Question 1

Commercial and farm mortgages, in which property is pledged as collateral, account for

Accepted Answer

A)  one-quarter of borrowing by nonfinancial businesses. 
B)  one-half of borrowing by nonfinancial businesses. 
C)  one-twentieth of borrowing by nonfinancial businesses. 
D)  two-thirds of borrowing by nonfinancial businesses. 
A)  one-quarter of borrowing by nonfinancial businesses. 
B)  one-half of borrowing by nonfinancial businesses. 
C)  one-twentieth of borrowing by nonfinancial businesses. 
D)  two-thirds of borrowing by nonfinancial businesses.

Question 2

For restrictive covenants to help reduce the moral hazard problem they must be ________ by the lender.

Accepted Answer

A)  monitored and enforced 
B)  written in all capitals 
C)  easily changed 
D)  impossible to remove 
A)  monitored and enforced 
B)  written in all capitals 
C)  easily changed 
D)  impossible to remove

Question 3

If you default on your auto loan, your car will be repossessed because it has been pledged as ________ for the loan.

Accepted Answer

A)  interest 
B)  collateral 
C)  dividend 
D)  commodity 
A)  interest 
B)  collateral 
C)  dividend 
D)  commodity

Question 4

Of the sources of external funds for nonfinancial businesses in the United States, stocks account for approximately ________ of the total.

Accepted Answer

A)  2% 
B)  11% 
C)  20% 
D)  40% 
A)  2% 
B)  11% 
C)  20% 
D)  40%

Question 5

In the United States, the government agency requiring that firms that sell securities in public markets adhere to standard accounting principles and disclose information about their sales, assets, and earnings is the

Accepted Answer

A)  Federal Communications Commission. 
B)  Federal Trade Commission. 
C)  Securities and Exchange Commission. 
D)  Federal Reserve System. 
A)  Federal Communications Commission. 
B)  Federal Trade Commission. 
C)  Securities and Exchange Commission. 
D)  Federal Reserve System.

Question 6

Regulation of the financial system

Accepted Answer

A)  occurs only in the United States. 
B)  protects the jobs of employees of financial institutions. 
C)  protects the wealth of owners of financial institutions. 
D)  ensures the stability of the financial system. 
A)  occurs only in the United States. 
B)  protects the jobs of employees of financial institutions. 
C)  protects the wealth of owners of financial institutions. 
D)  ensures the stability of the financial system.

Question 7

A borrower who takes out a loan usually has better information about the potential returns and risk of the investment projects he plans to undertake than does the lender. This inequality of information is called

Accepted Answer

A)  moral hazard. 
B)  asymmetric information. 
C)  noncollateralized risk. 
D)  adverse selection. 
A)  moral hazard. 
B)  asymmetric information. 
C)  noncollateralized risk. 
D)  adverse selection.

Question 8

One reason China has been able to grow so rapidly even though its financial development is still in its early stages is

Accepted Answer

A)  the high savings rate of around 40%. 
B)  the shift of labor to the agricultural sector. 
C)  the stringent enforcement of financial contracts. 
D)  the ease of obtaining high-quality information about creditors. 
A)  the high savings rate of around 40%. 
B)  the shift of labor to the agricultural sector. 
C)  the stringent enforcement of financial contracts. 
D)  the ease of obtaining high-quality information about creditors.

Question 9

A problem for equity contracts is a particular type of ________ called the ________ problem.

Accepted Answer

A)  adverse selection; principal-agent 
B)  moral hazard; principal-agent 
C)  adverse selection; free-rider 
D)  moral hazard; free-rider 
A)  adverse selection; principal-agent 
B)  moral hazard; principal-agent 
C)  adverse selection; free-rider 
D)  moral hazard; free-rider

Question 10

How does a mutual fund lower transactions costs through economies of scale?

Accepted Answer

The mutual fund takes the funds of the i

Question 11

The principal-agent problem would not occur if ________ of a firm had complete information about actions of the ________.

Accepted Answer

A)  owners; customers 
B)  owners; managers 
C)  managers; customers 
D)  managers; owners 
A)  owners; customers 
B)  owners; managers 
C)  managers; customers 
D)  managers; owners

Question 12

A lesson of the Enron collapse is that government regulation

Accepted Answer

A)  always fails. 
B)  can reduce but not eliminate asymmetric information. 
C)  increases the problem of asymmetric information. 
D)  should be reduced. 
A)  always fails. 
B)  can reduce but not eliminate asymmetric information. 
C)  increases the problem of asymmetric information. 
D)  should be reduced.

Question 13

One possible reason for slower growth in developing and transition countries is

Accepted Answer

A)  capital may not be directed to its most productive use. 
B)  strict accounting standards are too stringent for the banks to meet. 
C)  the weak link between government and financial intermediaries. 
D)  the lack of adverse selection and moral hazard problems. 
A)  capital may not be directed to its most productive use. 
B)  strict accounting standards are too stringent for the banks to meet. 
C)  the weak link between government and financial intermediaries. 
D)  the lack of adverse selection and moral hazard problems.

Question 14

Although restrictive covenants can potentially reduce moral hazard, a problem with restrictive covenants is that

Accepted Answer

A)  borrowers may find loopholes that make the covenants ineffective. 
B)  they are inexpensive to monitor and enforce. 
C)  too many resources may be devoted to monitoring and enforcing them, as debt holders duplicate others' monitoring and enforcement efforts. 
D)  they reduce the value of the debt contract. 
A)  borrowers may find loopholes that make the covenants ineffective. 
B)  they are inexpensive to monitor and enforce. 
C)  too many resources may be devoted to monitoring and enforcing them, as debt holders duplicate others' monitoring and enforcement efforts. 
D)  they reduce the value of the debt contract.

