Option A) Adverse selection problems increase: The problem of adverse selection arises due to asymmetry in information. In the case of the bond markets, when interest rates are higher two things happen - First, genuine borrowers find it hard to borrow money because of high rates of interest and thus the pool of good borrowers might shrink; second, bad borrowers are ready to borrow money at even these high rates of interest because they anyway do not plan on returning the money and their chances of default are very high. Thus with high rates of interest, the problem of adverse selection is compounded as the pool of good borrowers shrinks and it is increasingly more likely that the borrower you choose to lend to, might default (as there are higher chances of lending to risky/bad borrowers).
35) When interest rates in the bond market rise, A) adverse selection problems increase. C) moral...
Moral hazard and adverse selection issues likely contributed to the sub-prime mortgage problems during the 2007-2008 recession. Give an example of how moral hazard could be a problem in a simple mortgage market with borrowers and lenders. Give an example of how adverse selection could be a problem in a simple mortgage market with borrowers and lenders. How would the process of bundling mortgages together into a security for investors (Mortgage-backed-securities) affect information asymmetries?
Adverse selection and moral hazard are two examples of: _______. A) transaction costs B) symmetric information C) information cost D) financial market efficiency
For each scenario, indicate whether it is an example of moral hazard or adverse selection. a. You decide to buy a new car instead of a used car because you are worried about the quality of the used car. moral hazard adverse selection b. You sell your condominium because you fear there will be a large special assessment next year. There has been no official notice of an upcoming assessment. moral hazard adverse selection c. The owner of a company...
For the following cases, explain whether there is a problem of adverse selection or moral hazard: (2 points each) a. a classmate bets you $10,000 that she will fail this exam b. a person with an existing, serious medical condition applies for health insurance c. I decide to take up sky diving after I buy life insurance d. Wells Fargo offers credit cards with an interest rate of 20% on unpaid balances to anyone who wants on. e. you offer...
If a bond carries a 6.5% interest rate, and interest rates in the market rise to 9%, what happens to the market price that bond trades at all other things being equal?
If market interest rates increase, investors in corporate bonds will see the current market value of their bonds do what in the secondary market? a. If the market interest rates increase, the coupon rate on the bond increases b. When market interest rates increase, the market value of corporate bonds increase c. Remain the same, because the face value never changes d. When market interest rates increase, the market value of corporate bonds decrease
What happens when the price level rises? a. Interest rates rise, so firms increase investment. b. Interest rates rise, so firms decrease investment. c. Interest rates fall, so firms increase investment. d. Interest rates fall, so firms decrease investment. 44. Which of the following shifts money demand to the left? a. an increase in the price level b. a decrease in the price level c. an increase in the interest rate d. a decrease in the interest rate 45. If the world real interest rate exceeds the Canadian real interest...
Debt deflation occurs when A) corporations pay back their loans before the scheduled maturity date. B) an economic downturn causes the price level to fall and a deterioration in firms' net worth because of the increased burden of indebtedness. C) lenders reduce their lending due to declining stock prices (equity deflation) that lowers the value of collateral. D) rising interest rates worsen adverse selection and moral hazard problems.
A. Interest rates will be unaffected. B. Interest rates will decrease. C Interest rates will increase. D Interest rates could increase or decrease. In December 2017, the Trump Administration and the U.S. Congress passed tax reform legislation, the 2017 Tax Cuts and Jobs Act, that cut corporate taxes from 35 percent to 21 percent. Consider the market for money illustrated in the figure below. Assume the market initially (just prior to the legislation) is in equilibrium at point A. What...
1. Because of ______, the market will provide ______ the socially optimal level of information. A. The credibility problem; more B. The problem of adverse selection; less C. moral hazard; more D. The free-rider problem; less 2. If technological developments increase the marginal product of labor, then the: A. Supply of labor will increase. B. Demand for labor will decrease. C. The equilibrium wage rate will decrease. D. Demand for labor will increase.