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Effects of Real Interest Rate on Consumption and Investment Expenditure

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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?

US Securities and Exchange Commission (SEC) Signup and view all the answers

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

Ensure depositors are compensated if a bank fails Signup and view all the answers

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

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

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

To create a safety net for depositors Signup and view all the answers

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

To address difficult asymmetric information problems Signup and view all the answers

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

Bank failures might occur Signup and view all the answers

How does collateral reduce moral hazard in lending?

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