Chapter 14

Question 1

What is intertemporal substitution?

Answer 1

The allocation of consumption, work, and leisure across time to maximize well-being.

Question 2

What are irreversible investments?

Answer 2

Have high value only under specific conditions—they cannot be easily moved, adjusted, or reversed if conditions change.

Question 3

Negative shocks increase uncertainty, and the more uncertain the world appears, the harder it is for investors to..

Answer 3

know where to invest

Question 4

While investors wait before deciding what to invest in, resources remain idle, contributing to..

Answer 4

further economic slowdown

Question 5

What are labor adjustment costs?

Answer 5

The costs of shifting workers from declining sectors of the economy to the growing sectors.

Question 6

Where can the costs of shifting worker be seen?

Answer 6

1. job search activity

2. migration

Question 7

What is time bunching?

Answer 7

The tendency for economic activities to be coordinated at common points in time.

Question 8

The clustering of economic activity in time makes buying and selling..

Answer 8

more efficient.

Question 9

What is collateral?

Answer 9

A valuable asset that is pledged to a lender to secure a loan. If the borrower defaults, ownership of the collateral transfers to the lender.

Question 10

What is a collateral shock?

Answer 10

A reduction in the value of collateral. Collateral shocks make borrowing and lending more difficult.

Question 11

During booms, asset values increase and banks approve more..

Answer 11

loans

Question 12

When are banks reluctant to lend?

Answer 12

during recessions

Question 13

When asset prices fall, there is a lot of..

Answer 13

collateral damage