Question 1

Restrictive covenants

Accepted Answer

A) generally require that firms use debt finance rather than equity finance. 
B) generally require that firms use equity finance rather than debt finance. 
C) put restrictions on the use of borrowed funds. 
D) were outlawed under the Civil Rights Act of 1964. 
A) generally require that firms use debt finance rather than equity finance. 
B) generally require that firms use equity finance rather than debt finance. 
C) put restrictions on the use of borrowed funds. 
D) were outlawed under the Civil Rights Act of 1964.

Question 2

Financial intermediaries are able to exploit economies of scale since

Accepted Answer

A) the equipment or expertise necessary for one transaction can be applied to other transactions. 
B) they have special licenses needed to perform financial transactions. 
C) financial markets fail to do so. 
D) they can reduce transactions cost, but not information costs. 
A) the equipment or expertise necessary for one transaction can be applied to other transactions. 
B) they have special licenses needed to perform financial transactions. 
C) financial markets fail to do so. 
D) they can reduce transactions cost, but not information costs.

Question 3

Economies of scale are

Accepted Answer

A) charges to savers and borrowers imposed by banks in exchange for reducing transactions costs. 
B) the reduction in costs per unit that accompanies an increase in volume. 
C) decreases in transactions costs that occur as information costs increase. 
D) decreases in information costs that occur as transactions costs increase. 
A) charges to savers and borrowers imposed by banks in exchange for reducing transactions costs. 
B) the reduction in costs per unit that accompanies an increase in volume. 
C) decreases in transactions costs that occur as information costs increase. 
D) decreases in information costs that occur as transactions costs increase.

Question 4

The "lemons problem" in the used car market arises from

Accepted Answer

A) the difficulty U.S. producers have in making reliable cars. 
B) the difficulty buyers have in distinguishing good cars from lemons. 
C) the tendency of buyers of used cars to pay for them with bad checks. 
D) the reluctance of many car dealers to handle used cars. 
A) the difficulty U.S. producers have in making reliable cars. 
B) the difficulty buyers have in distinguishing good cars from lemons. 
C) the tendency of buyers of used cars to pay for them with bad checks. 
D) the reluctance of many car dealers to handle used cars.

Question 5

Since World War II what percentage of the funds needed by U.S. nonfinancial corporations have been raised internally?

Accepted Answer

A) 5% 
B) 10% 
C) 20% 
D) 75% 
A) 5% 
B) 10% 
C) 20% 
D) 75%

Question 6

Moral hazard problems arise when

Accepted Answer

A) lenders have difficulty in distinguishing between good and lemon firms. 
B) when a downturn in economic activity makes repaying loans difficult for borrowers. 
C) borrowers default on loans. 
D) borrowers have an incentive to conceal information. 
A) lenders have difficulty in distinguishing between good and lemon firms. 
B) when a downturn in economic activity makes repaying loans difficult for borrowers. 
C) borrowers default on loans. 
D) borrowers have an incentive to conceal information.

Question 7

In 2006, some economists were particularly concerned that what event may increase the chance for debt deflation?

Accepted Answer

A) A collapse of the bond market 
B) A collapse of housing prices 
C) A collapse of the stock market 
D) A collapse of the value of the dollar 
A) A collapse of the bond market 
B) A collapse of housing prices 
C) A collapse of the stock market 
D) A collapse of the value of the dollar

Question 8

You own a 2007 Ford Explorer. Although it has high mileage, you have maintained it very well. You want to sell it, but after checking the prices other owners of 2007 Ford Explorers are able to get for their cars in the used car market, you decide the prices are too low and you decide not to sell. This is an example of

Accepted Answer

A) the "lemons problem." 
B) moral hazard. 
C) economies of scale. 
D) low information costs. 
A) the "lemons problem." 
B) moral hazard. 
C) economies of scale. 
D) low information costs.

