Moral Hazard Assignment

Moral Hazard Assignment

This is a sample Moral Hazard Assignment in a Finance class. Having trouble completing it or any other academic writing project in Finance, be it an essay, research paper or term paper? Order now from Mytoptutor.com, and have an expert do it for you in the required timeline.

Q6 (Total marks 15)
A special purpose acquisition company (SPAC) is formed strictly to raise capital through an initial public offering (IPO) for acquiring an existing company. The fund raised by a SPAC is placed in an interest-bearing trust account. The management team of a SPAC decides on which company to acquire, but the investors do not know which company will be acquired at the time of IPO. The SPAC management team usually owns 20% of the SPAC though it does not need to pay for the shares it owned. A SPAC will be liquidated and the money in the trust account will be returned to the investors if it fails to complete an acquisition within a specified period (typically two years). In this case, the SPAC management team will not receive any money from the liquidation.

⦁ Solely based on the above discussion on the arrangement of a SPAC, discuss briefly one potential moral hazard problem between the management team of a SPAC and the IPO investors. (7 marks)

The regulator requires that investors have the right to vote on a potential target brought forth by the management team of a SPAC. If there are more than 50% of the investors approve the potential target but more than 20% of them disapprove, the trust account will be closed and the funds will be returned to the investors.

⦁ Briefly discuss why the above regulator’s requirement may alleviate the moral hazard problem stated in your answer to part (a). (3 marks)

⦁ Give one reason to explain why the above regulator’s requirement cannot eliminate the moral hazard problem stated in your answer to part (a). (5 marks)

 

Q8 (Total marks 15)
“If every person decides to save more by decreasing autonomous consumption, the national private saving must increase in the short-run equilibrium.” [Hint: National private saving is Real Income (Y) minus Income Tax (T) and Consumption (C)]

(a) Is the above statement True, False, or Uncertain in an economy in which income tax is a lump sum (i.e. Tax = To, where To is a constant)? Explain your answer briefly.
(10 marks)

(b) Is this statement True, False, or Uncertain in an economy in which income tax is a proportion of real income (i.e. Tax = tY, where t is a fixed income tax rate and Y is real income)? Explain your answer briefly.
⦁ marks)

 

Q10 (Total marks 15)
The table below displays the nominal interest rate, real interest rate, and real GDP growth rate in the United States from 1976 to 1984. The data were collected from the World Development Indicators.

⦁ Divide the sample into two groups based on the median real interest rate and compute the average real interest rate and average real GDP growth rate in each group. Show your answer in the following table. (2 marks)

Group Low real interest rate (Real interest rate ≤ median) High real interest rate (Real interest rate > median)
Average real interest rate (%)
Average real GDP growth rate (%)

⦁ Estimate the expected inflation rate for the United States from 1976 to 1984 and show your answer in the following table. (3 marks)

Year 1976 1977 1978 1979 1980 1981 1982 1983 1984
Expected inflation rate (%)

⦁ Divide the sample into two groups based on the median expected inflation rate and compute the average expected inflation rate and average real GDP growth rate in these two groups. Show your answer in the following table. (2 marks)

Group Low expected inflation rate (expected inflation rate ≤ median) High expected inflation rate (expected inflation rate > median)
Average expected inflation rate (%)
Average real
GDP growth rate (%)

Answer Q10 (d) using the model discussed in Textbook Ch. 27 (pp. 727-757) and assuming that the SRAS is horizontal and the economy is initially in its long run equilibrium.
⦁ Only using the data presented in this question and with the help of an aggregate demand and aggregate supply diagram, briefly explain why the US real GDP growth
rate in 1980 was negative.


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