Question 1

The problem of adverse selection helps to explain ________.

Accepted Answer

A)  which firms are more likely to obtain funds from banks and other financial intermediaries, rather than from securities markets 
B)  why direct finance is more important than indirect finance as a source of business finance 
C)  why collateral is not an important feature of debt contracts 
D)  why banks prefer to make loans unsecured 
A)  which firms are more likely to obtain funds from banks and other financial intermediaries, rather than from securities markets 
B)  why direct finance is more important than indirect finance as a source of business finance 
C)  why collateral is not an important feature of debt contracts 
D)  why banks prefer to make loans unsecured

Question 2

Of the sources of external funds for nonfinancial businesses in Canada, loans from banks and other financial intermediaries account for ________ of the total.

Accepted Answer

A)  6 percent 
B)  40 percent 
C)  56 percent 
D)  over 70 percent 
A)  6 percent 
B)  40 percent 
C)  56 percent 
D)  over 70 percent

Question 3

The concept of adverse selection helps to explain ________.

Accepted Answer

A)  why collateral is not a common feature of many debt contracts 
B)  why large, well-established corporations find it so difficult to borrow funds in securities markets 
C)  why financial markets are among the most heavily regulated sectors of the economy 
D)  why stocks are the most important source of external financing for businesses 
A)  why collateral is not a common feature of many debt contracts 
B)  why large, well-established corporations find it so difficult to borrow funds in securities markets 
C)  why financial markets are among the most heavily regulated sectors of the economy 
D)  why stocks are the most important source of external financing for businesses

Question 4

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 5

Financial intermediaries are able to reduce transaction costs through ________ and ________.

Accepted Answer

A)  economies of scale; expertise 
B)  restrictive covenants; unsecured debts 
C)  moral hazard; adverse selection 
D)  economies of scale; regulation 
A)  economies of scale; expertise 
B)  restrictive covenants; unsecured debts 
C)  moral hazard; adverse selection 
D)  economies of scale; regulation

Question 6

Explain the "lemons problem" as it applies to the used-car market. Why does this problem exist? How does this market resolve this problem?

Accepted Answer

The lemons problem exists because of asy

Question 7

Moral hazard in equity contracts is known as the ________ problem because the manager of the firm has fewer incentives to maximize profits than the stockholders might ideally prefer.

Accepted Answer

A)  principal-agent 
B)  adverse selection 
C)  free-rider 
D)  debt deflation 
A)  principal-agent 
B)  adverse selection 
C)  free-rider 
D)  debt deflation

Question 8

Stocks and bonds supply less than ________ of the external funds for Canadian corporations need to finance their activities.

Accepted Answer

A)  one-third 
B)  one-quarter 
C)  one-half 
D)  two-thirds 
A)  one-third 
B)  one-quarter 
C)  one-half 
D)  two-thirds

Question 9

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 percent 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 percent 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

Question 10

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 11

The ________ problem helps to explain why the private production and sale of information cannot eliminate ________.

Accepted Answer

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

Question 12

Explain the principal-agent problem as it pertains to equity contracts.

Accepted Answer

The principals are the stockholders who

Question 13

The solution to the adverse selection problem in financial markets is to ________.

Accepted Answer

A)  supply lenders with full details on the borrowers 
B)  supply borrowers with full details on the lenders 
C)  supply governmental agencies with financial information 
D)  produce more free riders 
A)  supply lenders with full details on the borrowers 
B)  supply borrowers with full details on the lenders 
C)  supply governmental agencies with financial information 
D)  produce more free riders

Question 14

Explain the difference between net worth and collateral.

Accepted Answer

Net worth is the difference be

Question 15

Government regulations require publicly traded firms to provide information, reducing ________.

Accepted Answer

A)  transactions costs 
B)  the need for diversification 
C)  the adverse selection problem 
D)  free-riders 
A)  transactions costs 
B)  the need for diversification 
C)  the adverse selection problem 
D)  free-riders

Question 16

That most used cars are sold by intermediaries (i.e., used car dealers) provides evidence that these intermediaries ________.

