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Chapter 13
Money and Output in the Short Run
 Multiple Choice Questions
1.
During a business cycle expansion, output grows until it reaches
(a) the physical maximum of production.
(b) the level at which inflation begins.
(c) a trough.
(d) a peak.
2.
The low point in a business cycle is known as the
(a) lower limit.
(b) zero point.
(c) trough.
(d) peak.
3.
Business cycles typically last
(a) from several months to several years.
(b) less than one year.
(c) more than five years.
(d) more than ten years.
4.
Business cycles have been a feature of modern economies since
(a) World War II.
(b) 1900.
(c) 1970.
(d) the Industrial Revolution.
Business cycles
(a) have existed since the Industrial Revolution, but have been analyzed by economists only since
the nineteenth century.
(b) have existed since the nineteenth century, but have been analyzed by economists only since
World War II.
(c) have existed since World War II, but have been analyzed by economists only since 1980.
(d) have existed since the Middle Ages, but have been analyzed by economists only since the
Industrial Revolution.
5.
6.
Periods of contraction in the business cycle are known as
(a) expansions.
(b) inflations.
(c) recessions.
Chapter 13
Money and Output in the Short Run
405
(d) down ticks.
7.
The growth rate of the money supply
(a) increases during both booms and recessions.
(b) increases during booms and falls during recessions.
(c) falls during booms and increases during recessions.
(d) falls during both booms and recessions.
8.
Movements in the growth rate of the money supply are
(a) procyclical.
(b) countercyclical.
(c) unrelated to the business cycle.
(d) difficult to identify because the federal government has stopped collecting data on the money
supply.
9.
Which of the following statements is correct?
(a) Monetary expansions precede business cycle peaks, and monetary contractions precede business
cycle troughs.
(b) Monetary expansions precede business cycle troughs, and monetary contractions precede
business cycle peaks.
(c) Monetary expansions precede both business cycle troughs and business cycle peaks.
(d) There is no consistent relationship between monetary expansions and contractions, and the
business cycle.
Which of the following is a correct characterization of the views of economists on the relation
between changes in the money supply and changes in output in the short run?
(a) Economists agree that changes in the money supply are responsible for subsequent changes in
output.
(b) Economists agree that changes in the money supply reflect, rather than cause, changes in output.
(c) Economists disagree over whether changes in the money supply are responsible for subsequent
changes in output or whether changes in the money supply reflect changes in output.
(d) Economists disagree over whether changes in the money supply and changes in output are
closely related in the short run.
10.
11.
When economists state that in the long run prices are flexible they mean
(a) inflation must be zero in the long run.
(b) in the long run firms adjust their prices to reflect changes in cost or demand.
(c) changes in the nominal money supply have greater impact on the level of economic activity in
the long run than in the short run.
(d) a one-time increase in the money supply will affect output only in the long run.
12.
When economists state that money is neutral in the long run, they mean that in the long run
(a) fluctuations in the money supply are equally likely to lead to recessions as to expansions.
(b) changes in the money supply have the same impact on the rich as they do on the poor.
(c) the level of output is independent of the nominal money supply.
(d) the price level is independent of the nominal money supply.
13.
In the long run the key reason that money is neutral is that
(a) the federal budget is balanced.
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Hubbard • Money, the Financial System, and the Economy, Fifth Edition
(b) prices are flexible.
(c) business cycles have become much milder.
(d) the nominal interest rate must equal the real interest rate.
14.
15.
In the long run, one-time increases or decreases in the nominal money supply affect
(a) real output, but not the price level.
(b) the price level, but not real output.
(c) both real output and the price level.
(d) neither real output nor the price level.
According to the real business cycle model,
(a) prices are flexible in the long run, but not in the short run.
(b) prices are flexible in the short run, but not in the long run.
(c) prices are flexible in both the short run and the long run.
(d) prices are inflexible in both the short run and the long run.
16.
According to the real business cycle model, in the economy’s short run equilibrium
(a) inflation must be zero.
(b) output is as the full employment level.
(c) productivity must be zero.
(d) the supply of money must be constant.
17.
According to the real business cycle model, the economy’s short-run aggregate supply curve is
(a) affected by monetary policy but not fiscal policy.
(b) flatter than the long-run aggregate supply curve.
(c) horizontal.
(d) vertical.
18.
