00:01
If there were to be an increase in adverse selection and moral hazard problems, what impact might this have on monetary policy, especially in its ability to deal with financial downturns? well, to start, it would become much less effective.
00:13
So we're going to see some level of ineffectiveness on behalf of this monetary policy, given the fact that adverse selection and moral hazard are going to get in the way.
00:23
Now, looking at adverse selection real quick, it's this asymmetric information problem essentially, right? but this is something that tends to happen before any sort of transaction takes place.
00:32
Now, an example here could be this idea that banks wouldn't want to lend out any funds that they might have received.
00:39
So suppose the monetary policy provided banks with increased liquidity, and instead they chose to hang on to that liquidity as excess reserves.
00:45
Instead of lending it out to many households and firms who might need it, well, that would be an example of adverse selection.
00:51
Now, if we're looking at moral hazard, this is this asymmetric information problem that occurs after a transaction takes.
00:57
Place...