Author Question: What are the benefits of bankruptcy laws that enable lenders to seize the assets of firms that ... (Read 81 times)

Sufayan.ah · **on:** Jun 30, 2018

What are the benefits of bankruptcy laws that enable lenders to seize the assets of firms that default on loan contracts?

What will be an ideal response?

Question 2

As the U.S. economy recovers from the recession of 2007-2009, stubbornly high unemployment is a concern. For each of the three business cycle models, identify the appropriate policy regime.

What will be an ideal response?

helenmarkerine · **Reply #1 on:** Jun 30, 2018

Answer to Question 1

When borrowers are aware that default will lead to asset seizure, they will work harder to avoid default. When lenders know that borrowers will do all they can to avoid default, they will offer more funds at lower cost. The result is more and more-productive economic activity. When default occurs, the seizure of assets is a reallocation of resources that raises their value and supports economic growth.

Answer to Question 2

The traditional Keynesian model advises a low real interest rate and a large fiscal deficit to stimulate aggregate demand. The new Keynesian model recommends a moderate stimulus and public announcement of policy makers' commitment to achieving the lowest possible rate of unemployment consistent with price stability. The real business cycle model cautions that policies to promote high employment must operate through incentives to work and to invest, so that aggregate productivity is improved.