Which of the following is NOT an explanation for short-run fluctuations in output in the real
business cycle model?
(a) A temporary shock to productivity
(b) A decline in the availability of oil
(c) An increase in the money supply
(d) A major increase in workplace safety regulations
19.
According to the real business cycle model, changes in the money supply will affect economic
activity
(a) in neither the short run nor the long run.
(b) in the short run but not the long run.
(c) in the long run but not the short run.
(d) in both the short run and the long run.
The argument that changes in output cause changes in the money supply is known as
(a) the liquidity effect.
(b) the money multiplier effect.
(c) reverse causation.
(d) direct causation.
20.
Chapter 13
Money and Output in the Short Run
407
21.
According to the real business cycle model, the correlation between changes in the money supply
and changes in output over the business cycle results from
(a) changes in money causing changes in output.
(b) changes in output causing changes in the demand for money, which leads the Fed to make
changes in the money supply.
(c) increases and decreases in the federal budget deficit, causing both the changes in money and the
changes in output.
(d) chance; the real business cycle model offers no other explanation for it.
22.
According to the real business cycle model,
(a) changes in money growth cause output fluctuations in both the short run and long run.
(b) changes in money growth cause output fluctuation in the long run, but not in the short run.
(c) there is no causal link between the money supply and output.
(d) most observed changes in the money supply are independent of previous changes in output.
23.
Milton Friedman and Anna Schwartz found in their study of money and business cycles from the
Civil War to 1960 that
(a) the growth rate of the money supply falls before output declines in every business cycle.
(b) the growth rate of the money supply rises before output declines in every business cycle.
(c) the growth rate of the money supply falls before output declines during some business cycles
and rises before output declines during other business cycles.
(d) there is no consistent relationship between money and output over the business cycle.
24.
The book in which Milton Friedman and Anna Schwartz reported on their study of the relation
between money and the business cycle is
(a) Money through the Ages.
(b) The General Theory of Employment, Interest, and Money.
(c) A Monetary History of the United States.
(d) Money and the Cycle.
Milton Friedman and Anna Schwartz conclude that
(a) output fluctuations cause changes in money growth.
(b) changes in money growth cause output fluctuations.
(c) there is no causal link between the money supply and output.
(d) there is no evidence for changes in the money supply that are not influenced by changes in
output or by third factors that influenced both money and output.
25.
26.
Milton Friedman and Anna Schwartz believe that money’s impact on output appears
(a) within a few months.
(b) only in the very long run.
(c) with a long and variable lag.
(d) only in the very short run.
27.
Milton Friedman and Anna Schwartz believe that their evidence indicates that money growth causes
output fluctuations because they discovered that
(a) nominal interest rates move inversely with changes in the money supply.
(b) the Fed always responds passively to changes in money demand.
(c) in many episodes money changed as a result of a previous change in output.
(d) in many episodes money changes preceded output changes and were independent of them.
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Hubbard • Money, the Financial System, and the Economy, Fifth Edition
28.
According to Milton Friedman and Anna Schwartz, the loss of output during the early 1930s in the
United States was due to
(a) high tax rates imposed by the federal government.
(b) the Fed’s increasing of the required reserve ratio.
(c) the stock market crash of 1929.
(d) a wave of bank failures.
29.
Milton Friedman and Anna Schwartz traced the recession of 1937–1938 to
(a) the monetary contraction resulting from the Fed’s increase in the required reserve ratio.
(b) the monetary contraction resulting from a wave of bank failures.
(c) the effects of World War II on the demand for U.S. exports.
(d) the increased foreign exchange value of the dollar.
Christina and David Romer identify six independent monetary policy shifts after 1960 in which the
Fed
(a) increased the money supply when output increased and decreased the money supply when
output decreased.
(b) announced a contractionary monetary policy to fight inflation, after which output fell.
(c) announced a contractionary monetary policy to fight inflation, after which output rose.
(d) raised nominal interest rates in order to fight recession, after which the money supply rose.
30.
31.
The finding that output declines following the implementation of a contractionary policy by the Fed
indicates that
(a) reverse causation appears to explain the correlation between changes in money and changes in
output.
(b) money is neutral in the short run.
(c) the real business cycle model’s explanation of the correlation between money and output is
incorrect.
(d) money is neutral in the long run.
32.
