Moral Hazard Occurs When Contracts Are Written in Such a Way

question 91

Multiple Choice

Moral hazard occurs when contracts are written in such a way that

• A) the interests of agent and principal converge.
• B) the interests of agent and principal diverge.
• C) agents will wish to maximize the principal's utility.
• D) production and risk-bearing efficiency are achieved.

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Definitions:

Reserve Requirements

Central bank regulations setting the minimum amount of reserves that must be held by a commercial bank.

Discount Rate

The interest rate charged to commercial banks and other financial institutions for loans received from the Federal Reserve's discount window.

Federal Reserve

The Federal Reserve is the central banking system of the United States, responsible for monetary policy, regulating banks, maintaining financial stability, and providing financial services.

Double Coincidence of Wants

A situation in barter economies where two parties each hold an item the other wants, making it possible for them to exchange these items directly.