Question

1. Suppose that government can borrow at 2.5% interest. Typically, companies can borrow at a rate that is 2% higher than government rates. If you notice that rates for companies are 7.5%, this is an indication of:

debt overhand

maturity transformation

a credit crunch

an asset bubble

2. Double-digit inflation

was the norm in the United States until the end of the Vietnam War

has occurred in the United States in only three of the past fifty years

has occurred throughout most of United States history

has not occurred in the United States since the Great Depression

is also called creeping inflation

3.

Figure 2-6
Point	#Rockets	#Cruise Ships
A	20	0
B	18	6
C	14	10
D	8	12
E	0	13

Figure 2-6 shows five different combinations of rockets and cruise ships that a country could manufacture. Suppose it decided to produce 18 rockets and 12 cruise ships. Which of the following would be true?

The country will be at point C.

The country will not be fully utilizing its resources.

The country will be at the midpoint of points B and D.

This combination could not be produced.

The country will be at point B.

Answer 1

1 Suppose that government can borrow at 2.5% interest. Typically, companies can borrow at a rate that is 2% higher than government rates. If you notice that rates for companies are 7.5%, this is an indication of a credit crunch

- A credit crunch is situation where there is low availability of loanable funds in the market due to risk of default, and risk of default increases the rate of interest rate.

2. Double-digit inflation

- has occurred in the United States in only three of the past fifty years

- Inflation rate in double digit in last 50 years

1974	12.30%
1979	13.30%
1980	12.50%

3. shows five different combinations of rockets and cruise ships that a country could manufacture. Suppose it decided to produce 18 rockets and 12 cruise ships. Which of the following would be true?

- The above picture shows country's production possibility at various combination

- Given combination requires more resources.

- Thus country can not produce 18 rockets and 12 cruise ships

Thus correct option is This combination could not be produced.