Question 1

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 2

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 3

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 4

The principal-agent problem

Accepted Answer

A) occurs when managers have more incentive to maximize profits than the stockholders-owners do. 
B) in financial markets helps to explain why equity is a relatively important source of finance for American business. 
C) would not arise if the owners of the firm had complete information about the activities of the managers. 
D) explains why direct finance is more important than indirect finance as a source of business finance. 
A) occurs when managers have more incentive to maximize profits than the stockholders-owners do. 
B) in financial markets helps to explain why equity is a relatively important source of finance for American business. 
C) would not arise if the owners of the firm had complete information about the activities of the managers. 
D) explains why direct finance is more important than indirect finance as a source of business finance.

Question 5

For restrictive covenants to help reduce the moral hazard problem they must be ________ by the lender.

Accepted Answer

A) monitored and enforced 
B) written in all capitals 
C) easily changed 
D) impossible to remove 
A) monitored and enforced 
B) written in all capitals 
C) easily changed 
D) impossible to remove

Question 6

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 7

Although restrictive covenants can potentially reduce moral hazard,a problem with restrictive covenants is that

Accepted Answer

A) borrowers may find loopholes that make the covenants ineffective. 
B) they are inexpensive to monitor and enforce. 
C) too many resources may be devoted to monitoring and enforcing them,as debtholders duplicate others' monitoring and enforcement efforts. 
D) they reduce the value of the debt contract. 
A) borrowers may find loopholes that make the covenants ineffective. 
B) they are inexpensive to monitor and enforce. 
C) too many resources may be devoted to monitoring and enforcing them,as debtholders duplicate others' monitoring and enforcement efforts. 
D) they reduce the value of the debt contract.

Question 8

Because conflicts of interest increase asymmetric information problems

Accepted Answer

A) the economy will not operate as efficiently. 
B) loans will not be made. 
C) banks will not be able to make a profit. 
D) the financial markets will operate more smoothly. 
A) the economy will not operate as efficiently. 
B) loans will not be made. 
C) banks will not be able to make a profit. 
D) the financial markets will operate more smoothly.

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

Why does the free-rider problem occur in the debt market?

Accepted Answer

Restrictive covenants can reduce moral h

Question 11

How does collateral help to reduce the adverse selection problem in credit market?

Accepted Answer

Collateral is property that is promised

Question 12

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.

Question 13

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 14

A problem for equity contracts is a particular type of ________ called the ________ problem.

Accepted Answer

A) adverse selection; principal-agent 
B) moral hazard; principal-agent 
C) adverse selection; free-rider 
D) moral hazard; free-rider 
A) adverse selection; principal-agent 
B) moral hazard; principal-agent 
C) adverse selection; free-rider 
D) moral hazard; free-rider

Question 15

In the United States,the government agency requiring that firms that sell securities in public markets adhere to standard accounting principles and disclose information about their sales,assets,and earnings is the

Accepted Answer

A) Federal Communications Commission. 
B) Federal Trade Commission. 
C) Securities and Exchange Commission. 
D) Federal Reserve System. 
A) Federal Communications Commission. 
B) Federal Trade Commission. 
C) Securities and Exchange Commission. 
D) Federal Reserve System.

Question 16

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 17

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 18

American businesses get their external funds primarily from

Accepted Answer

A) bank loans. 
B) bonds and commercial paper issues. 
C) stock issues. 
D) loans from nonbank financial intermediaries. 
A) bank loans. 
B) bonds and commercial paper issues. 
C) stock issues. 
D) loans from nonbank financial intermediaries.

Question 19

The presence of ________ in financial markets leads to adverse selection and moral hazard problems that interfere with the efficient functioning of financial markets.

Accepted Answer

A) noncollateralized risk 
B) free-riding 
C) asymmetric information 
D) costly state verification 
A) noncollateralized risk 
B) free-riding 
C) asymmetric information 
D) costly state verification

Question 20

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.

Exam 8: An Economic Analysis of Financial Structure

Debt contracts

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

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

The principal-agent problem

For restrictive covenants to help reduce the moral hazard problem they must be ________ by the lender.

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.

Although restrictive covenants can potentially reduce moral hazard,a problem with restrictive covenants is that

Because conflicts of interest increase asymmetric information problems

Equity contracts

Why does the free-rider problem occur in the debt market?

How does collateral help to reduce the adverse selection problem in credit market?

Government regulations designed to reduce the moral hazard problem include

Because information is scarce

A problem for equity contracts is a particular type of ________ called the ________ problem.

In the United States,the government agency requiring that firms that sell securities in public markets adhere to standard accounting principles and disclose information about their sales,assets,and earnings is the

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.

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

American businesses get their external funds primarily from

The presence of ________ in financial markets leads to adverse selection and moral hazard problems that interfere with the efficient functioning of financial markets.

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

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 and the Subprime Meltdown

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 for Monetary Policy

The Conduct of Monetary Policy: Strategy and Tactics

The Foreign Exchange Market

The International Financial System

The Demand for Money

The Islm Model

Monetary and Fiscal Policy in the ISLM Model

Aggregate Demand and Supply Analysis

Transmission Mechanisms of Monetary Policy: The Evidence

Money and Inflation

Rational Expectations: Implications for Policy

Filters

A problem for equity contracts is a particular type of called the problem.