Which of the Following Is an Example of How Incentive

question 497

Multiple Choice

Which of the following is an example of how incentive structures contributed to the collapse of investment banks?

• A) The bonus structure of most executives was tied to long-term profitability.
• B) The ratings agencies were paid attractive fees by investment banks seeking high ratings for their securities.
• C) Mortgage-backed securities were closely scrutinized in order to minimize risk and obtain higher ratings.
• D) Despite SEC regulations, investment banks kept leverage ratios low in order to increase profits.

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Definitions:

Nominal Wage

The amount of money paid to an employee without adjustments for inflation or purchasing power, expressed in current currency terms.

Real Wage

The purchasing power of an individual's earnings, taking into account the effects of inflation.

Aggregate Supply

The cumulative supply of products and services planned for sale by firms in an economy within a specific time period.

Cyclical Unemployment

Unemployment caused by a downturn in the economic cycle, such as a recession, which reduces the demand for goods and services.