Effects of Real Interest Rate on Consumption and Investment Expenditure
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Questions and Answers

How does collateral help reduce adverse selection in lending?

  • By increasing the consequences of default
  • By promoting transparency in financial reporting
  • By decreasing the incentives for borrowers to take on too much risk
  • By reducing the consequences of adverse selection (correct)

    • What is collateral in the context of a loan contract?

  • The credit score of the borrower
  • The property pledged by the borrower to the lender (correct)
  • The amount of money borrowed
  • The interest rate charged by the lender

    • Why do most household debts tend to be collateralized?

  • To increase the interest rate on loans
  • To discourage borrowers from taking on too much risk
  • To promote transparency in lending practices
  • To reduce the consequences of adverse selection (correct)

    • Which regulatory body in the US requires firms selling securities to disclose financial information?

    <p>US Securities and Exchange Commission (SEC)</p> Signup and view all the answers

    What role does deposit insurance play as a safety net for depositors?

    <p>Ensure depositors are compensated if a bank fails</p> Signup and view all the answers

    In what way does collateral help reduce moral hazard in lending?

    <p>By decreasing the incentives for borrowers to take on too much risk</p> Signup and view all the answers

    What is a common purpose of government regulation in the financial sector?

    <p>To create a safety net for depositors</p> Signup and view all the answers

    Why do banks play a larger role in providing credit in the US compared to other developed countries?

    <p>To address difficult asymmetric information problems</p> Signup and view all the answers

    What can happen if depositors withdraw large sums of funds due to uncertainty about bank managers' risky behaviors?

    <p>Bank failures might occur</p> Signup and view all the answers

    How does collateral reduce moral hazard in lending?

    <p>By decreasing incentives for borrowers to take on too much risk</p> Signup and view all the answers

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