Explain what may occur when a buyer and a seller have unequal amounts of limited information. Describe two different types of problems that may arise when asymmetric information exists
What will be an ideal response?
Asymmetric information may lead to opportunistic behavior where the informed person benefits at the expense of the person with less information. Adverse selection may occur where the informed person benefits form the less informed person not knowing about an unobserved characteristic of the informed person. Moral hazard may occur if the informed person takes advantage of the less informed person through an unobserved action.
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Suppose the IS curve shifts back and forth. With a steep LM curve you get __________ variability in the interest rate and __________ variability in output than you get with a flat LM curve
A) more; more B) more; less C) less; more D) less; less
If the world price of steel is greater than the U.S. "no-trade" domestic equilibrium price of steel, the United States:
a. will not produce steel. b. will demand steel from the rest of the world. c. will supply steel to the rest of the world. d. will not trade steel. e. will have a shortage of steel in the domestic market.