Which of the following is an example of how incentive structures contributed to the collapse of investment banks?
a. The bonus structures of most executives were tied to short-term profitability.
b. The rating agencies acted independently in assigning ratings to mortgage-backed securities and had no incentive to understate the risks.
c. Mortgage-backed securities were closely scrutinized in order to minimize risk and obtain higher ratings.
d. Despite SEC regulations, investment banks kept leverage ratios low in order to increase profits.
A
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"My son is a smart entrepreneur. Rather than borrow money from others, he used his own savings to start his music business, and thereby avoided paying interest on loans." An economist would respond by saying
A) "both you and your son are complete idiots." B) "it's always good to avoid borrowing and paying interest." C) "nobody can avoid paying interest, not even your clever son." D) "your son might have avoided paying interest, but he also avoided earning interest."
Suppose that everyone who has looked for a job for more than six months gave up in despair and stopped looking. What would happen to the unemployment rate? a. It would increase
b. It would fall. c. It would change, but the effect cannot be predicted. d. It would not change.