Question 1

Financial intermediaries develop ________ in things such as computer technology which allows them to lower transactions costs.

Accepted Answer

A)  expertise 
B)  diversification 
C)  regulations 
D)  equity 
A)  expertise 
B)  diversification 
C)  regulations 
D)  equity

Question 2

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

Question 3

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

Accepted Answer

A)  Debt contracts are typically extremely complicated legal documents that place substantial restrictions on the behavior of the borrower. 
B)  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. 
C)  Collateral is a prevalent feature of debt contracts for both households and business. 
D)  There is very little regulation of the financial system. 
A)  Debt contracts are typically extremely complicated legal documents that place substantial restrictions on the behavior of the borrower. 
B)  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. 
C)  Collateral is a prevalent feature of debt contracts for both households and business. 
D)  There is very little regulation of the financial system.

Question 4

Debt contracts ________.

Accepted Answer

A)  are agreements by the borrowers to pay the lenders fixed dollar amounts at periodic intervals 
B)  have a higher cost of state verification than equity contracts 
C)  are used less frequently to raise capital than are equity contracts 
D)  never result in a loss for the lender 
A)  are agreements by the borrowers to pay the lenders fixed dollar amounts at periodic intervals 
B)  have a higher cost of state verification than equity contracts 
C)  are used less frequently to raise capital than are equity contracts 
D)  never result in a loss for the lender

Question 5

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

Question 6

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 7

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 8

Adverse selection ________.

Accepted Answer

A)  is a problem of symmetric information 
B)  occurs after the transaction 
C)  is not important in financial markets 
D)  why large firms are more likely to obtain funds from securities markets 
A)  is a problem of symmetric information 
B)  occurs after the transaction 
C)  is not important in financial markets 
D)  why large firms are more likely to obtain funds from securities markets

Question 9

Credit card debt is ________.

Accepted Answer

A)  secured debt 
B)  unsecured debt 
C)  restricted debt 
D)  unrestricted debt 
A)  secured debt 
B)  unsecured debt 
C)  restricted debt 
D)  unrestricted debt

Question 10

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 Canadian 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 Canadian 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 11

Explain how government regulation can lessen asymmetric information problems but not eliminate them using Enron as an example.

Accepted Answer

The government can regulate firms and re

Question 12

Canadian businesses used stocks for external financing ________ percent over the 1970-2000 period.

Accepted Answer

A)  2 
B)  12 
C)  22 
D)  0.2 
A)  2 
B)  12 
C)  22 
D)  0.2

Question 13

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 14

Which of the following is not one of the four types of restrictive covenants?

Accepted Answer

A)  Covenants to discourage undesirable behaviour 
B)  Covenants to encourage desirable behaviour 
C)  Covenants to keep collateral valuable 
D)  Covenants for incentive compatibility 
A)  Covenants to discourage undesirable behaviour 
B)  Covenants to encourage desirable behaviour 
C)  Covenants to keep collateral valuable 
D)  Covenants for incentive compatibility

Question 15

Explain how high net worth and collateral reduce the problem of moral hazard.

Accepted Answer

High net worth and collateral

Question 16

The two ways financial intermediaries can reduce transactions costs are ________ and ________.

Accepted Answer

A)  economies of scale; expertise 
B)  moral hazard; adverse selection 
C)  direct finance; indirect finance 
D)  stocks; bonds 
A)  economies of scale; expertise 
B)  moral hazard; adverse selection 
C)  direct finance; indirect finance 
D)  stocks; bonds

Question 17

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 Canadian 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 Canadian 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.

Question 18

Government regulations designed to reduce the moral hazard problem include ________.

Accepted Answer

A)  laws that force firms to adhere to standard accounting principles 
B)  light sentences for those who commit the fraud of hiding and stealing profits 
C)  state verification subsidies 
D)  state licensing restrictions 
A)  laws that force firms to adhere to standard accounting principles 
B)  light sentences for those who commit the fraud of hiding and stealing profits 
C)  state verification subsidies 
D)  state licensing restrictions

Question 19

Which of the following statements concerning external sources of financing for nonfinancial businesses in Canada is 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 Canadian 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 Canadian households.

Question 20

In the absence of asymmetric information, the lemons problem ________.

Accepted Answer

A)  goes away 
B)  becomes worse 
C)  is not important 
D)  remains the same 
A)  goes away 
B)  becomes worse 
C)  is not important 
D)  remains the same

Exam 8: An Economic Analysis of Financial Structure

Financial intermediaries develop ________ in things such as computer technology which allows them to lower transactions costs.

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.

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

Debt contracts ________.

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

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

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

Adverse selection ________.

Credit card debt is ________.

The principal-agent problem ________.

Explain how government regulation can lessen asymmetric information problems but not eliminate them using Enron as an example.

Canadian businesses used stocks for external financing ________ percent over the 1970-2000 period.

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

Which of the following is not one of the four types of restrictive covenants?

Explain how high net worth and collateral reduce the problem of moral hazard.

The two ways financial intermediaries can reduce transactions costs are ________ and ________.

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

Government regulations designed to reduce the moral hazard problem include ________.

Which of the following statements concerning external sources of financing for nonfinancial businesses in Canada is true?

In the absence of asymmetric information, the lemons problem ________.

Why Study Money, Banking, and Financial Markets

An Overview of the Financial System

What Is Money

The Meaning of Interest Rates

The Behaviour of Interest Rates

The Risk and Term Structure of Interest Rates

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

Economic Analysis of Financial Regulation

Banking Industry: Structure and Competition

Financial Crises

Banking and the Management of Financial Institutions

Risk Management With Financial Derivatives

Central Banks and the Bank of Canada

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

The Is Curve

The Monetary Policy and Aggregate Demand Curves

Aggregate Demand and Supply Analysis

Monetary Policy Theory

The Role of Expectations in Monetary Policy

Transmission Mechanisms of Monetary Policy

Filters

The two ways financial intermediaries can reduce transactions costs are and .