Why are banks restricted in the assets that they can own? For example, why do you think banks are prohibited from owning common stock?
What will be an ideal response?
There are a few reasons for this; one, many of these assets are relatively illiquid and can cause wide swings in the value of assets. If the value of these assets were to decrease significantly, the institutions' capital would be negatively impacted putting the institution and the system at risk. Another reason is the problem of moral hazard. The government is providing a safety net, which by itself would cause a bank to want to seek a higher return by taking on more risk. To combat this problem, regulators restrict the institution in the types of assets it can hold.
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As the economy becomes more technologically sophisticated, the wage premium can be expected to
A. continue rising. B. continue falling. C. rise. D. fall.
Government policies that encourage savings
A) reduce interest rates. B) increase interest rates. C) have no effect on interest rates. D) lower the net present value of all investments.
Using a graph, show the price-output combination of a natural monopoly without regulation and the price-output combination if the government requires the monopoly to earn a normal rate of return. What are economic profits in each situation?
What will be an ideal response?
What arguments have been advanced in defense of price discrimination?
What will be an ideal response?