Carefully Distinguish Between an Economic Theory and Economic Model

question 240

Essay

Carefully distinguish between an economic theory and economic model.

Recognize the conditions and implications of variable interest entities (VIEs).

Understand the principles behind the equity method of accounting in consolidations.

Identify factors that indicate whether a business enterprise should consolidate a VIE.

Grasp the implications of subsidiary stock issuance and repurchase on a parent’s investment account.

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Definitions:

Moral Hazard

A situation in insurance and contracts where one party takes more risks because they know they are protected or that another party bears the costs of those risks.

Adverse Selection

A situation in financial markets where buyers and sellers have different levels of information, leading to transactions that favor the party with more or better information.

Adverse Selection

A situation where asymmetric information leads to the selection of poor risks, often seen in insurance markets.

Pre-contractual Problem

Issues that arise before the formation of a contract, often relating to the disclosure of information or negotiation terms.