Question 1

Asymmetric information leads to allocational inefficiencies in financial markets.

Accepted Answer

A) True 
 B)False  True

Question 2

Diversified lending is intended to help alleviate agency problems.

Accepted Answer

A) True 
 B)False  False

Question 3

What are restrictive covenants? Are they directed at adverse selection or moral hazard problems?

Accepted Answer

Restrictive covenants are legal restrictions on what borrowers can do with the loan. These affect behavior after the loan is made, so are directed at moral hazard problems.

Question 4

The two types of asymmetric information problems are moral hazard and agency problems.

Accepted Answer

A) True 
 B)False

Question 5

Give an example of monitoring and restrictive covenants the bank might require if you took a loan from a bank to open a clothing store.

Accepted Answer

The bank could require the fun

Question 6

It is difficult to make profits selling information about stock market analysis due to the free rider problem.

Accepted Answer

A) True 
 B)False

Question 7

Which are examples of external finance?

Accepted Answer

A)  issuing commercial paper 
B)  stock sales 
C)  issuing bonds 
D)  all of the above 
A)  issuing commercial paper 
B)  stock sales 
C)  issuing bonds 
D)  all of the above

Question 8

Laws against fraudulent reporting on financial documents are an attempt to solve the free-rider problem.

Accepted Answer

A) True 
 B)False

Question 9

Some transactions costs arise from agency problems.

Accepted Answer

A) True 
 B)False

Question 10

Costly state verification means the same as

Accepted Answer

A)  specialized lending. 
B)  agency costs. 
C)  monitoring. 
D)  all of the above. 
A)  specialized lending. 
B)  agency costs. 
C)  monitoring. 
D)  all of the above.

Question 11

When venture capitalists take an active role in the management of a company they finance, they are trying to alleviate the moral hazard problem.

Accepted Answer

A) True 
 B)False

Question 12

Sarbanes-Oxley was intended to reduce

Accepted Answer

A)  asymmetric information. 
B)  allocational efficiency. 
C)  transactions costs. 
D)  all of the above. 
A)  asymmetric information. 
B)  allocational efficiency. 
C)  transactions costs. 
D)  all of the above.

Question 13

The majority of funds raised by firms is done through internal finance.

Accepted Answer

A) True 
 B)False

Question 14

Which of the following is a technique lenders use to alleviate asymmetric information problems?

Accepted Answer

A)  specialized lending 
B)  diversified lending 
C)  requiring collateral 
D)  all of the above 
A)  specialized lending 
B)  diversified lending 
C)  requiring collateral 
D)  all of the above

Question 15

Joey's Bank decides to make loans only to agricultural firms. Explain the pros and cons of this decision in terms of diversification and specialization.

Accepted Answer

Making only agricultural loans reduces t

Question 16

The two types of asymmetric information problems are adverse selection and moral hazard.

Accepted Answer

A) True 
 B)False

Question 17

Which of the following is a technique lenders use to alleviate the adverse selection problem?

Accepted Answer

A)  checking credit ratings 
B)  monitoring borrower activity 
C)  restrictive covenants 
D)  all of the above 
A)  checking credit ratings 
B)  monitoring borrower activity 
C)  restrictive covenants 
D)  all of the above

Question 18

Which of the following is a technique lenders use to alleviate the moral hazard problem?

Accepted Answer

A)  checking credit ratings 
B)  monitoring borrower activity 
C)  both of the above 
D)  none of the above 
A)  checking credit ratings 
B)  monitoring borrower activity 
C)  both of the above 
D)  none of the above

Question 19

Specialized lending helps lenders solve the problem of

Accepted Answer

A)  adverse selection. 
B)  moral hazard. 
C)  transactions costs. 
D)  all of the above. 
A)  adverse selection. 
B)  moral hazard. 
C)  transactions costs. 
D)  all of the above.

Question 20

Which of the following is a technique lenders use to alleviate the moral hazard problem?

Accepted Answer

A)  checking credit ratings 
B)  monitoring borrower activity 
C)  restrictive covenants 
D)  all of the above 
A)  checking credit ratings 
B)  monitoring borrower activity 
C)  restrictive covenants 
D)  all of the above

Exam 8: Financial Structure, Transaction Costs, and Asymmetric Information

Asymmetric information leads to allocational inefficiencies in financial markets.

Diversified lending is intended to help alleviate agency problems.

What are restrictive covenants? Are they directed at adverse selection or moral hazard problems?

The two types of asymmetric information problems are moral hazard and agency problems.

Give an example of monitoring and restrictive covenants the bank might require if you took a loan from a bank to open a clothing store.

It is difficult to make profits selling information about stock market analysis due to the free rider problem.

Which are examples of external finance?

Laws against fraudulent reporting on financial documents are an attempt to solve the free-rider problem.

Some transactions costs arise from agency problems.

Costly state verification means the same as

When venture capitalists take an active role in the management of a company they finance, they are trying to alleviate the moral hazard problem.

Sarbanes-Oxley was intended to reduce

The majority of funds raised by firms is done through internal finance.

Which of the following is a technique lenders use to alleviate asymmetric information problems?

Joey's Bank decides to make loans only to agricultural firms. Explain the pros and cons of this decision in terms of diversification and specialization.

The two types of asymmetric information problems are adverse selection and moral hazard.

Which of the following is a technique lenders use to alleviate the adverse selection problem?

Which of the following is a technique lenders use to alleviate the moral hazard problem?

Specialized lending helps lenders solve the problem of

Which of the following is a technique lenders use to alleviate the moral hazard problem?

The Financial System

Money

Interest Rates

The Economics of Interest-Rate Fluctuations

The Economics of Interest-Rate Spreads and Yield Curves

Rational Expectations, Efficient Markets, and the Valuation of Corporate Equities

Bank Management

Innovation and Structure in Banking and Finance

The Economics of Financial Regulation

Financial Derivatives

Financial Crises: Causes and Consequences

Central Bank Form and Function

The Money Supply Process and the Money Multipliers

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Monetary Policy Targets and Goals

Foreign Exchange

International Monetary Regimes

Money Demand

Is-Lm

Is-Lm in Action

Aggregate Supply and Demand and the Growth Diamond

Monetary Policy Transmission Mechanisms

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Rational Expectations Redux: Monetary Policy Implications

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