Macroeconomics
13th Edition
ISBN: 9781337617390
Author: Roger A. Arnold
Publisher: Cengage Learning
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Question
Chapter 12.4, Problem 1ST
To determine
Identify whether the situation is moral hazard or adverse selction.
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What are moral hazard and adverse selection?
How are they similar, how are they different? What causes each?
Why does "adverse selection" exists in the case when a bank makes loans to individuals?
Why does "moral hazard" exists in the case when a bank makes loans to individuals?
After a loan has been made to a borrower, what can financial intermediaries do to reduce moral hazard?
Chapter 12 Solutions
Macroeconomics
Ch. 12.2 - Prob. 1STCh. 12.2 - Prob. 2STCh. 12.2 - Prob. 3STCh. 12.3 - Prob. 1STCh. 12.3 - Prob. 2STCh. 12.3 - Prob. 3STCh. 12.4 - Prob. 1STCh. 12.4 - Prob. 2STCh. 12.4 - Prob. 3STCh. 12 - How much money did you make last year? What is...
Ch. 12 - Prob. 2QPCh. 12 - Prob. 3QPCh. 12 - Prob. 4QPCh. 12 - Prob. 5QPCh. 12 - Prob. 6QPCh. 12 - Prob. 7QPCh. 12 - Prob. 8QPCh. 12 - Prob. 9QPCh. 12 - Prob. 10QPCh. 12 - Prob. 11QPCh. 12 - Prob. 12QPCh. 12 - Prob. 13QPCh. 12 - Prob. 14QPCh. 12 - Prob. 15QPCh. 12 - Prob. 16QPCh. 12 - Prob. 17QPCh. 12 - Prob. 1WNGCh. 12 - Prob. 2WNGCh. 12 - Prob. 3WNGCh. 12 - Prob. 4WNGCh. 12 - Prob. 5WNGCh. 12 - Prob. 6WNGCh. 12 - Prob. 7WNGCh. 12 - Prob. 8WNGCh. 12 - Prob. 9WNGCh. 12 - Prob. 10WNG
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- Why can government safety nets create both an adverseselection problem and a moral hazard problem?arrow_forwardIf the theory of moral hazard is correct, how would you expect the gains in insurance coverage to affect health behaviors such as smoking, drinking, exercise, and healthy eating habits? What would explain why moral hazard MIGHT NOT occur after the large gains in health insurance coverage?arrow_forwardProvide a real-world example of "Adverse Selection" in a business or financial transaction.arrow_forward
- How do information asymmetries affect financing decisions?arrow_forwardWhich of the following scenarios best illustrates the concept of "Moral Hazard" in the context of money and banking? Multiple Choice A government implementing a tax cut to stimulate economic growth. A bank offering competitive interest rates to attract new customers. A borrower taking on excessive risk because they know their loans are backed by a government bailout. An individual investing in a diversified portfolio to manage risk.arrow_forwardWhy some economists worry that there could be "moral hazard" risk after US government bailed out Silicon Valley Bank.arrow_forward
- How do you think the problem of moral hazard might have affected the safety of sports such as football and boxing when safety regulations started requiring that players wear more padding?arrow_forwardAsymmetric information makes it hard for investors to sell securities. Banks, meaning both investment and commercial, specialize in reducing asymmetric information. What methods do they have for reducing information asymmetries? Be sure to specify if the methods are designed to reduce the problems of adverse selection or moral hazard.arrow_forwardWhat are adverse selection and moral hazard?arrow_forward
- How could a company minimize asymmetric information if they were interested in pricing their stock fairly?arrow_forwardIn a formal setting where borrowers are subject to moral hazard, critically evaluate, especially with the reference to the relevant empirical literature, whether peer monitoring can reduce the likelihood of defaultarrow_forwardThe adverse selection problem in lending occurs: When information costs are low. When more risky borrowers than safe borrowers seek a loan. When a borrower engages in riskier activity after a loan is made. Bankers refuse to make a loan to a lender. The moral hazard problem in lending occurs: When information costs are low. When more risky borrowers than safe borrowers seek a loan. When a borrower engages in riskier activity after a loan is made. Bankers refuse to make a loan to a lender.arrow_forward
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