Question 1

Government regulations require publicly traded firms to provide information,reducing

Accepted Answer

A)  transactions costs. 
B)  the need for diversification. 
C)  the adverse selection problem. 
D)  economies of scale. 
A)  transactions costs. 
B)  the need for diversification. 
C)  the adverse selection problem. 
D)  economies of scale.

Question 2

Which of the following is not one of the eight basic puzzles about financial structure?

Accepted Answer

A)  Debt contracts are typically extremely complicated legal documents that place substantial restrictions on the behavior of the borrower. 
B)  Indirect finance, which involves the activities of financial intermediaries, is many times more important than direct finance, in which businesses raise funds directly from lenders in financial markets. 
C)  Collateral is a prevalent feature of debt contracts for both households and business. 
D)  There is very little regulation of the financial system. 
A)  Debt contracts are typically extremely complicated legal documents that place substantial restrictions on the behavior of the borrower. 
B)  Indirect finance, which involves the activities of financial intermediaries, is many times more important than direct finance, in which businesses raise funds directly from lenders in financial markets. 
C)  Collateral is a prevalent feature of debt contracts for both households and business. 
D)  There is very little regulation of the financial system.

Question 3

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 4

Analysis of adverse selection indicates that financial intermediaries,especially banks,

Accepted Answer

A)  have advantages in overcoming the free-rider problem, helping to explain why indirect finance is a more important source of business finance than is direct finance. 
B)  despite their success in overcoming free-rider problems, nevertheless play a minor role in moving funds to corporations. 
C)  provide better-known and larger corporations a higher percentage of their external funds than they do to newer and smaller corporations which rely to a greater extent on the new issues market for funds. 
D)  must buy securities from corporations to diversify the risk that results from holding non-tradable loans. 
A)  have advantages in overcoming the free-rider problem, helping to explain why indirect finance is a more important source of business finance than is direct finance. 
B)  despite their success in overcoming free-rider problems, nevertheless play a minor role in moving funds to corporations. 
C)  provide better-known and larger corporations a higher percentage of their external funds than they do to newer and smaller corporations which rely to a greater extent on the new issues market for funds. 
D)  must buy securities from corporations to diversify the risk that results from holding non-tradable loans.

Question 5

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 6

Commercial and farm mortgages,in which property is pledged as collateral,account for

Accepted Answer

A)  one-quarter of borrowing by nonfinancial businesses. 
B)  one-half of borrowing by nonfinancial businesses. 
C)  one-twentieth of borrowing by nonfinancial businesses. 
D)  two-thirds of borrowing by nonfinancial businesses. 
A)  one-quarter of borrowing by nonfinancial businesses. 
B)  one-half of borrowing by nonfinancial businesses. 
C)  one-twentieth of borrowing by nonfinancial businesses. 
D)  two-thirds of borrowing by nonfinancial businesses.

Question 7

Explain the principal-agent problem as it pertains to equity contracts.

Accepted Answer

The principals are the stockholders who

Question 8

Although debt contracts require less monitoring than equity contracts,debt contracts are still subject to ________ since borrowers have an incentive to take on more risk than the lender would like.

Accepted Answer

A)  moral hazard 
B)  agency theory 
C)  diversification 
D)  the "lemons" problem 
A)  moral hazard 
B)  agency theory 
C)  diversification 
D)  the "lemons" problem

Question 9

Equity contracts

Accepted Answer

A)  are claims to a share in the profits and assets of a business. 
B)  have the advantage over debt contracts of a lower costly state verification. 
C)  are used much more frequently to raise capital than are debt contracts. 
D)  are not subject to the moral hazard problem. 
A)  are claims to a share in the profits and assets of a business. 
B)  have the advantage over debt contracts of a lower costly state verification. 
C)  are used much more frequently to raise capital than are debt contracts. 
D)  are not subject to the moral hazard problem.

Question 10

Moral hazard in equity contracts is known as the ________ problem because the manager of the firm has fewer incentives to maximize profits than the stockholders might ideally prefer.

Accepted Answer

A)  principal-agent 
B)  adverse selection 
C)  free-rider 
D)  debt deflation 
A)  principal-agent 
B)  adverse selection 
C)  free-rider 
D)  debt deflation

Question 11

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 12

The principal-agent problem would not occur if ________ of a firm had complete information about actions of the ________.

