Question 1

Banks deal with problems of adverse selection by

Accepted Answer

A) charging high interest rates. 
B) gathering information about the default risk of borrowers. 
C) making only short-term loans. 
D) making only long-term loans. 
A) charging high interest rates. 
B) gathering information about the default risk of borrowers. 
C) making only short-term loans. 
D) making only long-term loans. B

Question 2

With debt financing

Accepted Answer

A) moral hazard problems are eliminated. 
B) moral hazard problems are reduced but not eliminated. 
C) adverse selection problems are eliminated. 
D) firms reduce the risk that they will become bankrupt during a recession. 
A) moral hazard problems are eliminated. 
B) moral hazard problems are reduced but not eliminated. 
C) adverse selection problems are eliminated. 
D) firms reduce the risk that they will become bankrupt during a recession. B

Question 3

How does the use of collateral and net worth help reduce the problem of adverse selection?

Accepted Answer

To make it more costly for firms to take advantage of their asymmetric information, lenders often require borrowers to pledge some of their assets as collateral, which the lender claims if the borrower defaults. When the firm's net worth is high, the firm's managers have more to lose by using borrowed money for high-risk investments.

Question 4

How does adverse selection affect the participation of small- and medium-sized firms in the stock market?

Accepted Answer

Many small- and medium-sized firms will

Question 5

To help offset the costs from loan defaults, the First National Bank of Gotham decides to increase the interest rate it charges on its business loans. As a result of this increase in the interest rate, the creditworthiness of Gotham's loan applicants is likely to

Accepted Answer

A) improve. 
B) deteriorate. 
C) be unchanged. 
D) be unchanged, unless the economy enters a recession at the same time as the interest rate is increased. 
A) improve. 
B) deteriorate. 
C) be unchanged. 
D) be unchanged, unless the economy enters a recession at the same time as the interest rate is increased.

Question 6

Adverse selection and moral hazard are examples of:

Accepted Answer

A) transaction costs 
B) information cost 
C) symmetric information 
D) financial market efficiency 
A) transaction costs 
B) information cost 
C) symmetric information 
D) financial market efficiency

Question 7

Which of the following is NOT an example of transactions costs?

Accepted Answer

A) high interest rates 
B) lawyers' fees 
C) brokerage commissions 
D) minimum investment requirements 
A) high interest rates 
B) lawyers' fees 
C) brokerage commissions 
D) minimum investment requirements

Question 8

What are the information costs faced by savers?

Accepted Answer

Information costs are the cost

Question 9

Generally, when there is asymmetric information

Accepted Answer

A) a lender will only lend to the government. 
B) a lender will only lend to well-known borrowers. 
C) practical solutions are devised to allow lending to take place. 
D) a lender will cease all lending activities. 
A) a lender will only lend to the government. 
B) a lender will only lend to well-known borrowers. 
C) practical solutions are devised to allow lending to take place. 
D) a lender will cease all lending activities.

Question 10

The presence of information and transactions cost result in all of the following EXCEPT:

Accepted Answer

A) reduced efficiency of financial markets. 
B) higher returns for savers 
C) some funds not being lent at all 
D) borrowers need to pay more for funds 
A) reduced efficiency of financial markets. 
B) higher returns for savers 
C) some funds not being lent at all 
D) borrowers need to pay more for funds

Question 11

Which of the following is NOT true of moral hazard?

Accepted Answer

A) It would not exist in a world of perfect information. 
B) It arises because borrowers typically know more than lenders. 
C) It describes a lender's problem of distinguishing the good-risk applicants from the bad-risk applicants. 
D) It describes a lender's problem in verifying borrowers are using their funds as intended. 
A) It would not exist in a world of perfect information. 
B) It arises because borrowers typically know more than lenders. 
C) It describes a lender's problem of distinguishing the good-risk applicants from the bad-risk applicants. 
D) It describes a lender's problem in verifying borrowers are using their funds as intended.

Question 12

Information costs

Accepted Answer

A) are the costs of buying and selling financial claims. 
B) include the costs that savers incur to determine the credit worthiness of borrowers. 
C) include the costs borrowers incur to discover the best investments to make with the money they have borrowed. 
D) are zero in financial markets, but high for transactions carried out through financial intermediaries. 
A) are the costs of buying and selling financial claims. 
B) include the costs that savers incur to determine the credit worthiness of borrowers. 
C) include the costs borrowers incur to discover the best investments to make with the money they have borrowed. 
D) are zero in financial markets, but high for transactions carried out through financial intermediaries.

Question 13

In the late 2000s, the primary source of external funds for corporations was

Accepted Answer

A) commercial paper. 
B) loans. 
C) bonds. 
D) stocks. 
A) commercial paper. 
B) loans. 
C) bonds. 
D) stocks.

Question 14

All of the following are benefits of securitization EXCEPT

Accepted Answer

A) risk sharing. 
B) reduced interest rates that borrowers pay on loans. 
C) increased liquidity. 
D) fewer adverse selection problems. 
A) risk sharing. 
B) reduced interest rates that borrowers pay on loans. 
C) increased liquidity. 
D) fewer adverse selection problems.

Question 15

The use of collateral

Accepted Answer

A) allows banks to charge higher interest rates on loans. 
B) makes it more costly for borrowers to take advantage of their asymmetric information. 
C) makes it more costly for lenders to take advantage of their asymmetric information. 
D) has important tax implications for both borrowers and lenders. 
A) allows banks to charge higher interest rates on loans. 
B) makes it more costly for borrowers to take advantage of their asymmetric information. 
C) makes it more costly for lenders to take advantage of their asymmetric information. 
D) has important tax implications for both borrowers and lenders.