Question 9

The reduction in transactions costs brought about by financial intermediaries benefits

Accepted Answer

A) small savers, but not small borrowers. 
B) small borrowers, but not small savers. 
C) both small savers and small borrowers. 
D) society through greater economic efficiency; small savers and borrowers do not gain directly. 
A) small savers, but not small borrowers. 
B) small borrowers, but not small savers. 
C) both small savers and small borrowers. 
D) society through greater economic efficiency; small savers and borrowers do not gain directly.

Question 10

Which of the following is NOT true of adverse selection?

Accepted Answer

A) It would not exist in a world of perfect information. 
B) It arises because borrowers typically know more than lenders. 
C) It describes a lender's problem of distinguishing the good-risk applicants from the bad-risk applicants. 
D) It describes a lender's problem in verifying borrowers are using their funds as intended. 
A) It would not exist in a world of perfect information. 
B) It arises because borrowers typically know more than lenders. 
C) It describes a lender's problem of distinguishing the good-risk applicants from the bad-risk applicants. 
D) It describes a lender's problem in verifying borrowers are using their funds as intended.

Question 11

If there were no adverse selection problems in the stock market,

Accepted Answer

A) some well-run firms would pay more to raise funds. 
B) some poorly-run firms would pay less to raise funds. 
C) the willingness of savers to invest in the market would be increased. 
D) the volume of new stock issues would be lower. 
A) some well-run firms would pay more to raise funds. 
B) some poorly-run firms would pay less to raise funds. 
C) the willingness of savers to invest in the market would be increased. 
D) the volume of new stock issues would be lower.

Question 12

Moral hazard is not eliminated in debt financing because

Accepted Answer

A) borrowers have an incentive to assume greater risk than is in the interest of the lender. 
B) firms with a great deal of debt often go bankrupt. 
C) principal-agent problems are greater with debt financing than with equity financing. 
D) the use of restrictive covenants tends to increase moral hazard. 
A) borrowers have an incentive to assume greater risk than is in the interest of the lender. 
B) firms with a great deal of debt often go bankrupt. 
C) principal-agent problems are greater with debt financing than with equity financing. 
D) the use of restrictive covenants tends to increase moral hazard.

Question 13

One reason that the principal-agent problem is a general one in equity contracts is that

Accepted Answer

A) most uses of corporate funds are highly visible. 
B) many uses of corporate funds are hidden from view. 
C) since top management usually also owns the bulk of the firm's stock, it has little incentive to respond to the wishes of the remaining shareholders. 
D) the Securities and Exchange Commission does a poor job of detecting fraud by top management. 
A) most uses of corporate funds are highly visible. 
B) many uses of corporate funds are hidden from view. 
C) since top management usually also owns the bulk of the firm's stock, it has little incentive to respond to the wishes of the remaining shareholders. 
D) the Securities and Exchange Commission does a poor job of detecting fraud by top management.

Question 14

Proponents of the Sarbanes-Oxley Act cite all of the following benefits EXCEPT

Accepted Answer

A) it should reduce the cost of capital. 
B) it will encourage CEOs to take more risks. 
C) it will promote more liquid markets. 
D) it will result in higher equity prices. 
A) it should reduce the cost of capital. 
B) it will encourage CEOs to take more risks. 
C) it will promote more liquid markets. 
D) it will result in higher equity prices.

Question 15

The adverse selection problem in financial markets creates a profit opportunity because

Accepted Answer

A) it opens a gap between the cost of short-term funds and the cost of long-term funds. 
B) savers are willing to pay for information about the quality of potential borrowers. 
C) it results in the value of a company's stock being well below the value of the company's assets. 
D) it makes bond-financed projects cheaper than stock-financed projects. 
A) it opens a gap between the cost of short-term funds and the cost of long-term funds. 
B) savers are willing to pay for information about the quality of potential borrowers. 
C) it results in the value of a company's stock being well below the value of the company's assets. 
D) it makes bond-financed projects cheaper than stock-financed projects.

Question 16

Lenders prefer to lend to firms with high net worth because

Accepted Answer

A) such firms are usually willing to pay higher interest rates. 
B) the owners of such firms have more to lose if the firm defaults on a loan. 
C) the government requires most bank loans to be made to such firms. 
D) such firms usually are unable to raise funds directly through financial markets. 
A) such firms are usually willing to pay higher interest rates. 
B) the owners of such firms have more to lose if the firm defaults on a loan. 
C) the government requires most bank loans to be made to such firms. 
D) such firms usually are unable to raise funds directly through financial markets.

