How does the free-rider problem aggravate adverse selection

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Question: State the expectations theory and explain its signi?cance. Using the generalized equation of the expectations theory of the term structure of interest rates, calculate today's four-year rate, assuming that the current one-year, 6% rate is expected to rise by one percentage point in each of the next three years. Complete all ?ve parts of this question.

a. How does the free-rider problem aggravate adverse selection and moral hazard problems in financial markets?

b. When can a decline in the value of a country's currency exacerbate adverse selection and moral hazard problems? Why?

c. Would adverse section and moral hazard still arise in ?nancial markets if information was not asymmetric? Explain.

d. How does the existence of asymmetric information provide a rationale for government regulation of financial markets?

e. What steps can the government take to reduce asymmetric information problems and help the ?nancial system function more smoothly and efficiently?

Reference no: EM133364134

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