The government safety net creates both an adverse selection problem and a moral hazard problem. Explain
What will be an ideal response?
The adverse selection problem occurs because risk-loving individuals might view the banking system as a wonderful opportunity to use other peoples' funds knowing that those funds are protected. The moral hazard problem comes about because depositors will not impose discipline on the banks since their funds are protected and the banks knowing this will be tempted to take on more risk than they would otherwise.
You might also like to view...
Refer to Scenario 12.1. Suppose that a third friend, Ryan, joins Simon and Paula on their way home from school, and this reduces the probability of any particular individual from stepping forward to help the man being attacked from 70% to 60%
What is the probability of either Simon, Paula, Ryan, or any combination of the three trying to rescue the man? A) 21.6% B) 50.4% C) 72.0% D) 93.6%
The governmental expense of a farm price support tends to diminish as the price of the good falls.
Answer the following statement true (T) or false (F)
Which of the following is another way of saying "marginal benefits of an action"?
A. Benefits given up, once the action is taken B. Unintended gains from taking the action C. Benefits accruing to others, as a result of one's action D. Extra benefits resulting from the action
The entry of new firms into a monopolistic competitive industry will shift the
a. market demand curve to the right b. market demand curve to the left c. existing firms' demand curves to the right d. existing firms' demand curves to the left e. market supply curve to the left