10 Questions
How does collateral help reduce adverse selection in lending?
By reducing the consequences of adverse selection
What is collateral in the context of a loan contract?
The property pledged by the borrower to the lender
Why do most household debts tend to be collateralized?
To reduce the consequences of adverse selection
Which regulatory body in the US requires firms selling securities to disclose financial information?
US Securities and Exchange Commission (SEC)
What role does deposit insurance play as a safety net for depositors?
Ensure depositors are compensated if a bank fails
In what way does collateral help reduce moral hazard in lending?
By decreasing the incentives for borrowers to take on too much risk
What is a common purpose of government regulation in the financial sector?
To create a safety net for depositors
Why do banks play a larger role in providing credit in the US compared to other developed countries?
To address difficult asymmetric information problems
What can happen if depositors withdraw large sums of funds due to uncertainty about bank managers' risky behaviors?
Bank failures might occur
How does collateral reduce moral hazard in lending?
By decreasing incentives for borrowers to take on too much risk
Explore the relationship between real interest rate, consumption expenditure, and investment expenditure. Understand the impact of changes in real interest rate on autonomous consumption expenditure, marginal propensity to consume, and sensitivity of consumption to real interest rate.
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