Ben Bernanke and Alan Blinder were able to document that
(a) peaks in the rate of growth of the money supply actually follow, rather than precede, peaks in
the business cycle.
(b) increases in the federal funds rate cause output to fall.
(c) increases in the federal funds rate cause increases in the inflation rate.
(d) output declines almost immediately in response to a contractionary policy by the Fed.
33.
Findings by various researchers have shown that
(a) the money supply declines almost immediately in response to a contractionary policy by the Fed
and that output declines with a lag of between six months and one year.
(b) the money supply declines with a lag of between six months and one year in response to a
contractionary policy by the Fed and output declines almost immediately.
(c) the money supply and output decline almost immediately in response to a contractionary policy
by the Fed.
(d) the money supply and output decline with a lag of between six months and one year to a
contractionary policy by the Fed.
34.
New classical economists attribute the link between the money supply and output to
(a) reverse causation.
Chapter 13
Money and Output in the Short Run
409
(b) sticky prices.
(c) the difficulty the Fed has in adjusting the Fed funds rate.
(d) imperfect information.
35.
In the new classical view, firms and workers
(a) adjust their wages and prices, even in the short run.
(b) do not adjust their wages and prices in the short run because they have imperfect information
about changes in the price level.
(c) increase their output when the price level is lower than expected.
(d) fail to incorporate expectations of changes in the money supply into their forecasts of the
aggregate price level.
36.
In the new classical view, whether changes in the nominal money supply affect output in the short
run depends on whether
(a) the changes are expected or unexpected.
(b) prices are flexible or inflexible.
(c) the nominal interest rate is affected by changes in the money supply.
(d) the Fed reacts passively or actively to the onset of recessions.
37.
In the new classical view, if the Chairman of the Fed announces a 10% increase in the money supply
and then takes actions that cause the money supply to grow by 10%, the result will be
(a) a 10% increase in the price level, and no change in output.
(b) a 10% increase in the price level, and a small increase in output.
(c) a less than 10% increase in the price level, and a small increase in output.
(d) a less than 10% increase in the price level, and no change in output.
38.
In the new classical view, if the Chairman of the Fed announces a 10% increase in the money supply
and then takes actions that cause the money supply to grow by more than 10%, the result will be
(a) a 10% increase in the price level, and no change in output.
(b) a 10% increase in the price level, and an increase in output.
(c) a greater than 10% increase in the price level, and an increase in output.
(d) a greater than 10% increase in the price level, and no change in output.
39.
In terms of the AD-AS model, the new classical approach indicates that an expected decrease in the
money supply will not affect output because
(a) neither the AD nor SRAS curve will be affected.
(b) the AD curve will shift left, but the SRAS curve will not shift.
(c) the SRAS curve will shift down, but the AD curve will not be affected.
(d) the AD curve will shift left, and the SRAS will shift down by the same amount.
In terms of the AD-AS model, the new classical approach indicates that an unexpected decrease in
the money supply will affect output because it will cause
(a) the SRAS curve to shift down, whereas the AD curve will be unaffected.
(b) the SRAS curve to shift up, whereas the AD curve will be unaffected.
(c) the AD curve to shift to the left, whereas the SRAS curve will be unaffected.
(d) the AD curve to shift to the right, whereas the SRAS curve will be unaffected.
40.
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Hubbard • Money, the Financial System, and the Economy, Fifth Edition
41.
Suppose that neither output nor the money supply has been growing. In the new classical view, if the
Chairman of the Fed announces a 10% increase in the money supply and then takes actions that
cause the money supply to grow by only 5%, the result will be that
(a) the price level will increase, but output will not.
(b) output will increase, but the price level will not.
(c) neither output nor the price level will increase.
(d) both the price level and output will increase.
42.
Available evidence suggests that
(a) only expected changes in the money supply affect output.
(b) only unexpected changes in the money supply affect output.
(c) both expected and unexpected changes in the money supply affect output.
(d) neither expected nor unexpected changes in the money supply affect output.
43.
The new Keynesian approach shares with the new classical approach
(a) the assumption of rational expectations.
(b) the conclusion that money does not affect output in the short run.
(c) the conclusion that only unexpected changes in the money supply affect output in the short run.
(d) the assumption that the short aggregate supply curve is vertical.
44.
According to new Keynesians, which of the following is NOT an important source of price
stickiness?
