1. Describe the conditions that lead to Akerlof's "Market for Lemons" issue. In your description, define the principal-agent problem and relate it to this issue. What kinds of industries/goods are particularly susceptible to this problem?

2. Describe how insurance works. What are the risks insurance companies face? When is insurance appropriate/not appropriate for a consumer? 

3. Describe what is meant by the phrase "too-big-to-fail." What issues might arise from organizations (e.g., banks) being seen as too-big-to-fail? What legislation was passed to counteract these potential problems? Describe what was done in this legislation and some alternative actions that could have been taken? 

4. Why is stability so important in our financial system? Elaborate. For example, what is the effect of instability on the consumer? The producer? 

5. What are the tradeoffs the Fed faces when combating high inflation and high unemployment? What actions could they take (consider conventional policy toolbox) and what negative consequences might they face for each action? 

6. Describe how deposit expansion works. How does the Fed's purchase of securities potentially increase the quantity of money substantially? How do the behaviors of the public (i.e., you and I) and of banks impact this expansion? 

7. Describe the idea of a "lower bound" for interest rates. Why might this be slightly below zero? What is expected to happen if the Fed sets rates that are substantially negative?

Answer rating: 100% (QA)

1 The market for lemons refers to a situation where sellers are better informed than buyers about the quality of the good for sale like used cars The informational asymmetrysellers know more than buye... View the full answer