ECON 0280 Problem Set 6

ECON 0280 Problem Set 6 - 5 Would moral hazard and adverse...

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ECON 0280: Introduction to Money and Banking Problem Set 6—Ball Chapter 7 1. Explain why the adverse selection problem arises in equity and debt markets. What can be done to reduce this problem? 2. Explain how the principal-agent problem affects stock markets. What can be used to reduce this problem? 3. Explain the tools used to reduce the moral hazard problem in debt contracts. 4. Describe two ways in which financial intermediaries help lower trans-
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Unformatted text preview: 5. Would moral hazard and adverse selection still arise in financial mar-kets if information was not asymmetric? 6. Which firms are most likely to use bank financing rather than to issue bonds or stocks to finance their activities? Why? 7. The more collateral there is backing a loan, the less the lender has to worry about adverse selection. Is this statement true, false or uncer-tain? Explain your answer. 1...
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