(a) Imperfect competition among sellers in the goods market
(b) Government wage and price controls
(c) Long-term nominal wage contracts
(d) Long-term nominal price contracts
According to the new Keynesian approach, changes in the money supply will affect output
(a) only if they are expected.
(b) only if they are unexpected.
(c) whether they are expected or unexpected.
(d) only if they affect the price level.
45.
46.
An expected change in the money supply will result in a greater shift in the short-run aggregate
supply curve in the new classical approach than in the new Keynesian approach because
(a) households and businesses have rational expectations in the new classical approach but not in
the new Keynesian approach.
(b) households and businesses have rational expectations in the new Keynesian approach but not in
the new classical approach.
(c) prices are perfectly flexible in the new Keynesian approach, whereas prices are sticky in the
new classical approach.
(d) prices are perfectly flexible in the new classical approach, whereas prices are sticky in the new
Keynesian approach.
47.
Suppose that neither output nor the money supply has been growing. In the new Keynesian view, if
the Chairman of the Fed announces a 10% increase in the money supply and then takes actions that
cause the money supply to grow by 10%, the result will be
(a) a 10% increase in the price level, and no change in output.
(b) a 10% increase in the price level, and an increase in output.
Chapter 13
Money and Output in the Short Run
411
(c) a less than 10% increase in the price level, and an increase in output.
(d) a less than 10% increase in the price level, and no change in output.
48.
Which of the following statements is true concerning the new Keynesian approach?
(a) Only unexpected changes in the money supply affect output.
(b) Only expected changes in the money supply affect output.
(c) Unexpected changes in the money supply have a greater effect on output than do expected
changes in the money supply.
(d) Expected changes in the money supply have a greater effect on output than do unexpected
changes in the money supply.
49.
In the new Keynesian approach, an increase in the nominal money supply
(a) raises real balances in the short run but not in the long run.
(b) raises real balances in the long run but not in the short run.
(c) raises real balances in both the short and long runs.
(d) does not raise real balances in either the short or long runs.
50.
In the new Keynesian approach, an increase in the nominal money supply affects output by
(a) directly increasing the wealth of consumers and, therefore, their spending.
(b) reducing the real interest rate, thereby stimulating consumption, investment, and net exports.
(c) allowing the government to increase its expenditures.
(d) increasing the funds available for saving, thereby stimulating investment spending.
51.
In the new Keynesian view, an increase in real money balances increases investment spending by
(a) giving business firms more funds to invest.
(b) raising the real interest rate, which makes saving and investing more attractive.
(c) lowering the real interest rate, which reduces the opportunity cost of investing in new plant and
equipment.
(d) allowing the government to increase its spending on bridges, highways, and other public works.
52.
In the new Keynesian view, an increase in the real interest rate would cause firms to
(a) increase their spending on plant and equipment.
(b) increase the wages they pay their employees.
(c) reduce their inventory holdings.
(d) increase their reliance on borrowed funds.
53.
Which of the following is a correct reason why a decrease in the money supply will tend to cause
stock prices to fall?
(a) A decrease in the money supply will cause interest rates to rise, thereby shifting funds from
financial to real investments.
(b) A decrease in the money supply will cause interest rates to fall, thereby shifting funds from
financial to real investments.
(c) A decrease in the money supply will result in higher corporate profits in real terms.
(d) A decrease in the money supply will cause interest rates to rise, thereby making bonds more
attractive investments than stocks.
54.
An increase in the money supply will tend to raise stock prices and
(a) reduce spending by consumers as they attempt to save in order to have the funds to buy more
stock.
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55.
Hubbard • Money, the Financial System, and the Economy, Fifth Edition
(b) increase spending by consumers as their wealth increases.
(c) decrease spending by firms as they cut back on buying new plant and equipment.
(d) decrease spending by firms as they cut back on inventory holdings.
An increase in the money supply will result in a lower exchange rate because
(a) the real interest rate on domestic assets will fall relative to the rates on foreign assets.
(b) the real interest rate on domestic assets will rise relative to the rates on foreign assets.
(c) it will lead to faster domestic growth, resulting in an increase in exports to other countries.
(d) it will lead to lower inflation, thereby increasing the demand for domestic currency.
56.
Stabilization policy refers to attempts to
(a) shift the AD curve to smooth short-run fluctuations in output.
(b) shift the SRAS curve to smooth short-run fluctuations in output.
