What is private information and what problems does it create?
What will be an ideal response?
Private information is information that is available to one person but too costly for anyone else to obtain. Private information creates two problems: moral hazard and adverse selection.
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Typically, in towns and villages across the Midwest, bowling alleys are one-story buildings. In Manhattan, one is more likely to bowl in alleys found in multi-story high rises. Why?
A) Because Midwesterners live on flat lands, they think flat and build flat. B) The bowling cultures are different. C) The cost of building single-story bowling alleys in Manhattan is too high. D) Midwestern zoning codes must prohibit bowling alleys in multi-story structures.
A reduction of the discount rate by the Federal Reserve Banks has the direct effect of
A) making it less costly for commercial banks to borrow from the Fed. B) making it more costly for the Treasury to finance deficits. C) increasing commercial bank reserves. D) increasing the stock of money. E) doing all of the above.
If the Fed has a goal of stable real GDP and the government announces a tax cut, which of the following would occur?
a. Money demand would not change, real GDP would not change, the interest rate would decrease, and there would be partial crowding out. b. Money demand would not change, real GDP would not change, the interest rate would increase, and there would be complete crowding out. c. Money demand would increase, real GDP would not change, the interest rate would increase, and there would be partial crowding out. d. Money demand would not change, real GDP would increase, the interest rate would decrease, and there would be complete crowding out. e. Money demand would increase, real GDP would not change, the interest rate would decrease, and there would be complete crowding out.
Suppose a consumer buys pizza (P) and soft drinks (S). The price of pizza is $10, the price of soft drinks is $2 and the consumer's income is $100. If pizza is measured on the vertical axis and soft drinks are measured on the horizontal axis, then the consumer's budget constraint is given by:
A. P = 10 - (1/5)S B. S = 10 - (1/5)P C. P = 100 - 5S D. P = 10 - 5S