Exam 20: The Financial System: Opportunities and Dangers

"The more unhealthy a person is, the more likely he or she is to take insurance," This is a fact stated by an employee of a health insurance company. Is this issue related to adverse selection? If yes, how?

Common elements of financial crises include:

When the borrower has more knowledge about the attributes of an investment project than the lender, then the lender has a problem of:

Purchasers of bonds issued by companies are _____ of the company, while purchasers of shares of stock issued by a company are _____ of the company.

Mutual funds that buy a diversified pool of assets can:

Falling house prices generate widespread insolvency of financial institutions by:

Adverse selection may cause lenders to be offered opportunities to finance only:

All of the following are examples of financial intermediaries except:

Financial markets allow households to _____ provide resources for investment, while financial intermediaries allow households to _____ provide resources for investment.

How do deposit insurance and the "too big to fail" policy increase moral hazard?

To the extent that mortgage defaults contributed to the financial crisis of 2008-2009, blame for these actions lies with:

The government purchasing ownership stakes in a faltering financial institution in order to prop up the financial system is an example of:

What are the benefits of a well-functioning financial system? What are the costs of a financial crisis?

Funds flow directly between savers and investors in financial _____ and flow indirectly between savers and investors through financial _____.

Risk that affects many businesses at the same time is called _____ risk, while risk associated with individual businesses is called _____ risk.

By definition, "shadow banks are a diverse set of financial institutions that perform some functions similar to banks, but do so outside the regulatory system that applies to traditional banking." In the recession of 2008, the government financially rescued many shadow banks. Was this a moral hazard? If yes, then why did the government do this?

One justification for greater regulation of traditional commercial banks than of shadow banks is the:

Provide specific examples from the 2008-2009 financial crisis of each of the five stages of a financial crisis: a. asset-price booms and busts, b. insolvencies of financial institutions, c. falling confidence in the financial system, d. credit crunch, e. recession.

Illiquid financial institutions:

The precipitous fall in the price of assets that takes place when financial institutions must sell their assets quickly in the midst of a crisis is called a(n):