Question 1

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

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 2

Equity contracts account for a small fraction of external funds raised by Canadian 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 3

Which of the following statements concerning external sources of financing for nonfinancial businesses in Canada is 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 Canadian 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 Canadian households.

Question 4

Explain the difference between net worth and collateral.

Accepted Answer

Net worth is the difference be

Question 5

Which of the following is not a benefit to an individual purchasing a mutual fund?

Accepted Answer

A)  Reduced risk 
B)  Lower transactions costs 
C)  Free-riding 
D)  Diversification 
A)  Reduced risk 
B)  Lower transactions costs 
C)  Free-riding 
D)  Diversification

Question 6

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 7

China's reforms to strengthen the financial system includes ________.

Accepted Answer

A)  privatizing state-owned banks 
B)  diluting legal reforms 
C)  industrializing the labour force 
D)  maintaining highly agrarian labour force 
A)  privatizing state-owned banks 
B)  diluting legal reforms 
C)  industrializing the labour force 
D)  maintaining highly agrarian labour force

Question 8

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)  free-riders 
A)  transactions costs 
B)  the need for diversification 
C)  the adverse selection problem 
D)  free-riders

Question 9

A debt contract is incentive compatible ________.

Accepted Answer

A)  if the borrower has the incentive to behave in the way that the lender expects and desires, since doing otherwise jeopardizes the borrower's net worth in the business 
B)  if the borrower's net worth is sufficiently low so that the lender's risk of moral hazard is significantly reduced 
C)  if the debt contract is treated like an equity 
D)  if the lender has the incentive to behave in the way that the borrower expects and desires 
A)  if the borrower has the incentive to behave in the way that the lender expects and desires, since doing otherwise jeopardizes the borrower's net worth in the business 
B)  if the borrower's net worth is sufficiently low so that the lender's risk of moral hazard is significantly reduced 
C)  if the debt contract is treated like an equity 
D)  if the lender has the incentive to behave in the way that the borrower expects and desires

Question 10

The problem of adverse selection helps to explain ________.

Accepted Answer

A)  which firms are more likely to obtain funds from banks and other financial intermediaries, rather than from securities markets 
B)  why direct finance is more important than indirect finance as a source of business finance 
C)  why collateral is not an important feature of debt contracts 
D)  why banks prefer to make loans unsecured 
A)  which firms are more likely to obtain funds from banks and other financial intermediaries, rather than from securities markets 
B)  why direct finance is more important than indirect finance as a source of business finance 
C)  why collateral is not an important feature of debt contracts 
D)  why banks prefer to make loans unsecured

Question 11

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 12

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 percent 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 percent stake in the company

Question 13

Bundling investors funds together ________.

Accepted Answer

A)  increases transactions costs per dollar of investment 
B)  reduces transaction costs per dollar of investment 
C)  increases moral hazard 
D)  explains why stocks are the most import means of external financing for Canadian businesses 
A)  increases transactions costs per dollar of investment 
B)  reduces transaction costs per dollar of investment 
C)  increases moral hazard 
D)  explains why stocks are the most import means of external financing for Canadian businesses

Question 14

How do restrictive covenants reduce moral hazard in debt contracts?

Accepted Answer

Restrictive covenants keep borrowers fro

Question 15

Financial intermediaries' low transaction costs allow them to provide ________ services that make it easier for customers to conduct transactions.

Accepted Answer

A)  liquidity 
B)  conduction 
C)  transcendental 
D)  equitable 
A)  liquidity 
B)  conduction 
C)  transcendental 
D)  equitable

Question 16

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 17

That only large,well-established corporations have access to securities markets ________.

Accepted Answer

A)  explains why indirect finance is such an important source of external funds for businesses 
B)  can be explained by the problem of moral hazard 
C)  can be explained by government regulations that prohibit small firms from acquiring funds in securities markets 
D)  explains why newer and smaller corporations rely so heavily on the new issues market for funds 
A)  explains why indirect finance is such an important source of external funds for businesses 
B)  can be explained by the problem of moral hazard 
C)  can be explained by government regulations that prohibit small firms from acquiring funds in securities markets 
D)  explains why newer and smaller corporations rely so heavily on the new issues market for funds

Question 18

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 19

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

Accepted Answer

The principals are the stockholders who

Question 20

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

Exam 8: An Economic Analysis of Financial Structure

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

Equity contracts account for a small fraction of external funds raised by Canadian businesses because ________.

Which of the following statements concerning external sources of financing for nonfinancial businesses in Canada is true?

Explain the difference between net worth and collateral.

Which of the following is not a benefit to an individual purchasing a mutual fund?

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

China's reforms to strengthen the financial system includes ________.

Government regulations require publicly traded firms to provide information,reducing ________.

A debt contract is incentive compatible ________.

The problem of adverse selection helps to explain ________.

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

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

Bundling investors funds together ________.

How do restrictive covenants reduce moral hazard in debt contracts?

Financial intermediaries' low transaction costs allow them to provide ________ services that make it easier for customers to conduct transactions.

Debt contracts ________.

That only large,well-established corporations have access to securities markets ________.

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

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

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

Why Study Money, banking, and Financial Markets

An Overview of the Financial System

What Is Money

Understanding Interest Rates

The Behaviour 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

Economic Analysis of Financial Regulation

Banking Industry: Structure and Competition

Nonbank Finance

Banking and the Management of Financial Institutions

Risk Management With Financial Derivatives

Central Banks and the Bank of Canada

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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