(c) shift the AD curve to keep the price level as low as possible.
(d) shift the SRAS curve to keep the nominal interest rate as low as possible.
57.
Which of the following statements concerning stabilization policy is correct?
(a) Increasing government spending during an economic boom would be an example of a
stabilization policy.
(b) Increasing taxes during a recession would be an example of a stabilization policy.
(c) New Keynesian economists are skeptical of the value of stabilization policies.
(d) Increasing the money supply during a recession is an example of a stabilization policy.
58.
Which of the following is true of the real business cycle approach to stabilization policy?
(a) It is necessary, but it should not be overused.
(b) It is necessary during recessions but not during booms.
(c) It is unnecessary because output fluctuations reflect productivity disturbances.
(d) It is unnecessary because output fluctuations are largely the result of policy mistakes by the Fed.
59.
Followers of the new classical approach believe that for stabilization policies to be effective they
must
(a) be unexpected.
(b) be announced before they are implemented.
(c) take the form of monetary policy.
(d) take the form of fiscal policy.
Which of the following is true of the new classical view of stabilization policy?
(a) It is necessary, but it should not be overused.
(b) It is necessary during recessions but not during booms.
(c) It is unnecessary because households and firms make use of all available information in forming
expectations of the price level.
(d) It has been very successful in the period since the Great Depression.
60.
61.
According to the new Keynesian view, upturns and downturns in economic activity
(a) may represent times when the economy is not at its long-run equilibrium.
(b) are always the result of unexpected changes in the money supply.
(c) cannot be offset by stabilization policy.
(d) are unrelated to movements in aggregate demand.
Chapter 13
Money and Output in the Short Run
413
62.
Which of the following is true of the new Keynesian view of stabilization policy?
(a) It is necessary because shifts in aggregate demand are the main source of movements in current
output.
(b) It is necessary during recessions but not during booms.
(c) It is unnecessary because output fluctuations reflect productivity disturbances.
(d) It is unnecessary because output fluctuations are largely the result of policy mistakes by the Fed.
63.
In the new Keynesian view, expected changes in monetary policy can affect output in the short run
because
(a) agents do not have rational expectations.
(b) prices are sticky.
(c) business firms rarely pay attention to policy announcements.
(d) they directly increase the funds available for businesses and consumers to spend.
64.
In the new Keynesian view a decline in consumer confidence that leads to a shift left in the AD
curve
(a) will cause output to fall in the short run, but not in the long run.
(b) will cause output to fall in both the short run and the long run.
(c) will not cause output to fall in either the short run or the long run.
(d) will cause output to fall only if prices are fully flexible.
An expansionary monetary policy that successfully counteracts a recession has the side effect of
(a) lower investment spending than if no action had been taken.
(b) a larger government deficit than if no action had been taken.
(c) a higher price level than if no action had been taken.
(d) lower output than if no action had been taken.
65.
66.
The economy begins to enter a recession, but it is several months before this is reflected in the
statistics on GDP. This is an example of
(a) a data lag.
(b) an impact lag.
(c) an implementation lag.
(d) a legislative lag.
67.
The Fed decides to stimulate the economy by driving down the real interest rate. Months pass,
however, before new factories and houses begin to be built in response. This is an example of
(a) a data lag.
(b) an impact lag.
(c) a recognition lag.
(d) an implementation lag.
68.
A recession begins, but Congress and the President take eighteen months to decide the details of the
tax cut that will be used to stimulate the economy. This is an example of
(a) an implementation lag.
(b) an impact lag.
(c) a recognition lag.
(d) a legislative lag.
69.
In 1992 the Central Bank of Japan resisted implementing an expansionary monetary policy because
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70.
Hubbard • Money, the Financial System, and the Economy, Fifth Edition
(a) it believed that output had been beyond its full-employment level in Japan during the late 1980s
and early 1990s.
(b) it followed the real business cycle approach.
(c) it believed that the only way to cure Japan’s economic problems was by reducing the large
government budget deficit the country was suffering from.
(d) it believed that the only way to cure Japan’s economic problems was by reducing the large
balance of trade deficit the country was suffering from.
What strategy did Yasushi Mieno, Governor of the Bank of Japan, believe was appropriate in the
face of declining aggregate output in Japan in the early 1990s?
(a) He decided to use an expansionary monetary policy.