Question 17

Suppose one person buys a copy of Consumer Reports and gives away free copies to all who request one. This is an example of

Accepted Answer

A) free rider problem. 
B) moral hazard. 
C) adverse selection. 
D) economies of scale. 
A) free rider problem. 
B) moral hazard. 
C) adverse selection. 
D) economies of scale.

Question 18

In effect, banks are able to charge

Accepted Answer

A) depositors for banks' superior information about borrowers. 
B) borrowers for banks' superior information about depositors. 
C) the government for banks' superior information about borrowers and depositors. 
D) interest rates that are in fact above those legally allowed. 
A) depositors for banks' superior information about borrowers. 
B) borrowers for banks' superior information about depositors. 
C) the government for banks' superior information about borrowers and depositors. 
D) interest rates that are in fact above those legally allowed.

Question 19

Which of the following was a consequence of the poorly developed financial markets in Eastern Europe in the 1990s?

Accepted Answer

A) Savers were unable to earn appropriate returns on their savings. 
B) Entrepreneurs were unable to fund their new business ventures. 
C) Financial markets failed to transfer funds to the most viable borrowers. 
D) All of the above 
A) Savers were unable to earn appropriate returns on their savings. 
B) Entrepreneurs were unable to fund their new business ventures. 
C) Financial markets failed to transfer funds to the most viable borrowers. 
D) All of the above

Question 20

Which of the following is NOT a company that collects information on individual borrowers and sells it to savers?

Accepted Answer

A) Moody's Investor Service 
B) Value Line 
C) Compuserve 
D) Dun and Bradstreet 
A) Moody's Investor Service 
B) Value Line 
C) Compuserve 
D) Dun and Bradstreet

Exam 11: Reducing Transactions Costs and Information Costs

Restrictive covenants

Financial intermediaries are able to exploit economies of scale since

Economies of scale are

The "lemons problem" in the used car market arises from

Since World War II what percentage of the funds needed by U.S. nonfinancial corporations have been raised internally?

Moral hazard problems arise when

In 2006, some economists were particularly concerned that what event may increase the chance for debt deflation?

The reduction in transactions costs brought about by financial intermediaries benefits

Which of the following is NOT true of adverse selection?

If there were no adverse selection problems in the stock market,

Moral hazard is not eliminated in debt financing because

One reason that the principal-agent problem is a general one in equity contracts is that

Proponents of the Sarbanes-Oxley Act cite all of the following benefits EXCEPT

The adverse selection problem in financial markets creates a profit opportunity because

Lenders prefer to lend to firms with high net worth because

Suppose one person buys a copy of Consumer Reports and gives away free copies to all who request one. This is an example of

In effect, banks are able to charge

Which of the following was a consequence of the poorly developed financial markets in Eastern Europe in the 1990s?

Which of the following is NOT a company that collects information on individual borrowers and sells it to savers?

Introducing Money and the Financial System

Money and the Payments System

Overview of the Financial System

Interest Rates and Rates of Return

The Theory of Portfolio Allocation

Determining Market Interest Rates

Risk Structure and Term Structure of Interest Rates

The Foreign-Exchange Market and Exchange Rates

Derivative Securities and Derivative Markets

Information and Financial Market Efficiency

What Financial Institutions Do

The Business of Banking

The Banking Industry

Banking Regulation: Crisis and Response

Banking in the International Economy

The Money Supply Process

Changes in the Monetary Base

Organization of Central Banks

Monetary Policy Tools

The Conduct of Monetary Policy

The International Financial System and Monetary Policy

The Demand for Money

Linking the Financial System and the Economy: the Is-Lm-Fe Model

Aggregate Demand and Aggregate Supply

Money and Output in the Short Run

Information Problems and Channels for Monetary Policy

Inflation: Causes and Consequences

Filters