Question 1

Of the four sources of external funding for nonfinancial businesses,the least often used in the U.S. is

Accepted Answer

A) bank loans. 
B) nonbank loans. 
C) bonds. 
D) stock. 
A) bank loans. 
B) nonbank loans. 
C) bonds. 
D) stock.

Question 2

As a source of funds for nonfinancial businesses,stocks are relatively more important in

Accepted Answer

A) the United States. 
B) Germany. 
C) Japan. 
D) Canada. 
A) the United States. 
B) Germany. 
C) Japan. 
D) Canada.

Question 3

Equity contracts account for a small fraction of external funds raised by American businesses because

Accepted Answer

A) costly state verification makes the equity contract less desirable than the debt contract. 
B) of the reduced scope for moral hazard problems under equity contracts,as compared to debt contracts. 
C) equity contracts do not permit borrowing firms to raise additional funds by issuing debt. 
D) there is no moral hazard problem when using a debt contract. 
A) costly state verification makes the equity contract less desirable than the debt contract. 
B) of the reduced scope for moral hazard problems under equity contracts,as compared to debt contracts. 
C) equity contracts do not permit borrowing firms to raise additional funds by issuing debt. 
D) there is no moral hazard problem when using a debt contract.

Question 4

American businesses get their external funds primarily from

Accepted Answer

A) bank loans. 
B) bonds and commercial paper issues. 
C) stock issues. 
D) loans from nonbank financial intermediaries. 
A) bank loans. 
B) bonds and commercial paper issues. 
C) stock issues. 
D) loans from nonbank financial intermediaries.

Question 5

The reduction in transactions costs per dollar of investment as the size of transactions increases is

Accepted Answer

A) discounting. 
B) economies of scale. 
C) economies of trade. 
D) diversification. 
A) discounting. 
B) economies of scale. 
C) economies of trade. 
D) diversification.

Question 6

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 7

The recent Enron and Tyco International scandals are an example of

Accepted Answer

A) the free-rider problem. 
B) the adverse selection problem. 
C) the principal-agent problem. 
D) the "lemons problem." 
A) the free-rider problem. 
B) the adverse selection problem. 
C) the principal-agent problem. 
D) the "lemons problem."

Question 8

One possible reason for slower growth in developing and transition countries is

Accepted Answer

A) capital may not be directed to its most productive use. 
B) strict accounting standards are too stringent for the banks to meet. 
C) the weak link between government and financial intermediaries. 
D) the lack of adverse selection and moral hazard problems. 
A) capital may not be directed to its most productive use. 
B) strict accounting standards are too stringent for the banks to meet. 
C) the weak link between government and financial intermediaries. 
D) the lack of adverse selection and moral hazard problems.

Question 9

The problem of adverse selection helps to explain

Accepted Answer

A) why firms are more likely to obtain funds from banks and other financial intermediaries,rather than from securities markets. 
B) why collateral is an important feature of consumer,but not business,debt contracts. 
C) why direct finance is more important than indirect finance as a source of business finance. 
D) why lenders refuse loans to individuals with high net worth. 
A) why firms are more likely to obtain funds from banks and other financial intermediaries,rather than from securities markets. 
B) why collateral is an important feature of consumer,but not business,debt contracts. 
C) why direct finance is more important than indirect finance as a source of business finance. 
D) why lenders refuse loans to individuals with high net worth.

Question 10

Regulation of the financial system

Accepted Answer

A) occurs only in the United States. 
B) protects the jobs of employees of financial institutions. 
C) protects the wealth of owners of financial institutions. 
D) ensures the stability of the financial system. 
A) occurs only in the United States. 
B) protects the jobs of employees of financial institutions. 
C) protects the wealth of owners of financial institutions. 
D) ensures the stability of the financial system.

Question 11

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 12

The name economists give the process by which stockholders gather information by frequent monitoring of the firm's activities is

Accepted Answer

A) costly state verification. 
B) the free-rider problem. 
C) costly avoidance. 
D) debt intermediation. 
A) costly state verification. 
B) the free-rider problem. 
C) costly avoidance. 
D) debt intermediation.

Question 13

The free-rider problem occurs because

Accepted Answer

A) people who pay for information use it freely. 
B) people who do not pay for information use it. 
C) information can never be sold at any price. 
D) it is never profitable to produce information. 
A) people who pay for information use it freely. 
B) people who do not pay for information use it. 
C) information can never be sold at any price. 
D) it is never profitable to produce information.

Question 14

Solutions to the moral hazard in equity contracts include all of the following EXCEPT

Accepted Answer

A) government regulations to increase information. 
B) the use of financial intermediaries. 
C) the use of debt contracts. 
D) government ownership of resources. 
A) government regulations to increase information. 
B) the use of financial intermediaries. 
C) the use of debt contracts. 
D) government ownership of resources.

Question 15

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 16

Of the sources of external funds for nonfinancial businesses in the United States,stocks account for approximately ________ of the total.

Accepted Answer

A) 2% 
B) 11% 
C) 20% 
D) 40% 
A) 2% 
B) 11% 
C) 20% 
D) 40%

Question 17

In developing countries,it can be expensive and time-consuming for the poor to legalize their property ownership. Without legal title,the property cannot be used as ________ to borrow funds.

Accepted Answer

A) collateral 
B) points 
C) interest 
D) restrictive covenants 
A) collateral 
B) points 
C) interest 
D) restrictive covenants

Question 18

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 American 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 American 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 19

The "lemons problem" exists because of

Accepted Answer

A) transactions costs. 
B) economies of scale. 
C) rational expectations. 
D) asymmetric information. 
A) transactions costs. 
B) economies of scale. 
C) rational expectations. 
D) asymmetric information.

Question 20

High net worth helps to diminish the problem of moral hazard problem by

Accepted Answer

A) requiring the state to verify the debt contract. 
B) collateralizing the debt contract. 
C) making the debt contract incentive compatible. 
D) giving the debt contract characteristics of equity contracts. 
A) requiring the state to verify the debt contract. 
B) collateralizing the debt contract. 
C) making the debt contract incentive compatible. 
D) giving the debt contract characteristics of equity contracts.

Exam 8: An Economic Analysis of Financial Structure

Of the four sources of external funding for nonfinancial businesses,the least often used in the U.S. is

As a source of funds for nonfinancial businesses,stocks are relatively more important in

Equity contracts account for a small fraction of external funds raised by American businesses because

American businesses get their external funds primarily from

The reduction in transactions costs per dollar of investment as the size of transactions increases is

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

The recent Enron and Tyco International scandals are an example of

One possible reason for slower growth in developing and transition countries is

The problem of adverse selection helps to explain

Regulation of the financial system

Because information is scarce

The name economists give the process by which stockholders gather information by frequent monitoring of the firm's activities is

The free-rider problem occurs because

Solutions to the moral hazard in equity contracts include all of the following EXCEPT

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

Of the sources of external funds for nonfinancial businesses in the United States,stocks account for approximately ________ of the total.

In developing countries,it can be expensive and time-consuming for the poor to legalize their property ownership. Without legal title,the property cannot be used as ________ to borrow funds.

The principal-agent problem

The "lemons problem" exists because of

High net worth helps to diminish the problem of moral hazard problem by

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