Why does the free-rider problem occur in the debt market?
What will be an ideal response?
Restrictive covenants can reduce moral hazard but they must be monitored and enforced to be effective. If bondholders know that other bondholders are monitoring and enforcing the restrictive covenants, they can free ride. Other bondholders will follow suit resulting in not enough resources devoted to monitoring and enforcing restrictive covenants.
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If workers and firms raise their inflation expectations,
A) unemployment will fall. B) the short-run Phillips curve will be vertical. C) the short-run Phillips curve will shift upward. D) actual inflation will fall to match expected inflation.
Major shocks occasionally strike a country's economy. List the types of shock that may occur and discuss the effects of these exogenous changes on a country that has a floating exchange rate.
What will be an ideal response?