Question

In: Finance

Assume that countries A and B are of similar size, that they have similar economies, and...

  1. Assume that countries A and B are of similar size, that they have similar economies, and that the government debt levels of both countries are within reasonable limits. Assume that the regulations in country A require complete disclosure of financial reporting by issuers of debt in that country, but that regulations in country B do not require much disclosure of financial reporting. Explain why the government of country A is able to issue debt at a lower cost than the government of country B.
  2. Financial institutions are subject to regulations to ensure that they do not take excessive risk and they can safely facilitate the flow of funds through financial markets. Nevertheless, during the credit crisis, individuals were concerned about using financial institutions to facilitate their financial transactions. Why do you think the existing regulations were ineffective at ensuring a safe financial system

Solutions

Expert Solution

Complete disclosure of financial reporting by issuers of debt in a country allows the general public and stakeholders to understand issuer’s macro policy and dynamic guidelines. It reduces information asymmetry between the public and the government and helps in improving the image and credibility of a government. This in turn helps government to attract external debt and outside investment by increasing investors’ trust. It helps the investors to evaluate the government’s resource allocation and behavior. It also sends out positive signals to outside investors during financial crisis. Complete disclosure of financial reporting can reduce moral hazard costs which could arise from conflicts among various stakeholders in the firm. So a higher level of disclosure of government financial reporting is associated with a lower cost of issuing a debt.

During the credit crisis in 2008, initially some financial institutions failed which caused concerns in the market that others financial institutions might also fail. This concern caused disruption of flow of funds in financial markets. The reason behind financial institution’s failure was that they experienced massive mortgage defaults. They were not able to recognized that subprime mortgages, (which includes low down payment, unqualified borrowers) may default. So regulators could have imposed regulations to limit an institution's exposure to subprime mortgages.


Related Solutions

Countries A and B are small open economies. Their economies depend on each other heavily for...
Countries A and B are small open economies. Their economies depend on each other heavily for trade, but their respective governments don't always work together when setting economic policy. Assume (for simplicity) that these countries only trade with each other. Country A decides to decrease domestic taxes to balance its budget. a) How does Country A's policy, assuming they have a floating exchange rate, immediately impact trade between the two countries? Explain your answer with graphs and two sentences. b)...
Assume there are two countries, Australia and Japan, each produces a similar basket of goods and...
Assume there are two countries, Australia and Japan, each produces a similar basket of goods and services. Suppose the price of this basket of goods and services in Australia is AU$500 and the price of the same basket of goods and services in Japan is ¥ 50000. Calculate the following: (a) According to PPP theory, calculate the dollar/yen and yen/dollar spot exchange rate. (b) Suppose over the next 12 months the price of the basket is expected to rise to...
"If A and B are similar then A and B are orthogonally similar. " Prove or...
"If A and B are similar then A and B are orthogonally similar. " Prove or disprove this statement.
. Consider two economies: Economy A and Economy B. Both economies have the same population, supply...
. Consider two economies: Economy A and Economy B. Both economies have the same population, supply of fiat money, and endowments. In each country, the number of young people born each period is constant at N, and the supply of fiat money is constant at M. Young people are endowed with y units of the consumption good but receive nothing when old. The only difference between these two economies is that people in Economy A have preferences that lean toward...
Consider two economies: Economy A and Economy B. Both economies have the same population, supply of...
Consider two economies: Economy A and Economy B. Both economies have the same population, supply of fiat money, and endowments. In each country, the number of young people born each period is constant at N, and the supply of fiat money is constant at M. Young people are endowed with y units of the consumption good but receive nothing when old. The only difference between these two economies is that people in Economy A have preferences that lean toward first...
(4 pts) Define ‘economies of scope’ and ‘economies of scale’. Discuss how they are similar. Discuss...
(4 pts) Define ‘economies of scope’ and ‘economies of scale’. Discuss how they are similar. Discuss how they differ. Explain how either could be used to sustain positive economic profits (up to and including a monopolistic position).
Instructions: Countries and economies across the globe have the ability to produce products and goods. Some...
Instructions: Countries and economies across the globe have the ability to produce products and goods. Some products are unique to a specific economic market and thus they are able to trade those goods with other markets that want or need that product, resource, or good. Though countries will also trade goods for products that country could easily produce themselves. With this understanding please address the following questions in a written essay. Why does the U.S. trade goods that they can...
Assume that the United States and Cambodia both have similar demand functions and similar taste preferences....
Assume that the United States and Cambodia both have similar demand functions and similar taste preferences. The United States however is capital abundant while Cambodia is labour abundant. Assume that the two countries produce only two goods: capital-intensive cars and labour-intensive shoes. Currently, the two countries are in the process of negotiating a bilateral free trade agreement (FTA). Part (a) Use the concepts of supply and demand to illustrate the situation of bilateral trade between the United States and Cambodia...
1) Manufacturing, warehousing, and ________ have similar considerations for the type and size of facility. Select...
1) Manufacturing, warehousing, and ________ have similar considerations for the type and size of facility. Select one: a. services firms b. retailing firms c. not-for-profit organizations d. distribution firms 2) As you hire employees, you will need to become aware of laws and taxes, including ________. Select one: a. anti-discrimination laws b. payroll taxes c. Fair Labor Standards Act and The Equal Pay Act of 1963 d. All of these. 3) As your business grows, have its financial records (its...
1. Can a star have a Jupiter-size plan in orbit at a distance similar to Earth...
1. Can a star have a Jupiter-size plan in orbit at a distance similar to Earth yet not exhibit a Doppler shift in its light? Explain your answer. 2. You observe a star for a few years yet do not detect any Doppler shifting of its light. Give three reasons (other than any that may have been stated in the previous question) why it may still have planets orbiting around it. 3. Around what types of stars would it be...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT