Question 1

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 2

The problem created by asymmetric information before the transaction occurs is called ________, while the problem created after the transaction occurs is called ________.

Accepted Answer

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

Question 3

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 4

Financial intermediaries' low transaction costs allow them to provide ________ services that make it easier for customers to conduct transactions.

Accepted Answer

A)  liquidity 
B)  conduction 
C)  transcendental 
D)  equitable 
A)  liquidity 
B)  conduction 
C)  transcendental 
D)  equitable

Question 5

If all the students in your class pool their money in order to buy one bond and share its return accordingly, in order to eliminate transaction costs, this is an example of ________.

Accepted Answer

A)  economies of scale 
B)  cooperative game 
C)  risk sharing 
D)  moral hazard 
A)  economies of scale 
B)  cooperative game 
C)  risk sharing 
D)  moral hazard

Question 6

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 7

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 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 percent 
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 percent 
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 solution to the high transaction costs is to bundle the funds of many investors so that they can take advantage of ________.

Accepted Answer

A)  economies of scale 
B)  high interest rates 
C)  high rates of return 
D)  lower risk 
A)  economies of scale 
B)  high interest rates 
C)  high rates of return 
D)  lower risk

Question 10

The principal-agent problem ________.

Accepted Answer

A)  arises because principals have incentives to free-ride off of the monitoring expenditures of other principals 
B)  arises because principals find it simple to monitor agents' activities 
C)  arises because agents' incentives are always compatible with those of the principals 
D)  arises because principals' incentives are always compatible with those of the agents 
A)  arises because principals have incentives to free-ride off of the monitoring expenditures of other principals 
B)  arises because principals find it simple to monitor agents' activities 
C)  arises because agents' incentives are always compatible with those of the principals 
D)  arises because principals' incentives are always compatible with those of the agents

A debt contract is incentive compatible ________.

The problem created by asymmetric information before the transaction occurs is called , while the problem created after the transaction occurs is called .

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

Financial intermediaries' low transaction costs allow them to provide ________ services that make it easier for customers to conduct transactions.

If all the students in your class pool their money in order to buy one bond and share its return accordingly, in order to eliminate transaction costs, this is an example of ________.

Solutions to the moral hazard problem include ________.

Property that is pledged to the lender in the event that a borrower cannot make his or her debt payment 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 solution to the high transaction costs is to bundle the funds of many investors so that they can take advantage of ________.

The principal-agent 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

Exam 8: An Economic Analysis of Financial Structure

A debt contract is incentive compatible ________.

The problem created by asymmetric information before the transaction occurs is called ________, while the problem created after the transaction occurs is called ________.

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

Financial intermediaries' low transaction costs allow them to provide ________ services that make it easier for customers to conduct transactions.

If all the students in your class pool their money in order to buy one bond and share its return accordingly, in order to eliminate transaction costs, this is an example of ________.

Solutions to the moral hazard problem include ________.

Property that is pledged to the lender in the event that a borrower cannot make his or her debt payment 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 solution to the high transaction costs is to bundle the funds of many investors so that they can take advantage of ________.

The principal-agent 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 problem created by asymmetric information before the transaction occurs is called , while the problem created after the transaction occurs is called .