Week 14 Notes
Week 14 Notes Econ 322
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This 2 page Class Notes was uploaded by Tulsi on Monday April 25, 2016. The Class Notes belongs to Econ 322 at University of South Carolina taught by Hauk in Spring 2016. Since its upload, it has received 17 views. For similar materials see Intermediate Macroeconomics in Economcs at University of South Carolina.
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Date Created: 04/25/16
Week 14 Tuesday, April 19, 23:17 PM Economic Functions of the Financial System 1) Facilitate Investment by Firms S=I, savings = investment 2) Risk-sharing People tend to be risk-averse -leads to development of insurance because people want to pay for it to reduce risk Entrepreneur: -debt finance-> owe the same amount of money to creditors no matter what -equity finance -> owe a fraction of a firm's profits (could be zero) -less risky option 3) Dealing with Asymmetric Information Big issue in insurance markets Adverse Selection: hidden information about a person's attribute that affect propensity to buy insurance Moral Hazard: insurance alters a person's behavior in an unobservable way 4/21/16 Economic Functions of the Financial System 1) Financing Investment 2) Sharing Risk 3) Dealing with asymmetric investment a. Adverse selection: hidden information about a person i. Might prevent an entrepreneur from getting as much equity finance as he wants b. Moral Hazard: hidden information about person's behavior i. Might prevent entrepreneur from getting as much equity finance as he wants 4) Foster economic growth a. S = I b. Lots of different types of capital to which savings can be allocated i. R = P * MPK c. Develop institutions that allow savings to be allocated well d. Reporting requirements i. Laws against fraud and market manipulation Financial Crisis of 2008 -Asset Price Boom: 2000-2006 (Housing speculation bubble) -Asset Price Bust: 2007-2009 -Insolvencies at Banks Policy Responses to Financial Crisis and Recession 1) Expansionary Fiscal Policy (more spending, tax cuts)