If we think back to Chapter 11 when we discussed moral hazard, discuss how a government ceding the right to control the amount of currency to a central bank is a way to treat a potential moral hazard problem.
What will be an ideal response?
Government officials have a variety of options available to finance their expenditures; these include taxation, borrowing and printing currency. The printing of currency, though inflationary, would allow these officials to avoid the short-term problems of raising taxes and/or borrowing, which may reduce their chances of holding on to their office, and by printing currency, the problem of inflation may not occur until they are out of office. This creates a potential moral hazard for elected officials, which is removed by giving the power to print currency to an independent central bank.
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Between 1930 and 1933, many banks in the U.S. failed because: a. the FDIC moved too slowly to prevent the bank failures
b. most bankers were either corrupt or incompetent. c. of excessive regulation by the federal government. d. people shifted their funds to take advantage of rising stock market prices. e. people lost confidence in them.
The difference in the prices of a zero-coupon bond and a coupon bond with the same face value and maturity date is simply:
A. the present value of the final payment. B. the future value of the coupon payments. C. the present value of the coupon payments. D. zero, since they are the same.
Suppose a consumer consumes two goods, X and Y. The slope of the budget constraint equals the
a. marginal rate of substitution. b. rate at which the consumer will give up X to gain Y while maintaining the same level of utility. c. relative price of the two goods. d. All of the above are correct.
The actual exchange rate of the real, Brazil's currency, is 2.40 real per U.S. dollar. According to the PPP estimation, the exchange rate should be 1.20 real per U.S. dollar. This implies that the real is:
A. undervalued by 50 percent. B. overvalued by 20 percent. C. undervalued by 20 percent. D. overvalued by 50 percent.