Econ practice
1. Would moral hazard and adverse selection still arise in financial markets if information was not asymmetric? Please explain. Up to 8 sentences.
2. Does Adverse Selection occur before or after a transaction? Please use a brief example to explain. Up to 5 sentences
3. According to Miskin, describe spinning. How can spinning lead to abuses?
4. How would an unanticipated drop in the price level effect lending? You might want to consider both the demand for borrowing, the supply of funds for borrowing, and the effect on existing loans. Up to 8 to 10 sentences.
Practice 4
1. What is the originate-to-distribute model? How was it a factor in the 2008 crash? How (or why) might incentives be askew in such a model?
2. Using “T-account” ledgers for “Bob’s National Bank” and “Fred’s National Bank” when someone writes a $50 check on their account at Bob’s and uses it to pay a friend who banks with Fred.
3. What happens to reserves at the First National Bank if one person withdraws $1,000 of cash and another person deposits $500 of cash? Use T-accounts to explain.
4. Suppose that you are the manager of a bank that has $15 million in fixed-rate assets, $30 million of rate-sensitive assets, $25 million of fixed-rate liabilities and $20 million of rate-sensitive liabilities.
a. Conduct a gap analysis for the bank and show what will happen to bank profits if interest rates rise 5 percentage points?
b. What actions could you take to reduce the bank’s interest rate risk?
5. What bank regulations exist to reduce moral hazard problems created by deposit insurance? Will they completely eliminate the moral hazard problem?
6. Who owns the fed? How much of the profits do the owners get?
7. Compare the structure, independence, and goals (mission) of the US Federal Reserve Bank and the European Central Bank. Use up to 10 sentences. Alternatively, Bullet form is ok too.