Question 1

Moral hazard problems arise when

Accepted Answer

A) lenders have difficulty in distinguishing between good and lemon firms. 
B) when a downturn in economic activity makes repaying loans difficult for borrowers. 
C) borrowers have an incentive to act in ways that do not reflect the lender's interests. 
D) borrowers default on loans. 
A) lenders have difficulty in distinguishing between good and lemon firms. 
B) when a downturn in economic activity makes repaying loans difficult for borrowers. 
C) borrowers have an incentive to act in ways that do not reflect the lender's interests. 
D) borrowers default on loans.

Question 2

Financial intermediaries emerged

Accepted Answer

A) to make loans to governments. 
B) to provide a market for municipal bonds. 
C) to reduce transactions costs for small savers and borrowers. 
D) to reduce transactions costs for traders in stocks and bonds. 
A) to make loans to governments. 
B) to provide a market for municipal bonds. 
C) to reduce transactions costs for small savers and borrowers. 
D) to reduce transactions costs for traders in stocks and bonds.

Question 3

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 4

Banks overcome the free-rider problem faced by private information-collection firms in financial markets by

Accepted Answer

A) charging only for information depositors find useful. 
B) charging both depositors and borrowers for information. 
C) mainly holding loans which are not traded in financial markets. 
D) mainly holding securities which have active secondary markets. 
A) charging only for information depositors find useful. 
B) charging both depositors and borrowers for information. 
C) mainly holding loans which are not traded in financial markets. 
D) mainly holding securities which have active secondary markets.

Question 5

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 6

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 7

Which of the following does NOT represent a way in which financial intermediaries take advantage of economies of scale?

Accepted Answer

A) Paying lower brokerage fees per dollar invested 
B) Paying lower legal fees per dollar invested 
C) Purchasing sophisticated computer systems 
D) Paying lower taxes per dollar invested 
A) Paying lower brokerage fees per dollar invested 
B) Paying lower legal fees per dollar invested 
C) Purchasing sophisticated computer systems 
D) Paying lower taxes per dollar invested

Question 8

Moral hazard arises from

Accepted Answer

A) the difficulty of distinguishing good-risk borrowers from bad-risk borrowers. 
B) the likelihood that bad-risk borrowers are more likely to accept a loan than are good-risk borrowers. 
C) savers' difficulties in monitoring borrowers. 
D) borrowers' difficulties in locating savers. 
A) the difficulty of distinguishing good-risk borrowers from bad-risk borrowers. 
B) the likelihood that bad-risk borrowers are more likely to accept a loan than are good-risk borrowers. 
C) savers' difficulties in monitoring borrowers. 
D) borrowers' difficulties in locating savers.

Question 9

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 10

The free-rider problem faced by private information-collection firms results in their

Accepted Answer

A) usually going out of business within a few years. 
B) collecting less than all the available information about the firms they investigate. 
C) being plagued by lawsuits. 
D) charging fees higher than can be justified by market conditions. 
A) usually going out of business within a few years. 
B) collecting less than all the available information about the firms they investigate. 
C) being plagued by lawsuits. 
D) charging fees higher than can be justified by market conditions.

Question 11

Individual investors can reduce transactions costs by

Accepted Answer

A) buying common stock rather than bonds. 
B) combining their purchases through an intermediary. 
C) common stocks directly, rather than through a mutual fund. 
D) making loans directly, rather than depositing funds in a bank. 
A) buying common stock rather than bonds. 
B) combining their purchases through an intermediary. 
C) common stocks directly, rather than through a mutual fund. 
D) making loans directly, rather than depositing funds in a bank.

Question 12

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 13

Why did one prominent economist state that in the late 1990s "hundreds of billions of dollars were being left on the table" in Eastern Europe?

Accepted Answer

A) The governments in these countries refused to allow the import of Western goods. 
B) Entrepreneurs were unable to fund new businesses while savers were unable to earn returns on their savings. 
C) The financial markets in Eastern Europe were attracting billions of dollars from small investors in the West. 
D) Many newly formed businesses in these countries were charging prices that were too low. 
A) The governments in these countries refused to allow the import of Western goods. 
B) Entrepreneurs were unable to fund new businesses while savers were unable to earn returns on their savings. 
C) The financial markets in Eastern Europe were attracting billions of dollars from small investors in the West. 
D) Many newly formed businesses in these countries were charging prices that were too low.

Exam 11: Reducing Transactions Costs and Information Costs

Moral hazard problems arise when

Financial intermediaries emerged

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

Banks overcome the free-rider problem faced by private information-collection firms in financial markets by

Generally, when there is asymmetric information

Information costs

Which of the following does NOT represent a way in which financial intermediaries take advantage of economies of scale?

Moral hazard arises from

When interest rates in the bond market rise,

The free-rider problem faced by private information-collection firms results in their

Individual investors can reduce transactions costs by

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

Why did one prominent economist state that in the late 1990s "hundreds of billions of dollars were being left on the table" in Eastern Europe?

Introducing Money and the Financial System

Money and the Payments System

Overview of the Financial System

Interest Rates and Rates of Return

The Theory of Portfolio Allocation

Determining Market Interest Rates

Risk Structure and Term Structure of Interest Rates

The Foreign-Exchange Market and Exchange Rates

Derivative Securities and Derivative Markets

Information and Financial Market Efficiency

What Financial Institutions Do

The Business of Banking

The Banking Industry

Banking Regulation: Crisis and Response

Banking in the International Economy

The Money Supply Process

Changes in the Monetary Base

Organization of Central Banks

Monetary Policy Tools

The Conduct of Monetary Policy

The International Financial System and Monetary Policy

The Demand for Money

Linking the Financial System and the Economy: the Is-Lm-Fe Model

Aggregate Demand and Aggregate Supply

Money and Output in the Short Run

Information Problems and Channels for Monetary Policy

Inflation: Causes and Consequences

Filters