Accepted Answer

A)  owners; customers 
B)  owners; managers 
C)  managers; customers 
D)  managers; owners 
A)  owners; customers 
B)  owners; managers 
C)  managers; customers 
D)  managers; owners

Question 13

The concept of adverse selection helps to explain all of the following except

Accepted Answer

A)  why firms are more likely to obtain funds from banks and other financial intermediaries, rather than from the securities markets. 
B)  why indirect finance is more important than direct finance as a source of business finance. 
C)  why direct finance is more important than indirect finance as a source of business finance. 
D)  why the financial system is so heavily regulated. 
A)  why firms are more likely to obtain funds from banks and other financial intermediaries, rather than from the securities markets. 
B)  why indirect finance is more important than direct finance as a source of business finance. 
C)  why direct finance is more important than indirect finance as a source of business finance. 
D)  why the financial system is so heavily regulated.

Question 14

Debt contracts

Accepted Answer

A)  are agreements by the borrowers to pay the lenders fixed dollar amounts at periodic intervals. 
B)  have a higher cost of state verification than equity contracts. 
C)  are used less frequently to raise capital than are equity contracts. 
D)  never result in a loss for the lender. 
A)  are agreements by the borrowers to pay the lenders fixed dollar amounts at periodic intervals. 
B)  have a higher cost of state verification than equity contracts. 
C)  are used less frequently to raise capital than are equity contracts. 
D)  never result in a loss for the lender.

Question 15

The current structure of financial markets can be best understood as the result of attempts by financial market participants to

Accepted Answer

A)  adapt to continually changing government regulations. 
B)  deal with the great number of small firms in the United States. 
C)  reduce transaction costs. 
D)  cartelize the provision of financial services. 
A)  adapt to continually changing government regulations. 
B)  deal with the great number of small firms in the United States. 
C)  reduce transaction costs. 
D)  cartelize the provision of financial services.

Question 16

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 17

With regard to external sources of financing for nonfinancial businesses in the United States,which of the following are accurate statements?

Accepted Answer

A)  Marketable securities account for a larger share of external business financing in the United States than in Germany and Japan. 
B)  Since 1970, most of the newly issued corporate bonds and commercial paper have been sold directly to American households. 
C)  Direct finance accounts for more than 50 percent of the external financing of American businesses. 
D)  Smaller businesses almost always raise funds by issuing marketable securities. 
A)  Marketable securities account for a larger share of external business financing in the United States than in Germany and Japan. 
B)  Since 1970, most of the newly issued corporate bonds and commercial paper have been sold directly to American households. 
C)  Direct finance accounts for more than 50 percent of the external financing of American businesses. 
D)  Smaller businesses almost always raise funds by issuing marketable securities.

Question 18

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 19

Of the sources of external funds for nonfinancial businesses in the United States,loans from banks and other financial intermediaries account for approximately ________ of the total.

Accepted Answer

A)  6% 
B)  40% 
C)  56% 
D)  60% 
A)  6% 
B)  40% 
C)  56% 
D)  60%

Question 20

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.

Exam 8: An Economic Analysis of Financial Structure

Government regulations require publicly traded firms to provide information,reducing

Which of the following is not one of the eight basic puzzles about financial structure?

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

Analysis of adverse selection indicates that financial intermediaries,especially banks,

The "lemons problem" exists because of

Commercial and farm mortgages,in which property is pledged as collateral,account for

Explain the principal-agent problem as it pertains to equity contracts.

Although debt contracts require less monitoring than equity contracts,debt contracts are still subject to ________ since borrowers have an incentive to take on more risk than the lender would like.

Equity contracts

Moral hazard in equity contracts is known as the ________ problem because the manager of the firm has fewer incentives to maximize profits than the stockholders might ideally prefer.

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

The principal-agent problem would not occur if ________ of a firm had complete information about actions of the ________.

The concept of adverse selection helps to explain all of the following except

Debt contracts

The current structure of financial markets can be best understood as the result of attempts by financial market participants to

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

With regard to external sources of financing for nonfinancial businesses in the United States,which of the following are accurate statements?

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

Of the sources of external funds for nonfinancial businesses in the United States,loans from banks and other financial intermediaries account for approximately ________ of the total.

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

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

Filters

The principal-agent problem would not occur if of a firm had complete information about actions of the .