Moral Hazard and Adverse Selection Problems Increased in Prominence in the 1980s

question 36

Multiple Choice

Moral hazard and adverse selection problems increased in prominence in the 1980s

• A) as deregulation opened up more avenues for savings and loans and mutual savings banks to take on more risk.
• B) following a burst of financial innovation in the 1970s and early 1980s that produced new financial instruments and markets, thereby widening the scope for risk taking.
• C) following a decrease in federal deposit insurance from $100,000 to $40,000.
• D) because of all of the above.
• E) because of only A and B of the above.

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Definitions:

Subsidize

Financial support extended by a government or organization to lower the production costs or price of goods and services, making them more accessible to the public.

Negative Externalities

Costs suffered by a third party as a result of an economic transaction, which are not reflected in the transaction's price.

Taxed

The act of imposing financial charges on individuals or entities by a governmental organization in order to fund public spending.

Coase Theorem

A principle that suggests that if property rights are well-defined and transaction costs are negligible, parties will negotiate to correct externalities without the need for government intervention.