Explain the moral hazard that automobile insurance companies face. What methods do they employ to try to mitigate this problem? Explain carefully
What will be an ideal response?
Once people have acquired automobile insurance and know that when an accident occurs a third party (this case the insurance company) will pay the repair bill this might have the effect of people driving less carefully than otherwise. Automobile insurance companies can mitigate this somewhat by having people pay graduated deductibles. That is the insured is responsible for at least part of the repair bill. The less risk they wish to take in the form of a lower deductible will simply be built into a higher insurance premium and vice versa.
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Exhibit 20-1 Money market demand and supply curves
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Starting from an equilibrium at E1 in Exhibit 20-1, a leftward shift of the money supply curve from MS1 to MS2 would cause an excess:
A. demand for money, leading people to sell bonds. B. demand for money, leading people to buy bonds. C. supply of money, leading people to sell bonds. D. supply of money, leading people to buy bonds.
The demand for the Franconian franc in the foreign exchange market equals 14,000 - 3,000e and the supply of francs in the foreign exchange market equals 2,000 + 2,000e, where e is the nominal exchange rate expressed in U.S. dollars per franc. If the franc is fixed at 2 U.S. dollars per franc, then to maintain this fixed rate Franconia's international reserves must:
A. increase by 4,000 francs per period B. decrease by 4,000 francs per period C. increase by 2,000 francs per period D. decrease by 2,000 francs per period