How does collateral help to reduce the adverse selection problem in credit market?
What will be an ideal response?
Collateral is property that is promised to the lender if the borrower defaults thus reducing the lender's losses. Lenders are more willing to make loans when there is collateral that can be sold if the borrower defaults.
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In 2008, the Treasury and Federal Reserve took action to save large financial firms such as Bear Stearns and AIG from failing. Which of the following is one reason why these measures were taken?
A) The Fed and the Treasury wanted to allow Freddie Mac and Fannie Mae more time to buy the firms before they went bankrupt. B) The Emergency Economic Stabilization Act required the Fed and the Treasury to provide financial assistance to firms that participated in regular open market actions with the Fed. C) The bankruptcy of a large financial firm would force the firm to sell its holdings of securities, which could cause other firms that hold these securities to also fail. D) The failure of these firms would have forced the Fed to increase interest rates, which could have led to a severe recession.
The long-run marginal cost is the additional cost incurred by the firm when producing one more unit of output, holding the amount of capital constant.
Answer the following statement true (T) or false (F)