Monetary Policy

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2. Some economists suspect that one of the reasons that economies in developing countries grow so slowly is that they do not have well-developed financial markets. Does this argument make sense? Yes it does make sense since the financial markets have a big role in a country’s economy and has a greater affect on it if it’s working well or not (channeling the funds to people who will use them efficiently and productively). When a country works its financial markets in an efficient way (having the right investments, having enough money supply to better develop the country with its education, health, and infrastructure, and also enough to give for entrepreneurs to help develop the country, etc.) it will defiantly affect the country positively and result in having a faster developing country.

4. If you suspect that a company will go bankrupt next year, which would you rather hold, bonds issued by the company or equities issued by the company? Why? I would rather hold bonds than equities because a company will pay whatever left of their assets to their bondholders before their shareholders since bonds are forms of debt; therefor bondholders have claim on a company’s assets before shareholders (owners).

11. How can the adverse selection problem explain why you are more likely to make a loan to a family member than to a stranger? Adverse selection is the problem created by asymmetric information (when one party doesn’t have enough information about the other party to make an accurate decision) before the transaction of a loan occurs. So making a loan with a family member is better, or most likely to occur, rather than with a stranger because one will have more information available (knowing their honesty, risk tolerance and more, and also easier contact) with a family member than a stranger, which will help him/her (the lender) avoid the adverse selection problem.

16. “In a world without information costs and transaction costs, financial intermediaries would not...
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