ECN 506 Lecture Notes - Lecture 5: Troubled Asset Relief Program, Federal Funds Rate, Adverse Selection
2 Jun 2015
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Document Summary
When one party to a transaction knows more than another, the situation is one of. Q. a. b: opportunity cost, asymmetric information. rational expectations. imperfect credibility. The main problems caused by asymmetric information are irrational expectations and moral hazard. imperfect credibility and adverse selection. Q. a. b: adverse selection and irrational expectations, adverse selection and moral hazard. When people or firms that are worse-than-average risks are most likely to enter a contract irrational expectations. Q. that is offered to everyone, the problem is called a: adverse selection, opportunity cost, moral hazard. When the existence of a contract changes the behavior of a party to the contract, the irrational expectations. Q. problem is called a: adverse selection, opportunity cost, moral hazard. A bank offers credit cards with a 25 percent interest rate, when its competitors" cards have. Despite the high rate, the bank finds itself losing money because many of its customers fail to repay the balances on their cards.