(b) He decided to advise the Japanese government to use an expansionary fiscal policy, while
keeping monetary policy neutral.
(c) He decided to rely on economic expansion in the United States to increase demand for Japanese
products.
(d) He decided to wait for downward adjustment of the price level.
71.
The existence of lags in the policymaking and implementation process has convinced new
Keynesian economists that stabilization policy should
(a) not be used.
(b) be used only to fine-tune the economy.
(c) be used only to fight major downturns in the economy.
(d) be used to fight inflations but not to fight recessions.
72.
In comparing the views of economists on stabilization policy in the 1960s with the views of
economists on stabilization policy in the 1990s, one can say
(a) few economists in the 1960s favored stabilization policy, while most economists in the 1990s
favored stabilization policy.
(b) economists’ views on stabilization policy have changed very little since the 1960s.
(c) fewer economists in the 1990s than in the 1960s believed it is possible to use stabilization policy
to fine-tune the economy.
(d) almost no economists in the 1990s believe stabilization policy should be used.
73.
Which of the following schools of thought among economists believe that unexpected changes in the
money supply can affect output in the short run?
(a) Only new Keynesian
(b) Only new Keynesian and new classical
(c) Only new Keynesian and real business cycle
(d) New Keynesian, new classical, and real business cycle
74.
Which of the following schools of thought among economists believe that expected changes in the
money supply can affect output in the short run?
(a) Only new Keynesian
(b) Only new Keynesian and new classical
(c) Only new Keynesian and real business cycle
(d) New Keynesian, new classical, and real business cycle
75.
Which of the following schools of thought among economists believe that activist stabilization
policy is ever desirable?
Chapter 13
(a)
(b)
(c)
(d)
Money and Output in the Short Run
415
Only new Keynesian
Only new Keynesian and new classical
Only new Keynesian and real business cycle
New Keynesian, new classical, and real business cycle
76.
One important point on which new Keynesian and new classical economists are in agreement is
(a) that only unexpected changes in policy can affect output.
(b) the importance of policy credibility for determining the response of output to policy.
(c) the irrelevance of policy as output changes are the result of technology shocks.
(d) the inability of the assumption of rational expectations to explain the reactions of businesses and
consumers to changes in policy.
77.
According to the new Keynesian approach, output fell during the early 1980s because
(a) fiscal policy was sufficiently contractionary to offset an expansionary monetary policy.
(b) the leftward shift of the AD curve was greater than the rightward shift of the SRAS curve.
(c) consumers and businesses came to expect higher inflation, thereby causing the SRAS curve to
shift to the left.
(d) Congress and the President decided to raise taxes and cut spending in order to reduce the budget
deficit.
78.
According to the new classical view, if Fed policy during the early 1980s had been more credible
(a) the SRAS curve would have shifted less than it did.
(b) the AD curve would have shifted less than it did.
(c) output would have declined by less than it did.
(d) the price level would have declined by more than it did.
79.
According to the new Keynesian approach output fell during the early 1990s because
(a) fiscal policy was sufficiently contractionary to offset an expansionary monetary policy.
(b) the rightward shift of the AD curve was greater than the leftward shift of SRAS curve.
(c) consumers and businesses came to expect higher inflation, thereby causing the SRAS curve to
shift to the left.
(d) the Fed decided to initiate a contractionary monetary policy to fight inflation.

Essay Questions
1.
Discuss the significance of the work of David Romer and Christina Romer that identified six
independent monetary policy shifts after 1960 in which the announcement of a contractionary
monetary policy was followed by a decline in output.
2.
Evaluate the following assertion: “The money supply always increases significantly a few weeks
before Christmas. Therefore, the increase in the money supply must be causing Christmas to
happen.”
3.
Evaluate the following assertion: “The new Keynesian economists reject the misperception theory
because they do not believe that households and businesses use all available information in forming
their expectations of money growth or the price level.”
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4.
Hubbard • Money, the Financial System, and the Economy, Fifth Edition
In the new Keynesian view, monetary policy has its main effect on output through the impact of
interest rate changes on aggregate demand. In the new Keynesian view, in which of the following
countries would an increase in interest rates have the greatest effect on aggregate demand in the
short run: (a) Slobovia, which has a large trade sector and where businesses and firms rely heavily
on short-term borrowing; or (b) Outlandia, which has a small trade sector and where little use is
made of short-term borrowing?