Briefly explain how moral hazard contributed to the problems faced by Freddie Mac and Fannie Mae in the 2008 financial crisis.
What will be an ideal response?
Student answers will vary. A sample response follows. A moral hazard occurs when people take additional risks because they are insured. In this case, government support for Freddie Mac and Fannie Mae meant that investors saw their mortgage-backed securities as very low risk, and the businesses themselves felt secure in issuing risky securities and making risky investments. These risks led to the collapse of Freddie Mac and Fannie Mae when the housing bubble burst and many people stopped paying their mortgages. The companies’ stocks became worthless and the government took them over.
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How can a corporation's board of directors and its managers try to reduce the principal-agent problem?
What will be an ideal response?
Which of the following did NOT contribute to "internal economies" in the industrialization process?
(a) Diminishing returns to scale (b) Central power sources (c) Managerial improvements (d) Transportation networks
Increases in the productivity of labor result partly from:
A. the law of diminishing returns. B. improvements in technology. C. reductions in wage rates. D. increases in the quantity of labor.
What is the relationship between the Federal funds rate and the prime interest rate? Why doesn’t the Federal Reserve target the prime interest rate?
What will be an ideal response?