Question 15

A debt contract is incentive compatible

Accepted Answer

A)  if the borrower has the incentive to behave in the way that the lender expects and desires, since doing otherwise jeopardizes the borrower's net worth in the business. 
B)  if the borrower's net worth is sufficiently low so that the lender's risk of moral hazard is significantly reduced. 
C)  if the debt contract is treated like an equity. 
D)  if the lender has the incentive to behave in the way that the borrower expects and desires. 
A)  if the borrower has the incentive to behave in the way that the lender expects and desires, since doing otherwise jeopardizes the borrower's net worth in the business. 
B)  if the borrower's net worth is sufficiently low so that the lender's risk of moral hazard is significantly reduced. 
C)  if the debt contract is treated like an equity. 
D)  if the lender has the incentive to behave in the way that the borrower expects and desires.

Question 16

Adverse selection is a problem associated with equity and debt contracts arising from

Accepted Answer

A)  the lender's relative lack of information about the borrower's potential returns and risks of his investment activities. 
B)  the lender's inability to legally require sufficient collateral to cover a 100% loss if the borrower defaults. 
C)  the borrower's lack of incentive to seek a loan for highly risky investments. 
D)  the lender's inability to restrict the borrower from changing his behavior once given a loan. 
A)  the lender's relative lack of information about the borrower's potential returns and risks of his investment activities. 
B)  the lender's inability to legally require sufficient collateral to cover a 100% loss if the borrower defaults. 
C)  the borrower's lack of incentive to seek a loan for highly risky investments. 
D)  the lender's inability to restrict the borrower from changing his behavior once given a loan.

Question 17

One reason financial systems in developing and transition countries are underdeveloped is

Accepted Answer

A)  they have weak links to their governments. 
B)  they make loans only to nonprofit entities. 
C)  the legal system may be poor making it difficult to enforce restrictive covenants. 
D)  the accounting standards are too stringent for the banks to meet. 
A)  they have weak links to their governments. 
B)  they make loans only to nonprofit entities. 
C)  the legal system may be poor making it difficult to enforce restrictive covenants. 
D)  the accounting standards are too stringent for the banks to meet.

Question 18

Since they require less monitoring of firms, ________ contracts are used more frequently than ________ contracts to raise capital.

Accepted Answer

A)  debt; equity 
B)  equity; debt 
C)  debt; loan 
D)  equity; stock 
A)  debt; equity 
B)  equity; debt 
C)  debt; loan 
D)  equity; stock

Question 19

The concept of adverse selection helps to explain all of the following except

Accepted Answer

A)  why firms are more likely to obtain funds from banks and other financial intermediaries, rather than from the securities markets. 
B)  why indirect finance is more important than direct finance as a source of business finance. 
C)  why direct finance is more important than indirect finance as a source of business finance. 
D)  why the financial system is so heavily regulated. 
A)  why firms are more likely to obtain funds from banks and other financial intermediaries, rather than from the securities markets. 
B)  why indirect finance is more important than direct finance as a source of business finance. 
C)  why direct finance is more important than indirect finance as a source of business finance. 
D)  why the financial system is so heavily regulated.

Question 20

Direct finance involves the sale to ________ of marketable securities such as stocks and bonds.

Accepted Answer

A)  households 
B)  insurance companies 
C)  pension funds 
D)  financial intermediaries 
A)  households 
B)  insurance companies 
C)  pension funds 
D)  financial intermediaries

Exam 8: An Economic Analysis of Financial Structure

Commercial and farm mortgages, in which property is pledged as collateral, account for

For restrictive covenants to help reduce the moral hazard problem they must be ________ by the lender.

If you default on your auto loan, your car will be repossessed because it has been pledged as ________ for the loan.

Of the sources of external funds for nonfinancial businesses in the United States, stocks account for approximately ________ of the total.

In the United States, the government agency requiring that firms that sell securities in public markets adhere to standard accounting principles and disclose information about their sales, assets, and earnings is the

Regulation of the financial system

A borrower who takes out a loan usually has better information about the potential returns and risk of the investment projects he plans to undertake than does the lender. This inequality of information is called

One reason China has been able to grow so rapidly even though its financial development is still in its early stages is

A problem for equity contracts is a particular type of ________ called the ________ problem.

How does a mutual fund lower transactions costs through economies of scale?

The principal-agent problem would not occur if ________ of a firm had complete information about actions of the ________.

A lesson of the Enron collapse is that government regulation

One possible reason for slower growth in developing and transition countries is

Although restrictive covenants can potentially reduce moral hazard, a problem with restrictive covenants is that

A debt contract is incentive compatible

Adverse selection is a problem associated with equity and debt contracts arising from

One reason financial systems in developing and transition countries are underdeveloped is

Since they require less monitoring of firms, ________ contracts are used more frequently than ________ contracts to raise capital.

The concept of adverse selection helps to explain all of the following except

Direct finance involves the sale to ________ of marketable securities such as stocks and bonds.

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

Filters

A problem for equity contracts is a particular type of called the problem.

The principal-agent problem would not occur if of a firm had complete information about actions of the .

Since they require less monitoring of firms, contracts are used more frequently than contracts to raise capital.