing capital subject to a financing constraint</p> Signup and view all the answers

    What is denoted by 'k2' in the text?

    <p>Capital used for production in period 2</p> Signup and view all the answers

    What is the enriched two-period model of firm profit maximization enriched to allow for?

    <p>Both physical assets (machines and equipment) and financial assets (stocks and bonds)</p> Signup and view all the answers

    What is represented by 'S2' in the text?

    <p>'Risky' asset representing the nominal return on stock</p> Signup and view all the answers

    'Interest rates' can be defined for any type of asset. What does 'i' represent?

    <p>'Nominal interest rate on bonds'</p> Signup and view all the answers

    Study Notes

    Financial Accelerator Framework

    • The financial accelerator framework is primarily used for thinking about the interaction between the financial system and the macroeconomy.
    • The main developers of the financial accelerator framework mentioned in the text are not specified.

    Credit Constraint Analysis

    • The credit constraint analysis is associated with firms' investment decisions.

    Firm Interactions with Markets

    • Firms interact with three types of markets: the goods market, the labor market, and the credit market.

    Key Idea Underlying the Financial Accelerator Framework

    • The major idea underlying the Financial Accelerator Framework is that small shocks to the economy can have large and persistent effects due to the amplification of shocks through the financial system.

    Sector Interaction with Monetary and Fiscal Policy

    • The private sector interacts with monetary and fiscal policy in the context of macroeconomic outcomes.

    Key Building Block of the Financial Accelerator Framework

    • The key building block of the financial accelerator framework is the firm's balance sheet.

    Interest Rates

    • The nominal interest rate on bonds is denoted by 'i' in the text.
    • The real interest rate on stocks represents the real cost of borrowing or the real return on lending.
    • Interest rates can be defined for any type of asset.

    Firm Profit Maximization

    • The quantity of physical capital firms can purchase depends on the availability of credit and the cost of borrowing.
    • The enriched two-period model of firm profit maximization is enriched to allow for the possibility of borrowing and lending.
    • In the enriched basic firm theory, events during period 1 involve the firm making investment decisions and borrowing or lending.
    • 'k2' in the text denotes the capital stock in period 2.
    • 'S2' in the text represents the savings of the firm in period 2.

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    Description

    This quiz explores the 'financial accelerator' framework, the widely used concept in macroeconomic theory and policy for understanding financial markets. Developed by Bernanke, Gertler, and Gilchrist, it sheds light on the financial-macroeconomic linkages underlying events like the Great Depression and Great Recession.

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