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Homework 4 – ECO315-810
How does a mutual fund lower transactions costs through economies of scale?
How does collateral help to reduce the adverse selection problem in credit market?
Explain the principal-agent problem as it pertains to equity contracts.
Why does the free-rider problem occur in the debt market?
What three types of financial service activities have led to serious conflict of interest problems in financial markets in recent years?
How can asymmetric information lead to a bank panic?
Typically, the economy recovers fairly quickly from a recession.

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Homework 4 – ECO315-810

How does a mutual fund lower transactions costs through economies of scale?

How does collateral help to reduce the adverse selection problem in credit market?

Explain the principal-agent problem as it pertains to equity contracts.

Why does the free-rider problem occur in the debt market?

What three types of financial service activities have led to serious conflict of interest problems in financial markets in recent years?

How can asymmetric information lead to a bank panic?

Typically, the economy recovers fairly quickly from a recession. Why did this not happen in the United States during the Great Depression?

What two key factors trigger speculative attacks leading to currency cries in emerging market countries?

Discussion Question

Analyzing the effects (or possible future effects) of economic policies is an important task for professional economists. In a perfectly competitive setting we assume that any government intervention in the market will result in an inefficient outcome and will lead to deadweight loss in total surplus for consumers and producers. However, in the real world we do see a need for some government intervention in markets.
• What are some reasons that government intervention can sometimes lead to a better outcome than a “free” market?

Economic policies are not immune to the fact that there are trade-offs when making important decisions. The most common issue comes when debating whether an economic policy should improve equity or efficiency.
• Define equity from an economist’s perspective. What are the benefits of a policy improving equity? What are the drawbacks?
• Define economic efficiency. What are the benefits and drawbacks of a policy that promotes efficient outcomes?
• Often when a domestic market cannot compete with world prices, tariffs or quotas on production will be used to increase foreign (or import) prices to make those firms competitive. Use equity and efficiency…

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