Chapter 12, Problem 1Q

To determine

The way in which asymmetric information defines the financial crisis.

Explanation of Solution

Financial crisis refers to the situation in which the sudden increase in the value of financial assets results in the situation of bank panic in an economy over a period of time.

Asymmetric information issues (moral hazard and adverse selection) are constantly present in money-related exchanges; however, typically don't keep the budgetary framework from proficiently directing assets from bank savers to borrowers.

During the financial crisis, nonetheless, asymmetric information issues increase and result in the subsequent frictional flow of funds being stopped or seriously disturbed, with destructive results for economic activity.

This is how; the problem of asymmetric information intensifies the final crisis in a given period of time.

Economics Concept Introduction

Introduction: Asymmetric information is the situationwhere there is insufficient learning. Specifically, it happens where one person or market has more information than another.