Question 1

Which of the following is NOT an example of adverse selection?

Accepted Answer

A) A family with a home ten feet from a large river buys flood insurance. 
B) A company uses the proceeds of a new stock sale to build an unnecessarily luxurious new headquarters. 
C) A terminal cancer patient buys life insurance. 
D) A company in serious financial trouble offers to pay you 30% on a loan. 
A) A family with a home ten feet from a large river buys flood insurance. 
B) A company uses the proceeds of a new stock sale to build an unnecessarily luxurious new headquarters. 
C) A terminal cancer patient buys life insurance. 
D) A company in serious financial trouble offers to pay you 30% on a loan.

Question 2

Which of the following is NOT true of adverse selection?

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 3

All of the following are consequences of adverse selection on good firms EXCEPT

Accepted Answer

A) the cost of external financing increases. 
B) firms need to rely more on internal funds. 
C) firms need to rely more on accumulated profits. 
D) firms will only be able to attain financing from the government. 
A) the cost of external financing increases. 
B) firms need to rely more on internal funds. 
C) firms need to rely more on accumulated profits. 
D) firms will only be able to attain financing from the government.

Question 4

By reducing transactions and information costs, financial intermediaries can

Accepted Answer

A) offer savers higher interest rates. 
B) offer borrowers lower interest rates. 
C) earn a profit. 
D) all of the above. 
A) offer savers higher interest rates. 
B) offer borrowers lower interest rates. 
C) earn a profit. 
D) all of the above.

Question 5

In the late 2000s, which of the following was the primary source of external financing for small to medium-size firms?

Accepted Answer

A) mortgages 
B) bank loans other than mortgages 
C) trade credit 
D) other loans 
A) mortgages 
B) bank loans other than mortgages 
C) trade credit 
D) other loans

Question 6

How do car dealers help reduce adverse selection?

Accepted Answer

To maintain their reputations

Question 7

Due in part to record low interest rates on U.S. Treasury Bonds,

Accepted Answer

A) investors searching for higher yields bought corporate bonds 
B) interest rates on corporate bonds rose 
C) corporations faced higher borrowing costs 
D) many corporations were at greater risk of defaulting 
A) investors searching for higher yields bought corporate bonds 
B) interest rates on corporate bonds rose 
C) corporations faced higher borrowing costs 
D) many corporations were at greater risk of defaulting

Question 8

A firm's principals are its

Accepted Answer

A) shareholders. 
B) management. 
C) values. 
D) customers. 
A) shareholders. 
B) management. 
C) values. 
D) customers.

Question 9

How does adverse selection in financial markets affect the method by which firms raise funds?

Accepted Answer

When investors have difficulty obtaining

Question 10

It is generally agreed that

Accepted Answer

A) the financial system would be more efficient if intermediaries were eliminated. 
B) small- and medium-sized firms benefit by the actions of intermediaries. 
C) the addition of intermediaries adds to transactions costs. 
D) intermediaries should not seek to profit from reducing transactions costs. 
A) the financial system would be more efficient if intermediaries were eliminated. 
B) small- and medium-sized firms benefit by the actions of intermediaries. 
C) the addition of intermediaries adds to transactions costs. 
D) intermediaries should not seek to profit from reducing transactions costs.

Question 11

When managers do not own very much of the net worth of the firm, then

Accepted Answer

A) there may be a principal-agent problem. 
B) the firm will usually have to raise most of its funds in financial markets. 
C) the firm will have to rely more on equity financing than debt financing. 
D) the firm will have to rely more on debt financing than equity financing. 
A) there may be a principal-agent problem. 
B) the firm will usually have to raise most of its funds in financial markets. 
C) the firm will have to rely more on equity financing than debt financing. 
D) the firm will have to rely more on debt financing than equity financing.

Question 12

Economies of scale are

Accepted Answer

A) charges to savers and borrowers imposed by banks in exchange for reducing transactions costs. 
B) the reduction in costs per unit that accompanies an increase in volume. 
C) decreases in transactions costs that occur as information costs increase. 
D) decreases in information costs that occur as transactions costs increase. 
A) charges to savers and borrowers imposed by banks in exchange for reducing transactions costs. 
B) the reduction in costs per unit that accompanies an increase in volume. 
C) decreases in transactions costs that occur as information costs increase. 
D) decreases in information costs that occur as transactions costs increase.

Question 13

Transactions costs are

Accepted Answer

A) zero in financial markets. 
B) zero in financial intermediaries. 
C) the costs of direct financial transactions. 
D) equal to the taxes imposed on financial transactions. 
A) zero in financial markets. 
B) zero in financial intermediaries. 
C) the costs of direct financial transactions. 
D) equal to the taxes imposed on financial transactions.

