Question 1

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. D

Question 2

That most used cars are sold by intermediaries (i.e.,used car dealers)provides evidence that these intermediaries

Accepted Answer

A)  have been afforded special government treatment, since used car dealers do not provide information that is valued by consumers of used cars. 
B)  are able to prevent potential competitors from free-riding off the information that they provide. 
C)  have failed to solve adverse selection problems in this market because "lemons" continue to be traded. 
D)  have solved the moral hazard problem by providing valuable information to their customers. 
A)  have been afforded special government treatment, since used car dealers do not provide information that is valued by consumers of used cars. 
B)  are able to prevent potential competitors from free-riding off the information that they provide. 
C)  have failed to solve adverse selection problems in this market because "lemons" continue to be traded. 
D)  have solved the moral hazard problem by providing valuable information to their customers. B

Question 3

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. A

Question 4

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 5

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 6

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.

Question 7

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 8

One way the venture capital firm avoids the free-rider problem is by

Accepted Answer

A)  prohibiting the sale of equity in the firm to anyone except the venture capital firm. 
B)  prohibiting members from serving on the board of directors. 
C)  prohibiting the borrowing firm from replacing management. 
D)  requiring collateral equal to the value of the borrowed funds. 
A)  prohibiting the sale of equity in the firm to anyone except the venture capital firm. 
B)  prohibiting members from serving on the board of directors. 
C)  prohibiting the borrowing firm from replacing management. 
D)  requiring collateral equal to the value of the borrowed funds.

Question 9

How does a mutual fund lower transactions costs through economies of scale?

Accepted Answer

The mutual fund takes the funds of the i

Question 10

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 11

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 12

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 13

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 14

A venture capital firm protects its equity investment from moral hazard through which of the following means?

Accepted Answer

A)  It places people on the board of directors to better monitor the borrowing firm's activities. 
B)  It writes contracts that prohibit the sale of an equity investment to the venture capital firm. 
C)  It prohibits the borrowing firm from replacing its management. 
D)  It requires a 50% stake in the company. 
A)  It places people on the board of directors to better monitor the borrowing firm's activities. 
B)  It writes contracts that prohibit the sale of an equity investment to the venture capital firm. 
C)  It prohibits the borrowing firm from replacing its management. 
D)  It requires a 50% stake in the company.

Question 15

The problem faced by the lender that the borrower may take on additional risk after receiving the loan is called

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 16

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 17

A clause in a debt contract requiring that the borrower purchase insurance against loss of the asset financed with the loan is called a

Accepted Answer

A)  collateral-insurance clause. 
B)  prescription covenant. 
C)  restrictive covenant. 
D)  proscription covenant. 
A)  collateral-insurance clause. 
B)  prescription covenant. 
C)  restrictive covenant. 
D)  proscription covenant.

Question 18

A borrower who takes out a loan usually has better information about the potential returns and risk of the investment projects he plans to undertake than does the lender.This inequality of information is called

Accepted Answer

A)  moral hazard. 
B)  asymmetric information. 
C)  noncollateralized risk. 
D)  adverse selection. 
A)  moral hazard. 
B)  asymmetric information. 
C)  noncollateralized risk. 
D)  adverse selection.

Question 19

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 20

As information technology improves,the lending role of financial institutions such as banks should

Accepted Answer

A)  increase somewhat. 
B)  decrease. 
C)  stay the same. 
D)  increase significantly. 
A)  increase somewhat. 
B)  decrease. 
C)  stay the same. 
D)  increase significantly.

Exam 8: An Economic Analysis of Financial Structure

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

That most used cars are sold by intermediaries (i.e.,used car dealers)provides evidence that these intermediaries

Government regulations designed to reduce the moral hazard problem include

Regulation of the financial system

Because information is scarce

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

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.

One way the venture capital firm avoids the free-rider problem is by

How does a mutual fund lower transactions costs through economies of scale?

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

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

The problem of adverse selection helps to explain

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

A venture capital firm protects its equity investment from moral hazard through which of the following means?

The problem faced by the lender that the borrower may take on additional risk after receiving the loan is called

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

A clause in a debt contract requiring that the borrower purchase insurance against loss of the asset financed with the loan is called a

A borrower who takes out a loan usually has better information about the potential returns and risk of the investment projects he plans to undertake than does the lender.This inequality of information is called

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

As information technology improves,the lending role of financial institutions such as banks should

Why Study Money, banking, and Financial Markets

An Overview of the Financial System

What Is Money

Understanding 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

Financial Crises

Banking and the Management of Financial Institutions

Economic Analysis of Financial Regulation

Banking Industry: Structure and Competition

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

The ISLM Model

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