The financial sector is heavily regulated. Explain how government regulations help to solve information problems, increasing the effectiveness of financial markets and institutions.
Answer to relevant QuestionsDeflation causes the value of a borrower’s collateral to drop. Define deflation and explain how it reduces the value of a borrower's collateral. How might a lender who anticipates deflation alter the terms of a loan?Consider again the low-risk type A firm described in Problem. If you were the financial advisor to such a firm, what suggestions would you make to the firm’s management about obtaining borrowed funds? Consider a small company run by a manager who is also the owner. If this company borrows funds, why might a moral hazard problem still exist? Explain why banks’ holdings of cash have increased significantly as a portion of their balance sheets in recent times.If lines of credit and other off-balance sheet activities do not, by definition, appear on the bank’s balance sheet, how can they influence the level of liquidity risk to which the bank is exposed?
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