Question 1

Professional athletes often have contract clauses prohibiting risky activities such as skiing and motorcycle riding. These clauses are

Accepted Answer

A)  limited-liability clauses. 
B)  risk insurance. 
C)  restrictive covenants. 
D)  illegal. 
A)  limited-liability clauses. 
B)  risk insurance. 
C)  restrictive covenants. 
D)  illegal. C

Question 2

Which of the following is not one of the eight basic puzzles about financial structure?

Accepted Answer

A)  Stocks are the most important source of finance for American businesses. 
B)  Issuing marketable securities is not the primary way businesses finance their operations. 
C)  Indirect finance, which involves the activities of financial intermediaries, is many times more important than direct finance, in which businesses raise funds directly from lenders in financial markets. 
D)  Banks are the most important source of external funds to finance businesses. 
A)  Stocks are the most important source of finance for American businesses. 
B)  Issuing marketable securities is not the primary way businesses finance their operations. 
C)  Indirect finance, which involves the activities of financial intermediaries, is many times more important than direct finance, in which businesses raise funds directly from lenders in financial markets. 
D)  Banks are the most important source of external funds to finance businesses. A

Question 3

An example of the ________ problem would be if Brian borrowed money from Sean in order to purchase a used car and instead took a trip to Atlantic City using those funds.

Accepted Answer

A)  moral hazard 
B)  adverse selection 
C)  costly state verification 
D)  agency 
A)  moral hazard 
B)  adverse selection 
C)  costly state verification 
D)  agency A

Question 4

The presence of ________ in financial markets leads to adverse selection and moral hazard problems that interfere with the efficient functioning of financial markets.

Accepted Answer

A)  noncollateralized risk 
B)  free-riding 
C)  asymmetric information 
D)  costly state verification 
A)  noncollateralized risk 
B)  free-riding 
C)  asymmetric information 
D)  costly state verification

Question 5

The name economists give the process by which stockholders gather information by frequent monitoring of the firm's activities is

Accepted Answer

A)  costly state verification. 
B)  the free-rider problem. 
C)  costly avoidance. 
D)  debt intermediation. 
A)  costly state verification. 
B)  the free-rider problem. 
C)  costly avoidance. 
D)  debt intermediation.

Question 6

A clause in a debt contract requiring that the borrower purchase insurance against loss of the asset financed with the loan is called a

Accepted Answer

A)  collateral-insurance clause. 
B)  prescription covenant. 
C)  restrictive covenant. 
D)  proscription covenant. 
A)  collateral-insurance clause. 
B)  prescription covenant. 
C)  restrictive covenant. 
D)  proscription covenant.

Question 7

One financial intermediary in our financial structure that helps to reduce the moral hazard from arising from the principal-agent problem is the

Accepted Answer

A)  venture capital firm. 
B)  money market mutual fund. 
C)  pawn broker. 
D)  savings and loan association. 
A)  venture capital firm. 
B)  money market mutual fund. 
C)  pawn broker. 
D)  savings and loan association.

Question 8

Explain the principal-agent problem as it pertains to equity contracts.

Accepted Answer

The principals are the stockholders who

Question 9

One purpose of regulation of financial markets is to

Accepted Answer

A)  limit the profits of financial institutions. 
B)  increase competition among financial institutions. 
C)  promote the provision of information to shareholders, depositors and the public. 
D)  guarantee that the maximum rates of interest are paid on deposits. 
A)  limit the profits of financial institutions. 
B)  increase competition among financial institutions. 
C)  promote the provision of information to shareholders, depositors and the public. 
D)  guarantee that the maximum rates of interest are paid on deposits.

Question 10

The "lemons problem" exists because of

Accepted Answer

A)  transactions costs. 
B)  economies of scale. 
C)  rational expectations. 
D)  asymmetric information. 
A)  transactions costs. 
B)  economies of scale. 
C)  rational expectations. 
D)  asymmetric information.

Question 11

Net worth can perform a similar role to

Accepted Answer

A)  diversification. 
B)  collateral. 
C)  intermediation. 
D)  economies of scale. 
A)  diversification. 
B)  collateral. 
C)  intermediation. 
D)  economies of scale.

Question 12

The principal-agent problem

Accepted Answer

A)  occurs when managers have more incentive to maximize profits than the stockholders-owners do. 
B)  in financial markets helps to explain why equity is a relatively important source of finance for American business. 
C)  would not arise if the owners of the firm had complete information about the activities of the managers. 
D)  explains why direct finance is more important than indirect finance as a source of business finance. 
A)  occurs when managers have more incentive to maximize profits than the stockholders-owners do. 
B)  in financial markets helps to explain why equity is a relatively important source of finance for American business. 
C)  would not arise if the owners of the firm had complete information about the activities of the managers. 
D)  explains why direct finance is more important than indirect finance as a source of business finance.

Question 13

The problem faced by the lender that the borrower may take on additional risk after receiving the loan is called

Accepted Answer

A)  adverse selection. 
B)  moral hazard. 
C)  transactions costs. 
D)  diversification. 
A)  adverse selection. 
B)  moral hazard. 
C)  transactions costs. 
D)  diversification.

Question 14

If bad credit risks are the ones who most actively seek loans then financial intermediaries face the problem of

Accepted Answer

A)  moral hazard. 
B)  adverse selection. 
C)  free-riding. 
D)  costly state verification. 
A)  moral hazard. 
B)  adverse selection. 
C)  free-riding. 
D)  costly state verification.

