Why is the financial industry inherently more unstable than most other industries?
What will be an ideal response?
In most other industries the failure of one participant does not put the other participants and the industry at risk. The same cannot be said of the financial industry. The failure of one bank or financial institution, through contagion, can put the entire system at risk. This is due to information asymmetries that can have depositors assuming their bank is going to also fail and seeking to withdraw their funds. This then leads to liquidity risk, because most banks would lack the liquidity to withstand the run.
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A requirement that the budget be balanced each and every year would worsen the severity of economic fluctuations by preventing which of the following from working?
a. budget surpluses b. budget deficits c. automatic stabilizers d. manual stabilizers
If the labor supply and demand curves cross at a wage of $20,
a. a wage rate of $10 per hour would lead to an excess demand for labor b. a wage rate of $10 per hour would lead to an excess supply of labor c. that wage causes a high rate of cyclical unemployment d. employees are overpaid e. a wage rate of $10 per hour would mean there is a significant amount of structural unemployment
The Jordanian government might consider devaluing its currency (the dinar)
a. if domestic inflation is high b. if Jordan has a large trade deficit c. if Jordan has achieved full employment d. if the dollar is appreciated e. if Jordan has a large trade surplus
One advantage of a proprietorship is that
A) it is relatively easy to raise financial capital for a proprietorship. B) a proprietorship is relatively easy to form and to dissolve. C) there are limits to the possible liabilities of the owner. D) depreciation rates on capital are higher.