Accepted Answer

A)  have solved the moral hazard problem created by the consumers of used cars 
B)  are not able to prevent others from free-riding off the information that they provide 
C)  help solve the adverse selection problem 
D)  only sell "lemons" 
A)  have solved the moral hazard problem created by the consumers of used cars 
B)  are not able to prevent others from free-riding off the information that they provide 
C)  help solve the adverse selection problem 
D)  only sell "lemons"

Question 17

Government agencies require that firms that sell securities in public markets adhere to have ________.

Accepted Answer

A)  intermediation 
B)  nondisclosure 
C)  independent audits 
D)  collateral 
A)  intermediation 
B)  nondisclosure 
C)  independent audits 
D)  collateral

Question 18

Of the sources of external funds for nonfinancial businesses in Canada, stocks account for approximately ________ of the total.

Accepted Answer

A)  2 percent 
B)  12 percent 
C)  20 percent 
D)  40 percent 
A)  2 percent 
B)  12 percent 
C)  20 percent 
D)  40 percent

Question 19

Canadian 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 20

Regulation of the financial system ________.

Accepted Answer

A)  occurs only in Canada 
B)  protects the jobs of employees of financial institutions 
C)  protects the wealth of owners of financial institutions 
D)  ensures the stability of the financial system 
A)  occurs only in Canada 
B)  protects the jobs of employees of financial institutions 
C)  protects the wealth of owners of financial institutions 
D)  ensures the stability of the financial system

Exam 8: An Economic Analysis of Financial Structure

The problem of adverse selection helps to explain ________.

Of the sources of external funds for nonfinancial businesses in Canada, loans from banks and other financial intermediaries account for ________ of the total.

The concept of adverse selection helps to explain ________.

Because information is scarce ________.

Financial intermediaries are able to reduce transaction costs through ________ and ________.

Explain the "lemons problem" as it applies to the used-car market. Why does this problem exist? How does this market resolve this problem?

Moral hazard in equity contracts is known as the ________ problem because the manager of the firm has fewer incentives to maximize profits than the stockholders might ideally prefer.

Stocks and bonds supply less than ________ of the external funds for Canadian corporations need to finance their activities.

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

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

The ________ problem helps to explain why the private production and sale of information cannot eliminate ________.

Explain the principal-agent problem as it pertains to equity contracts.

The solution to the adverse selection problem in financial markets is to ________.

Explain the difference between net worth and collateral.

Government regulations require publicly traded firms to provide information, reducing ________.

That most used cars are sold by intermediaries (i.e., used car dealers) provides evidence that these intermediaries ________.

Government agencies require that firms that sell securities in public markets adhere to have ________.

Of the sources of external funds for nonfinancial businesses in Canada, stocks account for approximately ________ of the total.

Canadian businesses get their external funds primarily from ________.

Regulation of the financial system ________.

Why Study Money, Banking, and Financial Markets

An Overview of the Financial System

What Is Money

The Meaning of Interest Rates

The Behaviour of Interest Rates

The Risk and Term Structure of Interest Rates

The Stock Market, the Theory of Rational Expectations, and the Efficient Market Hypothesis

Economic Analysis of Financial Regulation

Banking Industry: Structure and Competition

Financial Crises

Banking and the Management of Financial Institutions

Risk Management With Financial Derivatives

Central Banks and the Bank of Canada

The Money Supply Process

Tools of Monetary Policy

The Conduct of Monetary Policy: Strategy and Tactics

The Foreign Exchange Market

The International Financial System

Quantity Theory, Inflation, and the Demand for Money

The Is Curve

The Monetary Policy and Aggregate Demand Curves

Aggregate Demand and Supply Analysis

Monetary Policy Theory

The Role of Expectations in Monetary Policy

Transmission Mechanisms of Monetary Policy

Filters

Financial intermediaries are able to reduce transaction costs through and .

The problem helps to explain why the private production and sale of information cannot eliminate .