market failure finical Flashcards
Complete the following statement: Asymmetric information is when one party knows than another in a .
Asymmetric information is when one party knows more or less than another in a transaction .
Which party knew more in the transaction of selling subprime mortgages ?
Asymmetric information is when one party knows more than another in a transaction. In this transaction, the bankers know a lot about complicated subprime mortgages and adjustable rates. The poorer, generally uneducated people who were buying them did not understand exactly what type of mortgage they were taking out. So, the bankers had more information than the borrowers.
Complete the following statement: The banks were able to get away with selling subprime mortages because there was - the banks knew more about the mortgages than the people borrowing.
Complete the following statement: The banks were able to get away with selling subprime mortages because there was asymmetric information - the banks knew more about the mortgages than the people borrowing.
Complete the following statement: Two examples of asymmetric information in the financial sector are:
1. Bankers knew much more about their rate mortgages than the people they were selling them to
- Bankers knew far more about banking than the financial who were meant to be monitoring their behaviour.
Bankers knew much more about their adjustable rate subprime mortgages than the people they were selling them to
- Bankers knew far more about banking than the financial regulators who were meant to be monitoring their behaviour.
Complete the following statement: In the build up to the 2008 financial crisis, bankers speculated that house ???? would continue to ???/ , so they kept giving out subprime mortgages.
Complete the following statement: In the build up to the 2008 financial crisis, bankers speculated that house prices would continue to rise , so they kept giving out subprime mortgages.
Complete the following statement: The cycle of increasing demand for housing, which increased house prices, eventually led to a housing .
More subprime mortgages -> Increased demand for houses -> Increased house prices -> More profit from selling houses when people default -> More subprime mortgages -> Increased demand for houses -> Increased house prices -> Housing bubble
Before the 2008 financial crisis, bankers speculated that:
More subprime mortgages -> Increased demand for houses -> Increases house prices -> More profit from selling houses when people default -> More subprime mortgages -> Increased demand for houses -> Increases house prices -> Housing bubble
Bitcoin is a cryptocurrency which can be bought or sold by currency investors. The price of Bitcoin rose dramatically in 2017, rising by $3000 in just one day at the end of the year.
Investors were buying Bitcoin speculatively. This means that most people who bought it weren’t actually wanting to have Bitcoin - they just bought it because they thought it would go up in price and so they would be able to make money. More and more people kept buying it as the price increased further and further. Eventually, people begin to realise that they had paid $16000 for a Bitcoin and they don’t even really know what a Bitcoin is! The price was probably overvalued. This created a market bubble.
Why might an asset bubble ‘burst’ ?
In a market bubble, the price of an asset begins to increase. As the price of an asset increases, demand for that asset increases. This increases the price of the asset further and the cycle continues until the asset become hugely overvalued. People suddenly realise that they have paid more for the asset than it is actually worth - the bubble starts to burst. They quickly start to sell the asset while the price is still high. As they sell the asset, supply increases and price falls. As the price starts to fall, more people sell and the cycle continues.
After the financial crisis, banks stopped money to people or businesses. Firms couldn’t borrow money, so they had to make cutbacks, which meant that millions of people became . There was therefore a decrease in real . This is a negative externality because the people who lost their jobs were the price mechanism in the financial sector.
After the financial crisis, banks stopped lending money to people or businesses. Firms couldn’t borrow money, so they had to make cutbacks, which meant that millions of people became unemployed . There was therefore a decrease in real GDP or Gross Domestic Product . This is a negative externality because the people who lost their jobs were outside or external the price mechanism in the financial sector.
The fourth type of market failure in the financial sector is .
The fourth type of market failure in the financial sector is moral hazard .
Moral hazard occurs when you take more because somebody else is bearing the of that risk.
Moral hazard occurs when you take more risk because somebody else is bearing the consequence of that risk.
Which of the following statements is true?about how much the us spent on banks bailouts
After the 2008 financial crisis, the US spent about $700 billion of taxpayers’ money in order to stop the banks from going bankrupt.
Which of the following explains what is meant by moral hazard ?
Moral hazard occurs when somebody takes more risks because somebody else is bearing the cost of that risk.
Which of the following is an example of a negative externality as a result of the financial crisis ?
Remember that negative externalities have to affect someone outside of the price mechanism - someone who is not involved in production or consumption. The plumber never expected to lose his job as a result of people being given subprime mortgages in America - he probably didn’t know what a subprime mortgage was! He is outside the price mechanism as he is not involved in the financial sector. He suffered a large cost, as did many millions of people, as a result of the financial crisis.
