Explain the principal-agent problem as it pertains to equity contracts.

Explain the principal-agent problem as it pertains to equity contracts.

Essay # 1
Your response should be a minimum of one (1) single-spaced page to a maximum of two (2) pages in length.

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Discuss each of the following in a complete paragraph.

1. Explain the principal-agent problem as it pertains to equity contracts.
2. Why does the free-rider problem occur in the debt market?
3. Your bank has the following balance sheet:
Assets
Reserves $50 million
Securities $50 million
Loans $150 million

Liabilities
Checkable deposits $200 million
Bank capital $50 million

If the required reserve ratio is 10%, what actions should the bank manager take if there is an unexpected deposit outflow of $50 million?

4. How can specializing in lending help to reduce the adverse selection problem in lending?

Essay # 2
Your response should be a minimum of one (1) single spaced page to a maximum of two (2) pages in length.

Briefly explain what inflation targeting is and list the five (5) main elements related to it. Then discuss the four (4) advantages and three (3) disadvantages of this type of monetary policy strategy.