(Consider This) When Making a Capital Stock and Reservoir Analogy

question 164

Multiple Choice

(Consider This) When making a capital stock and reservoir analogy, the

• A)outflow below the dam is gross investment.
• B)inflow from the river is the stock of capital.
• C)level of water in the reservoir is the stock of capital.
• D)level of water in the reservoir is net investment.

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Definitions:

Risk Aversion

The preference to avoid uncertainty and risky situations, often influencing economic and financial decisions.

Adverse Selection

The case in which an individual knows more about the way things are than other people do. Adverse selection problems can lead to market problems: private information leads buyers to expect hidden problems in items offered for sale, leading to low prices and the best items being kept off the market.

Moral Hazard

The situation that can exist when an individual knows more about his or her own actions than other people do. This leads to a distortion of incentives to take care or to expend effort when someone else bears the costs of the lack of care or effort.

Risk Aversion

The tendency to prefer certainty over uncertainty, avoiding risk in decision-making or preferring safer investments.