How do high interest rates increase the risk of adverse selection in the bond market?
What will be an ideal response?
Investors often reason that as interest rates on bonds rise, a larger fraction of the firms willing to pay the high interest rates are lemon firms. After all, the managers of a firm facing bankruptcy may well be willing to pay very high interest rates to borrow funds that can be used to finance risky investments.
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If the forward rate is greater than the spot rate, what are markets signaling about their expectations for the future spot rates for the home currency?
What will be an ideal response?
A collective consumption good may be inefficiently produced by the private sector because _____
a. it is inefficient to raise price above marginal cost b. of free riding problems c. fixed costs are too high d. private producers are greedy