Question 15

Equity contracts

Accepted Answer

A)  are claims to a share in the profits and assets of a business. 
B)  have the advantage over debt contracts of a lower costly state verification. 
C)  are used much more frequently to raise capital than are debt contracts. 
D)  are not subject to the moral hazard problem. 
A)  are claims to a share in the profits and assets of a business. 
B)  have the advantage over debt contracts of a lower costly state verification. 
C)  are used much more frequently to raise capital than are debt contracts. 
D)  are not subject to the moral hazard problem.

Question 16

Of the sources of external funds for nonfinancial businesses in the United States, corporate bonds and commercial paper account for approximately ________ of the total.

Accepted Answer

A)  5% 
B)  10% 
C)  32% 
D)  50% 
A)  5% 
B)  10% 
C)  32% 
D)  50%

Question 17

Of the sources of external funds for nonfinancial businesses in the United States, loans from banks and other financial intermediaries account for approximately ________ of the total.

Accepted Answer

A)  6% 
B)  40% 
C)  56% 
D)  60% 
A)  6% 
B)  40% 
C)  56% 
D)  60%

Question 18

Property that is pledged to the lender in the event that a borrower cannot make his or her debt payment is called

Accepted Answer

A)  collateral. 
B)  points. 
C)  interest. 
D)  good faith money. 
A)  collateral. 
B)  points. 
C)  interest. 
D)  good faith money.

Question 19

Because of the "lemons problem" the price a buyer of a used car pays is

Accepted Answer

A)  equal to the price of a lemon. 
B)  less than the price of a lemon. 
C)  equal to the price of a peach. 
D)  between the price of a lemon and a peach. 
A)  equal to the price of a lemon. 
B)  less than the price of a lemon. 
C)  equal to the price of a peach. 
D)  between the price of a lemon and a peach.

Question 20

Analysis of adverse selection indicates that financial intermediaries, especially banks,

Accepted Answer

A)  have advantages in overcoming the free-rider problem, helping to explain why indirect finance is a more important source of business finance than is direct finance. 
B)  despite their success in overcoming free-rider problems, nevertheless play a minor role in moving funds to corporations. 
C)  provide better-known and larger corporations a higher percentage of their external funds than they do to newer and smaller corporations which rely to a greater extent on the new issues market for funds. 
D)  must buy securities from corporations to diversify the risk that results from holding non-tradable loans. 
A)  have advantages in overcoming the free-rider problem, helping to explain why indirect finance is a more important source of business finance than is direct finance. 
B)  despite their success in overcoming free-rider problems, nevertheless play a minor role in moving funds to corporations. 
C)  provide better-known and larger corporations a higher percentage of their external funds than they do to newer and smaller corporations which rely to a greater extent on the new issues market for funds. 
D)  must buy securities from corporations to diversify the risk that results from holding non-tradable loans.

Exam 8: An Economic Analysis of Financial Structure

Professional athletes often have contract clauses prohibiting risky activities such as skiing and motorcycle riding. These clauses are

Which of the following is not one of the eight basic puzzles about financial structure?

An example of the ________ problem would be if Brian borrowed money from Sean in order to purchase a used car and instead took a trip to Atlantic City using those funds.

The presence of ________ in financial markets leads to adverse selection and moral hazard problems that interfere with the efficient functioning of financial markets.

The name economists give the process by which stockholders gather information by frequent monitoring of the firm's activities is

A clause in a debt contract requiring that the borrower purchase insurance against loss of the asset financed with the loan is called a

One financial intermediary in our financial structure that helps to reduce the moral hazard from arising from the principal-agent problem is the

Explain the principal-agent problem as it pertains to equity contracts.

One purpose of regulation of financial markets is to

The "lemons problem" exists because of

Net worth can perform a similar role to

The principal-agent problem

The problem faced by the lender that the borrower may take on additional risk after receiving the loan is called

If bad credit risks are the ones who most actively seek loans then financial intermediaries face the problem of

Equity contracts

Of the sources of external funds for nonfinancial businesses in the United States, corporate bonds and commercial paper account for approximately ________ of the total.

Of the sources of external funds for nonfinancial businesses in the United States, loans from banks and other financial intermediaries account for approximately ________ of the total.

Property that is pledged to the lender in the event that a borrower cannot make his or her debt payment is called

Because of the "lemons problem" the price a buyer of a used car pays is

Analysis of adverse selection indicates that financial intermediaries, especially banks,

Why Study Money, Banking, and Financial Markets

An Overview of the Financial System

What Is Money

Understanding Interest Rates

The Behavior of Interest Rates

The Risk and Term Structure of Interest Rates

The Stock Market, the Theory of Rational Expectations, and the Efficient Market Hypothesis

Financial Crises

Banking and the Management of Financial Institutions

Economic Analysis of Financial Regulation

Banking Industry: Structure and Competition

Nonbank Finance

Financial Derivatives

Conflicts of Interest in the Financial Industry

Central Banks and the Federal Reserve System

The Money Supply Process

Tools of Monetary Policy

The Conduct of Monetary Policy: Strategy and Tactics

The Foreign Exchange Market

The International Financial System

Quantity Theory, Inflation, and the Demand for Money

Aggregate Demand and Supply Analysis

Monetary Policy Theory

Transmission Mechanisms of Monetary Policy

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