How does adverse selection contribute to market failure?

July 7, 2024 No Comments

A: Adverse selection is perhaps the most academically cited example of market failure in a laissez-faire economy. The problem arises when exchanging agents have different information or conflicting incentives about product quality. According to adverse selection theory, voluntary market transactions sometimes attract the sub-optimal type

How does aggregate demand affect price level?

July 7, 2024 No Comments

A: Prices coordinate supply and demand, and they are also determined by it; there is no clean, direct and one-dimensional link between aggregate demand and general price levels. Under ceteris paribus conditions, however, a rightward shift in aggregate demand corresponds with an increase in the

How do investment banks help the economy?

July 7, 2024 No Comments

A: There are two broadly recognized functions of investment banks: capital market intermediation and trading. These are distinct and separate from the functions typically associated with commercial banks, which accept deposits and make loans. Investment banks are critical agents of capital formation and price setting.

How does contractionary fiscal policy lead to the opposite of the crowding out effect?

July 7, 2024 No Comments

A: According to general equilibrium models in contemporary macroeconomics, expansionary fiscal policy could cause crowding out of private activity in the credit market. This argument also flows the other way; contractionary policy could allow for increased private activity in the credit market. This phenomenon is

How do investors lose money when the stock market crashes?

July 7, 2024 No Comments

A: Over the last 100 years, there have been several large stock market crashes that have plagued the American financial system. For example, during the Great Depression, stock prices dropped to 10% of their previous highs and during the crash of 1987, the market fell more

How do leverage ratios help to regulate how much banks lend or invest?

July 7, 2024 No Comments

A: Banks are among the most leveraged institutions in the United States; the combination of fractional-reserve banking and Federal Deposit Insurance Corporation, or FDIC, protection has produced a banking environment with limited lending risks. To compensate for this, three separate regulatory bodies, the FDIC, the

How do modern companies assess business risk?

July 7, 2024 No Comments

A: Before a business can assess or mitigate business risk, it must first identify probable or likely risks to its bottom line. There is no surefire method for identification or assessment, but firms rely on reasonable approximations based on past experience. Risk processes naturally evolve

How do modern corporations deal with agency problems?

July 7, 2024 No Comments

A: Agency problems—also known as principal-agent problems or asymmetric information-driven conflicts of interest—are inherent in static corporate structures. This conflict arises when separate parties in a business relationship, such as a corporation’s managers and shareholders, or principals and agents, have disparate interests. Principals hire agents

How do NGOs get funding?

July 7, 2024 No Comments

A: A non-governmental organization (NGO) is a non-profit, citizen-based group that functions independently of government. NGOs are organized on local, national and international levels to serve specific social or political purposes. As non-profit organizations, NGOs rely on a variety of sources for funding projects, operations,

How do property rights affect externalities and market failure?

July 7, 2024 No Comments

A: Externalities, or external economies, are important subjects in economics, especially when negative externalities may adversely affect traditional Pareto-optimal outcomes. A system that protects private property rights is often the most efficient at correctly distributing costs and benefits as long as there is a visible

All Rights Reserved