Q 1.
A) Moral Hazard is a event where one of the party involves itself into a transaction / event very
well knowing that is it fully protected against any kind of risk. And in case of any mis-happen
,the other party involved shall incur the cost.
An example for the same is :- One gets a comprehensive insurance for his assets very well knowing
incase of any loss , the insurance shall compensate for the same, whilst the insurance company on the
other hand benefits from the premium incase nothing happens during the period insured.
B) Asymmetric Information is where one party has better information than the other in regards to
a transaction to take place. Incase of financial institutions , the borrow has more into about his
own financial state then the lender, which keeps the lender always in doubt whether the
borrower will repay or default.
Eg. A Dealer for selling used motor vehicles has lots more inside information of the vehicle to be sold
then the person intending to purchase the same. In most cases such information is not disclosed as it
may hinder the sale.
C) Insider trading is defined as a malpractice wherein trade of a company's securities is
undertaken by people who by virtue of their work have access to the otherwise non public
information.
Eg. A board member of a company knows that a merger is going to be announced within the next day
or so and that the company stock is likely to go way up. He buys 1,000 shares of the company stock in
his mother's name so he can make a profit using his insider knowledge without reporting the trade to
the Securities and Exchange Commission and without news of the purchase going public.
D)
Quantitative easing (QE) is the Federal Reserve's program of buying bonds from its member
banks. The Fed purchases U.S. Treasury notes and mortgage-backed securities (MBS),
and issues credit to the banks' reserves to buy the bonds. The purpose of this expansionary
monetary policy is to lower interest rates and...