ASSIGNMENT 04 F01 Money and Banking Directions: Be sure to save an electronic copy of your answer before submitting it to Ashworth College for grading. Unless otherwise stated, answer in complete sentences, and be sure to use correct English, spelling, and grammar. Sources must be cited in APA format. Your response should be four (4) doublespaced pages; refer to the Format Requirements page for specific format requirements.

Respond to each of the following questions.

1. Explain the principal-agent problem as it pertains to equity contracts.

2. Why does the free-rider problem occur in the debt market? Provide one (1) supporting fact.

3. Your bank has the following balance sheet.

Assets Reserves $50 million Securities $50 million Loans $150 million Liabilities Checkable deposits $200 million Bank capital $50 million

If the required reserve ratio is 10%, describe two (2) actions that the bank manager should take if there is an unexpected deposit outflow of $50 million?

4. How can specializing in lending help to reduce the adverse selection problem in lending? Provide two (2) examples to support your response.