20):-Covenants such as those to discourage undesirable behaviour of borrowers and those which require borrowers to...

20):-Covenants such as those to discourage undesirable behaviour of borrowers and those which require borrowers to maintain and insure their collateral are intended to help solve the a. Adverse selection in equity contracts. b. Moral hazard in debt contracts. c. Adverse selection in debt contracts. d. Moral hazard in equity contracts
21. If bank depositors begin to withdraw more currency from banks, a. The monetary base is unchanged b. Bank reserves increase c. The monetary base decreases d. Bank reserves are unchanged.
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Expert Solution

20) Covenants such as those to discourage undesirable behaviour of borrowers and those which require borrowers to maintain and insure their collateral are intended to help solve the- b. Moral hazard in debt contract.

This is because after taking debt the borrower may not think about the repaying and also can consume or sell the colletral, this may be an example of moral hazard. So in order to eliminate this there is a contract between the lender and the borrower so as to minimize this risk.

21) If bank depositors begin to withdraw more currency from banks - a. The monetary base is unchanged.

This is because the monetary base consists of both the currency in circulation (held with public) and the commercial bank deposits, so when depositors withdrew money from bank it remains in the monetary base. But the bank reserves will decrease as it is a proportion of the deposits, so when deposits decrease, reserves will also decrease.

Rahul Sunny answered 1 year ago

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