1.While Akerlof described adverse selection in the used car market, can you

think of how adverse selection might arise in the labor market? Or even in

dating?

2.CarMax offers a solution to the lemons problem in the used car market. What

other ways might the lemons problem be resolved?

3.Akerlof changed the conditions of perfect competition by adding in what factor

that often occurs in real life?

a.Price differences

b.Time dimension

c.Uncertainty

d.Different sellers

• How does the existence of "free riders" help to perpetuate the adverse selection

problem?

• It is often stated that "we live in an information age", yet the adverse selection

problem still exists.Why?

• Which government regulatory agency was created, in great part, to help overcome

the adverse selection problem in equity markets?

a. The Federal Reserve

b. The United States Treasury

c. The Department of Justice

d. The Securities and Exchange Commission

• What is the relationship between the principle - agent problem in corporate

governance and the moral hazard problem?

• Explain how compensating balances help to resolve the moral hazard problem

in bank lending?

• High deductibles are used in which financial market to help address the moral

hazard problem?

a.Equity market

b.Bond market

c.Insurance market

d.Bank deposit market

• Explain why economies without banks suffer from high search cost.
• Explain how banks offer diversification to savers even if a depositor puts all of their funds into a single bank account.
• Which one of the following has the highest level of liquidity?

a.The stock of a Fortune 100 corporation

b.A bond issued by the US Government

c.A bank checking account

d.A bank savings account

• If $100 million is deposited into the banking system, what would happen to the money supply, according to the simple deposit multiplier, if the required reserve ratio is 4%?What if the required reserve ratio is 6%?What do you think will happen to interest rates and the overall economy if this change in the required reserve ratio took place?

• If $100 million is withdrawn from the banking system, what would happen to the money supply, according to the simple deposit multiplier, if the required reserve ratio is 4%?What if the required reserve ratio is 6%? What do you think will happen to interest rates and the overall economy if this change in the required reserve ratio took place?

• You read a story in the press that there are growing fears of a credit crunch.What impact might this have in terms of the simple deposit multiplier?
• Which of the following is not an assumption of the simple deposit multiplier?

1. Banks always earn a profit
2. Banks hold no excess reserves
3. Consumers hold no cash
4. There is one required reserve ratio