Question 1

The analysis of how asymmetric information problems affect economic behavior is called ________ theory.

Accepted Answer

A)  uneven 
B)  parallel 
C)  principal 
D)  agency 
A)  uneven 
B)  parallel 
C)  principal 
D)  agency

Question 2

Which of the following statements concerning external sources of financing for nonfinancial businesses in the United States are true?

Accepted Answer

A)  Stocks are a far more important source of finance than are bonds. 
B)  Stocks and bonds, combined, supply less than one-half of the external funds. 
C)  Financial intermediaries are the least important source of external funds for businesses. 
D)  Since 1970, more than half of the new issues of stock have been sold to American households. 
A)  Stocks are a far more important source of finance than are bonds. 
B)  Stocks and bonds, combined, supply less than one-half of the external funds. 
C)  Financial intermediaries are the least important source of external funds for businesses. 
D)  Since 1970, more than half of the new issues of stock have been sold to American households.

Question 3

Solutions to the moral hazard problem include

Accepted Answer

A)  low net worth. 
B)  monitoring and enforcement of restrictive covenants. 
C)  greater reliance on equity contracts and less on debt contracts. 
D)  greater reliance on debt contracts than financial intermediaries. 
A)  low net worth. 
B)  monitoring and enforcement of restrictive covenants. 
C)  greater reliance on equity contracts and less on debt contracts. 
D)  greater reliance on debt contracts than financial intermediaries.

Question 4

That most used cars are sold by intermediaries (i.e., used car dealers) provides evidence that these intermediaries

Accepted Answer

A)  have been afforded special government treatment, since used car dealers do not provide information that is valued by consumers of used cars. 
B)  are able to prevent potential competitors from free-riding off the information that they provide. 
C)  have failed to solve adverse selection problems in this market because "lemons" continue to be traded. 
D)  have solved the moral hazard problem by providing valuable information to their customers. 
A)  have been afforded special government treatment, since used car dealers do not provide information that is valued by consumers of used cars. 
B)  are able to prevent potential competitors from free-riding off the information that they provide. 
C)  have failed to solve adverse selection problems in this market because "lemons" continue to be traded. 
D)  have solved the moral hazard problem by providing valuable information to their customers.

Question 5

A key finding of the economic analysis of financial structure is that

Accepted Answer

A)  the existence of the free-rider problem for traded securities helps to explain why banks play a predominant role in financing the activities of businesses. 
B)  while free-rider problems limit the extent to which securities markets finance some business activities, nevertheless the majority of funds going to businesses are channeled through securities markets. 
C)  given the great extent to which securities markets are regulated, free-rider problems are not of significant economic consequence in these markets. 
D)  economists do not have a very good explanation for why securities markets are so heavily regulated. 
A)  the existence of the free-rider problem for traded securities helps to explain why banks play a predominant role in financing the activities of businesses. 
B)  while free-rider problems limit the extent to which securities markets finance some business activities, nevertheless the majority of funds going to businesses are channeled through securities markets. 
C)  given the great extent to which securities markets are regulated, free-rider problems are not of significant economic consequence in these markets. 
D)  economists do not have a very good explanation for why securities markets are so heavily regulated.

Question 6

Because information is scarce

Accepted Answer

A)  helps explain why equity contracts are used so much more frequently to raise capital than are debt contracts. 
B)  monitoring managers gives rise to costly state verification. 
C)  government regulations, such as standard accounting principles, have no impact on problems such as moral hazard. 
D)  developing nations do not rely heavily on banks for business financing. 
A)  helps explain why equity contracts are used so much more frequently to raise capital than are debt contracts. 
B)  monitoring managers gives rise to costly state verification. 
C)  government regulations, such as standard accounting principles, have no impact on problems such as moral hazard. 
D)  developing nations do not rely heavily on banks for business financing.

Question 7

The ________ problem helps to explain why the private production and sale of information cannot eliminate ________.

Accepted Answer

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

Question 8

Moral hazard in equity contracts is known as the ________ problem because the manager of the firm has fewer incentives to maximize profits than the stockholders might ideally prefer.

Accepted Answer

A)  principal-agent 
B)  adverse selection 
C)  free-rider 
D)  debt deflation 
A)  principal-agent 
B)  adverse selection 
C)  free-rider 
D)  debt deflation

Question 9

One way the venture capital firm avoids the free-rider problem is by

Accepted Answer

A)  prohibiting the sale of equity in the firm to anyone except the venture capital firm. 
B)  prohibiting members from serving on the board of directors. 
C)  prohibiting the borrowing firm from replacing management. 
D)  requiring collateral equal to the value of the borrowed funds. 
A)  prohibiting the sale of equity in the firm to anyone except the venture capital firm. 
B)  prohibiting members from serving on the board of directors. 
C)  prohibiting the borrowing firm from replacing management. 
D)  requiring collateral equal to the value of the borrowed funds.

The analysis of how asymmetric information problems affect economic behavior is called ________ theory.

Which of the following statements concerning external sources of financing for nonfinancial businesses in the United States are true?

Solutions to the moral hazard problem include

That most used cars are sold by intermediaries (i.e., used car dealers) provides evidence that these intermediaries

A key finding of the economic analysis of financial structure is that

Because information is scarce

The problem helps to explain why the private production and sale of information cannot eliminate .

Moral hazard in equity contracts is known as the ________ problem because the manager of the firm has fewer incentives to maximize profits than the stockholders might ideally prefer.

One way the venture capital firm avoids the free-rider problem is by

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

Exam 8: An Economic Analysis of Financial Structure

The analysis of how asymmetric information problems affect economic behavior is called ________ theory.

Which of the following statements concerning external sources of financing for nonfinancial businesses in the United States are true?

Solutions to the moral hazard problem include

That most used cars are sold by intermediaries (i.e., used car dealers) provides evidence that these intermediaries

A key finding of the economic analysis of financial structure is that

Because information is scarce

The ________ problem helps to explain why the private production and sale of information cannot eliminate ________.

Moral hazard in equity contracts is known as the ________ problem because the manager of the firm has fewer incentives to maximize profits than the stockholders might ideally prefer.

One way the venture capital firm avoids the free-rider problem is by

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

The problem helps to explain why the private production and sale of information cannot eliminate .