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Problem Set #5 (Fall 2011) 1/5 Name: ____________________________ SID: ____________________________ GSI: ____________________________ Econ 100B Macroeconomic Analysis Professor Steven Wood Fall 2011 Problem Set #5 ANSWERS Due: November 22, 2011 (in class before 3:50:01 p.m.) Place your completed problem set in the box near the entrance. Please sign the following oath: The answers on this problem set are entirely my own work. I neither copied from the work of others nor allowed others to copy from my work. _______________________________________ Signature Any problem set turned in without a signature will be assigned a grade of zero. Problem Set Instructions 1. You MUST complete your problem set on this template. 2. Graphs and equations MAY be drawn by hand. When drawing diagrams, clearly and accurately label all axis, lines, curves, and equilibrium points. 3. Explanations MUST be word-processed. Your explanations should be succinct and to the point.

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Problem Set #5 (Fall 2011) 2/5 A. Multiple Choice Questions (15 points) . Circle the letter corresponding to the best answer (3 points each). 1. Moral hazard arises because: a. Adverse selection exists. b. Free-rider problems exist. c. Of the law of diminishing marginal opportunity costs. d. One party to an economic transaction possesses more information than another. 2. The tyranny of collateral: a. Suggests that government tax rates are too high. b. Generates problems of moral hazard and adverse selection. c. Implies that when a person has very few assets it may be difficult to acquire financing. d. Implies that government regulation can decrease moral hazard problems in the financial sector. 3. For a given real exchange rate, a nominal appreciation of the domestic currency will result from: a. A decrease in the prices of foreign goods. b.
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