May\'s theorem suggests that any deviation from majority rule must be justified
ID: 1140130 • Letter: M
Question
May's theorem suggests that any deviation from majority rule must be justified by a re departure from one of four conditions: U, A, N, or M. For each of the following cases, explain which of these conditions is violated by the electoral rule, and suggest a possible justification: (a) the proposal of an amendment to the U.S. Constitution requires two-thirds support in each chamber of Congress; (b) the International Monetary Fund (IMF) uses a system of weighted voting where weights are determined by contributions to IMF operating funds. The United States also holds a veto in some circumstances; (c) a guilty verdict in a criminal case usually requires unanimity, or a large supermajority on the jury; (d) the French president is elected under two-stage majority rule. In the first stage, all parties' candidates compete against one anot her. A second stage takes place bet ween the top two vote get-ters from stage one only if no candidate secured an outright majority in stage one.Explanation / Answer
The view of credit channel mainly emphasizes the role of bank credits in transmitting
the effects of monetary policy onto real economy, and in this perspective, investigates the
effects of credit rationing applied to firms by banking sector in financial markets led by
asymmetric information problems (Ökte, 1999: 277). As to the main arguments alleged by this
transmission channel, as was plainly expressed in Cecchetti (1995: 83-97), Hubbard (1995:
63-77) and Bernanke and Gertler (1995: 27-48), credit market imperfections making the
calculation of the marginal efficiency of investment schedule more complex lead to
information asymmetries and moral hazard problems meaning increased likelihood of the
occurrence of the thing against which is insured (Begg et al., 1994: 240) or which should be
avoided, and in this environment, policy-induced increases in interest rates managed to cause
a deterioration in the firms’ net worth both by reducing the expected future sales and
increasing the real value of nominally denominated debt. With lower net worth, the firms
would be less creditworthy, due to now an increased incentive for themselves to misrepresent
the riskiness of potential projects. In this case, potential lenders would increase the risk
premium they required when making a loan. As a result, the asymmetric information problems
in capital markets would make the internal finance of new investment projects cheaper than
the external finance. But if this channel works in such a way expressed above, the more risky
firms which do not have internal finance possibilities would unavoidably accept and try to use
the harder borrowing possibilities and this case would in turn cause an adverse selection
problem in these markets decreasing the efficiency of credit channel (Paya, 1997: 346).