Question

T/F with a short explanation

1. By increasing the interest rate, it is possible that a lender facing adverse selection may reduce her own expected profit.

2. Moral hazard is important in credit markets, but not in insurance markets.

3. The Total Poverty Gap is the total income needed to eliminate poverty, normalized by the total income in society.

4. When applied to real-world data, the Solow model does pretty well in explaining how amounts of capital and labor can impact aggregate production.

Answer 1

a) True. When interest rate increased, the investment level will be fall down. The adverse selection mechanism leads to drop of the good borrowers who pool the loans with riskiness of average borrowers. This will reduce the expected profit and most of the investors face a high loss over their investment.
b) False. Moral hazard is the particular point in insurance market. Moral hazards are the incentives to alter the behaviour of the people when there is risk emerged. There is a fall in comprehensive insurance with the incentives take care of the possessions.
c) False. Total poverty gap is the measure which shows the fall in total population from the poverty line. This poverty gap shows the intensity of poverty in the nation. If shows the minimum level of income required for the securing the basic needs for the survival of the people.
d) True. Solow model explain the rise in aggregate production with long run economic growth in capital accumulation, labour supply or the rise in population. The increasing level of this variable will increase the productivity and this will leads to development of aggregate development in production sector.