Question 04 a) Briefly explain why a country without a robust financial system might struggle to achieve high rates of economic growth. b) What is the difference between moral hazard and adverse selection? Explain the "lemons problem." How does the lemons problem lead many firms to borrow from banks rather than from individual investors? c) Why was the Securities and Exchange Commission (SEC) founded? What effect has the SEC had on the level of asymmetric information in the U.S. financial system?

Question 04 a) Briefly explain why a country without a robust financial system might struggle to achieve high rates of economic growth. b) What is the difference between moral hazard and adverse selection? Explain the "lemons problem." How does the lemons problem lead many firms to borrow from banks rather than from individual investors? c) Why was the Securities and Exchange Commission (SEC) founded? What effect has the SEC had on the level of asymmetric information in the U.S. financial system?

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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1. How has deregulation of the financial services industry affected the makeup offinancial intermediaries? How do you think intermediaries’ characteristics willchange in the future? 2. How do banking organizations in the United States differ from banking organizationsin other countries? Why are they different? 3. How is money created in a banking system that has fractional reserve requirements(i.e., a fractional reserve system)? 4. Describe the open market operations undertaken by the Federal Reserve. Whattype of trades would the Fed make if it wanted to increase interest rates? 5. How would funds—that is, the money supply—in the United States be affectedif the Federal Reserve increases reserve requirements? Give an example.
2. If the value of the financial sector is in terms of reducing the individual risk in the economy, how could you measure the value of the financial sector without using information on loan payments (broadly construed to include any interest payment necessary to measure an interest rate or any payment that looks like a return on an investmemt)? If we think of the amount of individual risk remaining after individuals buy portfolios is a measure of the ineffectiveness of the financial sector [or its imperfections], what do you think accounts for these imperfections?
What are some arguments in favor of continuing government support of Citigroup? Discuss who would be hurt by the bank's failure. Is the failure of Citigroup different from that of other firms? Does the government have people to manage such a global financial enterprise?
1) comment on banks’ and insurance companies’ behaviour and identify main drivers of their performance (e.g. what does explain European banks’ low profits); 2) identify main source of risk for banks and financial organisations nowadays; 3) comment on benefits and flaws of regulation as well as hypothesise main potential effects of new set of rules
One of the main arguments against using Fiscal Policy is the crowding out effect. Suppose the government uses government purchases to stimulate the economy. a) Explain the crowding out effect in detail using a graph for the bond market, the money market, the foreign exchange market, and the AD SRAS LRAS model. b). Explain quantitative easing? c) If the Fed’s current policy is quantitative easing, do you think that there is a danger of the government’s current fiscal policy being crowded out? Why or Why not? Explanation required for credit.
What is a financial market? What is the role of a financial market? 3-2 What would happen to the standard of living in the United States if people lost faith in our financial markets? Why? 3-3 How does a cost-efficient capital market help to reduce the prices of goods and services? 3-4 The SEC attempts to protect investors who are purchasing newly issued securities by requiring issuers to provide relevant financial information to prospective investors. The SEC does not provide an opinion about the real value of the securities. Hence, an unwise investor might pay too much for some stocks and consequently lose heavily. Do you think the SEC should, as a part of every new stock or bond offering, render an opinion to investors on the proper value of the securities being offered? Explain.
Discuss the following statements: “(1) individual financial institutions will generally haveunimportant effects on market prices or the economy as a whole and (2) serving theirfinancial interests always safeguards stability of the financial system” according to
Why would the U.S. government consider reinstitutingthe “wall” between investment banking and commercialbanking?
Which of the following is NOT among key trends affecting the banking industry? Convergence ESG finance Government Deregulation and then Reregulation Activism
Which of the following is a reason for financial regulation? a. To ensure market dominance by strong financial institutions. b. The failure of any financial institution may have a serious negative impact on individuals and economies. c. Banks cannot be trusted. d. To ensure government control of the economy.
Which of the following is true of the current state of financial regulation for financial institutions (FIs)? Most banks can transfer risk on a greater scale and in more complex ways than before. Most FIs now conduct virtual global business, reducing the influence of very large FIs. Most global financial money and capital markets are deliberately disconnected. Most securities exchanges have required majority ownership by resident nationals.
In which economic conditions would a central bankwant to use a “forward-guidance” strategy? Based onyour previous answer, can we easily measure the effectsof such a strategy?

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