Upon Learning That His Auto Transmission Is About to Fail

question 53

Multiple Choice

Upon learning that his auto transmission is about to fail, Ray Roma sells his car to an unsuspecting buyer. This circumstance illustrates the

• A) adverse selection problem.
• B) free-rider problem.
• C) moral hazard problem.
• D) principal-agent problem.

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Definitions:

Cyclical Unemployment

Unemployment that results from economic recessions and downturns, reflecting a lack of demand for goods and services.

Money Demand

The desire to hold cash or cash equivalents based on liquidity preference, influenced by interest rates, income levels, and transaction needs.

Interest Rate

The cost of borrowing money or the reward for saving, typically expressed as a percentage of the principal amount per annum.

Nominal Interest Rate

The interest rate before adjustments for inflation, reflecting the rate at which money can be borrowed or lent.