Question 16

Crowd funding can best be described as:

Accepted Answer

A) raising funds in a very large market 
B) raising small amounts of money from large numbers of people 
C) many firms competing for the same source of funds 
D) making funds available for a large number of business start ups 
A) raising funds in a very large market 
B) raising small amounts of money from large numbers of people 
C) many firms competing for the same source of funds 
D) making funds available for a large number of business start ups

Question 17

Many economists and policymakers have raised concerns about crowd funding due to the existence of:

Accepted Answer

A) information costs facing small investors 
B) information costs facing business start ups 
C) transaction costs facing business start ups 
D) increased competition for banks in funding business start ups 
A) information costs facing small investors 
B) information costs facing business start ups 
C) transaction costs facing business start ups 
D) increased competition for banks in funding business start ups

Question 18

The reduction in average cost resulting from an increase in the volume of a good or services produced is called:

Accepted Answer

A) information cost 
B) transaction cost 
C) diminishing returns 
D) economies of scale 
A) information cost 
B) transaction cost 
C) diminishing returns 
D) economies of scale

Question 19

When there's asymmetric information, who tends to have the better information?

Accepted Answer

A) lender 
B) borrower 
C) intermediary 
D) equally likely to be the borrower or the lender 
A) lender 
B) borrower 
C) intermediary 
D) equally likely to be the borrower or the lender

Question 20

All of the following concerns have been raised about crowd funding EXCEPT:

Accepted Answer

A) possibility of fraud 
B) lack of liquidity 
C) information costs 
D) limits access to funds for business start ups 
A) possibility of fraud 
B) lack of liquidity 
C) information costs 
D) limits access to funds for business start ups

Banks deal with problems of adverse selection by

With debt financing

How does the use of collateral and net worth help reduce the problem of adverse selection?

How does adverse selection affect the participation of small- and medium-sized firms in the stock market?

To help offset the costs from loan defaults, the First National Bank of Gotham decides to increase the interest rate it charges on its business loans. As a result of this increase in the interest rate, the creditworthiness of Gotham's loan applicants is likely to

Adverse selection and moral hazard are examples of:

Which of the following is NOT an example of transactions costs?

What are the information costs faced by savers?

Generally, when there is asymmetric information

The presence of information and transactions cost result in all of the following EXCEPT:

Which of the following is NOT true of moral hazard?

Information costs

In the late 2000s, the primary source of external funds for corporations was

All of the following are benefits of securitization EXCEPT

The use of collateral

Crowd funding can best be described as:

Many economists and policymakers have raised concerns about crowd funding due to the existence of:

The reduction in average cost resulting from an increase in the volume of a good or services produced is called:

When there's asymmetric information, who tends to have the better information?

All of the following concerns have been raised about crowd funding EXCEPT:

Introducing Money and the Financial System

Money and the Payments System

Interest Rates and Rates of Return

Determining Interest Rates

The Risk Structure and Term Structure of Interest Rates

The Stock Market, Information, and Financial Market Efficiency

Derivatives and Derivative Markets

The Market for Foreign Exchange

The Economics of Banking

Investment Banks, Mutual Funds, Hedge Funds, and the Shadow Banking System

Financial Crises and Financial Regulation

The Federal Reserve and Central Banking

The Federal Reserves Balance Sheet and the Money Supply Process

Monetary Policy

The International Financial System and Monetary Policy

Monetary Theory I: The Aggregate Demand and Aggregate Supply Model

Monetary Theory II: The IS-MP Model

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Exam 9: Transactions Costs, Asymmetric Information, and the Structure of the Financial System

Banks deal with problems of adverse selection by

With debt financing

How does the use of collateral and net worth help reduce the problem of adverse selection?

How does adverse selection affect the participation of small- and medium-sized firms in the stock market?

To help offset the costs from loan defaults, the First National Bank of Gotham decides to increase the interest rate it charges on its business loans. As a result of this increase in the interest rate, the creditworthiness of Gotham's loan applicants is likely to

Adverse selection and moral hazard are examples of:

Which of the following is NOT an example of transactions costs?

What are the information costs faced by savers?

Generally, when there is asymmetric information

The presence of information and transactions cost result in all of the following EXCEPT:

Which of the following is NOT true of moral hazard?

Information costs

In the late 2000s, the primary source of external funds for corporations was

All of the following are benefits of securitization EXCEPT

The use of collateral

Crowd funding can best be described as:

Many economists and policymakers have raised concerns about crowd funding due to the existence of:

The reduction in average cost resulting from an increase in the volume of a good or services produced is called:

When there's asymmetric information, who tends to have the better information?

All of the following concerns have been raised about crowd funding EXCEPT:

Introducing Money and the Financial System

Money and the Payments System

Interest Rates and Rates of Return

Determining Interest Rates

The Risk Structure and Term Structure of Interest Rates

The Stock Market, Information, and Financial Market Efficiency

Derivatives and Derivative Markets

The Market for Foreign Exchange

The Economics of Banking

Investment Banks, Mutual Funds, Hedge Funds, and the Shadow Banking System

Financial Crises and Financial Regulation

The Federal Reserve and Central Banking

The Federal Reserves Balance Sheet and the Money Supply Process

Monetary Policy

The International Financial System and Monetary Policy

Monetary Theory I: The Aggregate Demand and Aggregate Supply Model

Monetary Theory II: The IS-MP Model

Filters