Question 1

Because of the "lemons problem" the price a buyer of a used car pays is

Accepted Answer

A) equal to the price of a lemon. 
B) less than the price of a lemon. 
C) equal to the price of a peach. 
D) between the price of a lemon and a peach. 
A) equal to the price of a lemon. 
B) less than the price of a lemon. 
C) equal to the price of a peach. 
D) between the price of a lemon and a peach.

Question 2

In many developing and transition countries,commercial banks are owned by their governments. These ________ may have little incentive to allocate their capital to the most productive uses.

Accepted Answer

A) state-owned banks 
B) central banks 
C) national banks 
D) federal banks 
A) state-owned banks 
B) central banks 
C) national banks 
D) federal banks

Question 3

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 4

The statement "Only the people who don't need money can borrow it!" can be explained by the concept of

Accepted Answer

A) adverse selection. 
B) moral hazard. 
C) direct finance. 
D) costly state verification. 
A) adverse selection. 
B) moral hazard. 
C) direct finance. 
D) costly state verification.

Question 5

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 6

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 7

Why does the free-rider problem occur in the debt market?

Accepted Answer

Restrictive covenants can reduce moral h

Question 8

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

Question 9

Nonfinancial businesses in Germany,Japan,and Canada raise most of their funds

Accepted Answer

A) by issuing stock. 
B) by issuing bonds. 
C) from nonbank loans. 
D) from bank loans. 
A) by issuing stock. 
B) by issuing bonds. 
C) from nonbank loans. 
D) from bank loans.

Question 10

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 11

The concept of adverse selection helps to explain

Accepted Answer

A) why collateral is not a common feature of many debt contracts. 
B) why large,well-established corporations find it so difficult to borrow funds in securities markets. 
C) why financial markets are among the most heavily regulated sectors of the economy. 
D) why stocks are the most important source of external financing for businesses. 
A) why collateral is not a common feature of many debt contracts. 
B) why large,well-established corporations find it so difficult to borrow funds in securities markets. 
C) why financial markets are among the most heavily regulated sectors of the economy. 
D) why stocks are the most important source of external financing for businesses.

Question 12

One way of describing the solution that high net worth provides to the moral hazard problem is to say that it

Accepted Answer

A) collateralizes the debt contract. 
B) makes the debt contract incentive compatible. 
C) state verifies the debt contract. 
D) removes all of the risk in the debt contract. 
A) collateralizes the debt contract. 
B) makes the debt contract incentive compatible. 
C) state verifies the debt contract. 
D) removes all of the risk in the debt contract.

Question 13

By bundling share purchases of many investors together mutual funds can take advantage of economies of scale and thereby lower

Accepted Answer

A) adverse selection. 
B) moral hazard. 
C) transactions costs. 
D) diversification. 
A) adverse selection. 
B) moral hazard. 
C) transactions costs. 
D) diversification.

Question 14

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 15

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 16

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 17

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 18

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 19

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 20

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.

Exam 8: An Economic Analysis of Financial Structure

Because of the "lemons problem" the price a buyer of a used car pays is

In many developing and transition countries,commercial banks are owned by their governments. These ________ may have little incentive to allocate their capital to the most productive uses.

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.

The statement "Only the people who don't need money can borrow it!" can be explained by the concept of

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

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

Why does the free-rider problem occur in the debt market?

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

Nonfinancial businesses in Germany,Japan,and Canada raise most of their funds

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

The concept of adverse selection helps to explain

One way of describing the solution that high net worth provides to the moral hazard problem is to say that it

By bundling share purchases of many investors together mutual funds can take advantage of economies of scale and thereby lower

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

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?

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

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

Property that is pledged to the lender in the event that a borrower cannot make his or her debt payment is called

Government regulations designed to reduce the moral hazard problem include

Why Study Money, banking, and Financial Markets

An Overview of the Financial System

What Is Money

The Meaning of 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

Banking and the Management of Financial Institutions

Economic Analysis of Financial Regulation

Banking Industry: Structure and Competition

Financial Crises

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

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

Financial Crises in Emerging Market Economies

The ISLM Model

Filters

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

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