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Chapter 8: Q.10 (page 235)

What steps can the government take to reduce asymmetric information problems and help the financial system function more smoothly and efficiently?

Short Answer

Expert verified

The government has made measures to address asymmetric information concerns by establishing appropriate communication channels, vetting material, and explaining norms and regulations.

Step by step solution

01

Introduction

Asymmetric information refers to information that is not identical, hence inconsistency occurs when information presented to individuals differs from the genuine information.

02

Explanation

Thegovernmenthasmademeasurestoaddressasymmetricinformationconcernsbyestablishingappropriatecommunicationchannels,vettingmaterial,andexplainingnormsandregulations.
Properchannelsofcommunicationwillbeheldaccountableiftheydeliverinaccurateinformation,andtheywillboostuserconfidence.
Screeninginformationproperlyimpliesthatitshouldbereviewedbeforebeingshowntousers,increasingthematerial'slegitimacy.
The benefit of explaining laws and regulations is that it eliminates fraud or abuse of any information by anybody.
It aids in the smooth and effective operation of the financial system.

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Most popular questions from this chapter

You wish to hire Ron to manage your Dallas operations. The profits from the operations depend partially on how hard Ron works, as follows

If Ron is lazy, he will surf the Internet all day, and he views this as a zero-cost opportunity. However, Ron views working hard as a 鈥減ersonal cost鈥� valued at $2000. What fixed percentage of the profits should you offer Ron? Assume Ron cares only about his expected payment less any 鈥減ersonal cost.鈥�

鈥淭he more collateral there is backing a loan, the less the lender has to worry about adverse selection.鈥� Is this statement true, false, or uncertain? Explain your answer.

How can asymmetric information problems lead to a bank panic?

Go to the St. Louis Federal Reserve FRED database and find data on the percent of value of loans secured by collateral for all commercial and industrial loans (ESANQ) and the net percentage of domestic banks tightening standards for commercial and industrial loans to large and middle-market firms (DRTSCILM). Download the data into a spreadsheet.

a. Calculate the average, over the most recent four quarters and the four quarters prior to that, for the bank standards indicator and the 鈥減ercent of loans secured by collateral鈥� indicator. Do these averages behave as you would expect?

b. Use the Data Analysis tool in Excel to calculate the correlation coefficient for the two data series from 1997:Q3 to the most recent quarter of data available. What can you conclude about the relationship between collateral and bank C&I lending standards? Is this result consistent with efforts to reduce asymmetric information?

For each of the following countries, identify the single most important (largest) and least important (smallest) source of external funding: United States; Germany; Japan; Canada. Comment on the similarities and differences among the countries鈥� funding sources.
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