ps2 - ECON 3310: Money and Credit Problem Set 2 Instructor:...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: ECON 3310: Money and Credit Problem Set 2 Instructor: Karel Mertens Due in class on Friday October 23 1. The figure below shows the total reserves (billions of dollars) of US banks since 2000. Discuss why reserves have increased so dramatically since late 2008. 2. A firm seeks to finance an investment project of size normalized to one. The riskless rate of interest is assumed to be zero. Once a firm get its financing, it can choose between safe and risky strategy. The safe strategy produces S with probability S and 0 with probability 1- S . Similarly, the risky strategy produces R with R and 0 otherwise. Assume that only the safe strategy has a positive (expected) Net Present Value and that the pay off using risky strategy is greater than using safe one once it succeeds, i.e. S S > 1 > R R and R > S . Whether a strategy was successful is 1 assumed to be verifiable by outsiders, but the strategy used is not. Because lenders cannot observe the the firms production, it is natural that lenders demand a fixed...
View Full Document

This note was uploaded on 04/02/2011 for the course ECON 3310 at Cornell University (Engineering School).

Page1 / 2

ps2 - ECON 3310: Money and Credit Problem Set 2 Instructor:...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online