Question 14

The "lemons problem" is overcome in the used car market by

Accepted Answer

A) strict government regulation of private deals between individual buyers and sellers of used cars. 
B) most used cars selling for well below their true values. 
C) "lemon insurance" policies being offered by insurance companies. 
D) the existence of used car dealers who are concerned about maintaining their reputations. 
A) strict government regulation of private deals between individual buyers and sellers of used cars. 
B) most used cars selling for well below their true values. 
C) "lemon insurance" policies being offered by insurance companies. 
D) the existence of used car dealers who are concerned about maintaining their reputations.

Question 15

One method that lenders use to mitigate the adverse selection problem is to

Accepted Answer

A) charge higher interest rates to less creditworthy borrowers. 
B) monitor closely the behavior of borrowers after a loan is made. 
C) ration credit. 
D) provide default insurance. 
A) charge higher interest rates to less creditworthy borrowers. 
B) monitor closely the behavior of borrowers after a loan is made. 
C) ration credit. 
D) provide default insurance.

Question 16

In the United States the stake of top management in firms' ownership usually is

Accepted Answer

A) less than 5%. 
B) more than 25%. 
C) more than 50%. 
D) more than 75%. 
A) less than 5%. 
B) more than 25%. 
C) more than 50%. 
D) more than 75%.

Question 17

Which of the following is the most important source of external financing for corporations?

Accepted Answer

A) stock market 
B) bond market 
C) retained earnings 
D) mortgages 
A) stock market 
B) bond market 
C) retained earnings 
D) mortgages

Question 18

Which of the following is NOT true of restrictive covenants?

Accepted Answer

A) They sometimes require borrowers to maintain the value of collateral offered to the lender. 
B) They increase the marketability and liquidity of loans. 
C) They sometimes require a borrower to maintain a certain minimum level of net worth. 
D) They sometimes limit a borrower's risk taking. 
A) They sometimes require borrowers to maintain the value of collateral offered to the lender. 
B) They increase the marketability and liquidity of loans. 
C) They sometimes require a borrower to maintain a certain minimum level of net worth. 
D) They sometimes limit a borrower's risk taking.

Question 19

When interest rates in the bond market rise,

Accepted Answer

A) adverse selection problems increase. 
B) adverse selection problems are mitigated. 
C) moral hazard problems increase. 
D) moral hazard problems are mitigated. 
A) adverse selection problems increase. 
B) adverse selection problems are mitigated. 
C) moral hazard problems increase. 
D) moral hazard problems are mitigated.

Question 20

How does adverse selection affect the economic efficiency of the used car market?

Accepted Answer

Since potential buyers have a

Which of the following is NOT an example of adverse selection?

Which of the following is NOT true of adverse selection?

All of the following are consequences of adverse selection on good firms EXCEPT

By reducing transactions and information costs, financial intermediaries can

In the late 2000s, which of the following was the primary source of external financing for small to medium-size firms?

How do car dealers help reduce adverse selection?

Due in part to record low interest rates on U.S. Treasury Bonds,

A firm's principals are its

How does adverse selection in financial markets affect the method by which firms raise funds?

It is generally agreed that

When managers do not own very much of the net worth of the firm, then

Economies of scale are

Transactions costs are

The "lemons problem" is overcome in the used car market by

One method that lenders use to mitigate the adverse selection problem is to

In the United States the stake of top management in firms' ownership usually is

Which of the following is the most important source of external financing for corporations?

Which of the following is NOT true of restrictive covenants?

When interest rates in the bond market rise,

How does adverse selection affect the economic efficiency of the used car market?

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

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

Which of the following is NOT an example of adverse selection?

Which of the following is NOT true of adverse selection?

All of the following are consequences of adverse selection on good firms EXCEPT

By reducing transactions and information costs, financial intermediaries can

In the late 2000s, which of the following was the primary source of external financing for small to medium-size firms?

How do car dealers help reduce adverse selection?

Due in part to record low interest rates on U.S. Treasury Bonds,

A firm's principals are its

How does adverse selection in financial markets affect the method by which firms raise funds?

It is generally agreed that

When managers do not own very much of the net worth of the firm, then

Economies of scale are

Transactions costs are

The "lemons problem" is overcome in the used car market by

One method that lenders use to mitigate the adverse selection problem is to

In the United States the stake of top management in firms' ownership usually is

Which of the following is the most important source of external financing for corporations?

Which of the following is NOT true of restrictive covenants?

When interest rates in the bond market rise,

How does adverse selection affect the economic efficiency of the used car market?

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