Question 1

Mutual funds offer investors:

Accepted Answer

A)  a greater return for greater risk than what an investor can earn on his own. 
B)  a lower return for more risk than what the investor could earn on his own. 
C)  a lower return for less risk than what the investor could earn on his own. 
D)  a way for individuals to eliminate the idiosyncratic risk associated with any single investment. 
A)  a greater return for greater risk than what an investor can earn on his own. 
B)  a lower return for more risk than what the investor could earn on his own. 
C)  a lower return for less risk than what the investor could earn on his own. 
D)  a way for individuals to eliminate the idiosyncratic risk associated with any single investment. D

Question 2

A bank usually treats the moral hazard problem by using all of the following, except:

Accepted Answer

A)  not making loans. 
B)  requiring collateral. 
C)  requiring down payments. 
D)  restrictive covenants. 
A)  not making loans. 
B)  requiring collateral. 
C)  requiring down payments. 
D)  restrictive covenants. A

Question 3

Financial intermediaries pool the resources of many small savers so that they can:

Accepted Answer

A)  charge fees to these small savers and earn substantial income. 
B)  obtain the funds necessary to make loans to borrowers seeking large amounts. 
C)  lower their transaction costs of obtaining funds. 
D)  avoid paying any interest to obtain funds to lend. 
A)  charge fees to these small savers and earn substantial income. 
B)  obtain the funds necessary to make loans to borrowers seeking large amounts. 
C)  lower their transaction costs of obtaining funds. 
D)  avoid paying any interest to obtain funds to lend. B

Question 4

If a lender faces a potential loan applicant pool made up of equal amounts of low risks and high risks, will charging an average interest rate provide the average (expected) return? Explain.

Accepted Answer

No, the lender will suffer adverse selec

Question 5

Credit may dry up at the start of an economic downturn because of all of the following except:

Accepted Answer

A)  lenders require information and accurate information is more difficult to obtain. 
B)  it becomes more difficult for lenders to determine the creditworthiness of borrowers. 
C)  lenders see greater risk in making loans to borrowers. 
D)  the free-rider problem worsens during a downturn. 
A)  lenders require information and accurate information is more difficult to obtain. 
B)  it becomes more difficult for lenders to determine the creditworthiness of borrowers. 
C)  lenders see greater risk in making loans to borrowers. 
D)  the free-rider problem worsens during a downturn.

Question 6

Mutual funds are attractive because:

Accepted Answer

A)  they provide high returns from purchasing the financial securities of a few select companies. 
B)  they provide the investor with greater diversification at a lower cost than what most investors could obtain individually. 
C)  they have inside information that is not available to other investors. 
D)  they usually have inside information because they run most of the companies they invest in. 
A)  they provide high returns from purchasing the financial securities of a few select companies. 
B)  they provide the investor with greater diversification at a lower cost than what most investors could obtain individually. 
C)  they have inside information that is not available to other investors. 
D)  they usually have inside information because they run most of the companies they invest in.

Question 7

The function of providing liquidity by financial intermediaries:

Accepted Answer

A)  includes depositors withdrawing funds but not borrowers. 
B)  only considers people who borrow on a short-term basis, but not depositors. 
C)  affects people who need to borrow and depositors who withdraw their funds. 
D)  only affects customers with savings accounts. 
A)  includes depositors withdrawing funds but not borrowers. 
B)  only considers people who borrow on a short-term basis, but not depositors. 
C)  affects people who need to borrow and depositors who withdraw their funds. 
D)  only affects customers with savings accounts.

Question 8

Since one function of financial intermediaries is to provide liquidity:

Accepted Answer

A)  they must keep all of their funds in short-term securities. 
B)  they keep almost all of their funds in cash. 
C)  they must know approximately how much liquidity their customers will need each day and have these funds available. 
D)  regulations require financial intermediaries to keep 50% of their assets in cash. 
A)  they must keep all of their funds in short-term securities. 
B)  they keep almost all of their funds in cash. 
C)  they must know approximately how much liquidity their customers will need each day and have these funds available. 
D)  regulations require financial intermediaries to keep 50% of their assets in cash.

Question 9

Used car dealers that provide warranties on the cars they sell are addressing the:

Accepted Answer

A)  lemons problem. 
B)  monopoly problem. 
C)  problem of people preferring foreign cars. 
D)  free rider problem of buyers preferring new versus used cars. 
A)  lemons problem. 
B)  monopoly problem. 
C)  problem of people preferring foreign cars. 
D)  free rider problem of buyers preferring new versus used cars.

Question 10

If diversification is such a good idea for a saver, why do so many people put a lot of their savings in the same bank?

Accepted Answer

The answer lies in the fact that the ban

Question 11

The moral hazard that can result from debt financing is mainly due to the:

Accepted Answer

A)  borrower not working as hard once he or she obtains the loan. 
B)  borrower wanting to refinance the loan. 
C)  borrower taking greater risk in hopes of obtaining a larger return. 
D)  economy turning sour and the borrower defaulting. 
A)  borrower not working as hard once he or she obtains the loan. 
B)  borrower wanting to refinance the loan. 
C)  borrower taking greater risk in hopes of obtaining a larger return. 
D)  economy turning sour and the borrower defaulting.

Question 12

Most individuals save at banks rather than lend directly because:

Accepted Answer

A)  the bank creates information asymmetry. 
B)  moral hazard exists only when individuals make loans directly to borrowers, it does not occur when banks issue loans. 
C)  banks can reduce the cost of information asymmetry. 
D)  information asymmetry is a problem for individuals but not for banks. 
A)  the bank creates information asymmetry. 
B)  moral hazard exists only when individuals make loans directly to borrowers, it does not occur when banks issue loans. 
C)  banks can reduce the cost of information asymmetry. 
D)  information asymmetry is a problem for individuals but not for banks.

Question 13

Moral hazard problems arise because:

Accepted Answer

A)  lenders cannot distinguish good from bad risks. 
B)  borrowers have incentives to act in ways that do not reflect the lender's interest. 
C)  firms hire incompetent employees. 
D)  lenders charge interest rates that are too low. 
A)  lenders cannot distinguish good from bad risks. 
B)  borrowers have incentives to act in ways that do not reflect the lender's interest. 
C)  firms hire incompetent employees. 
D)  lenders charge interest rates that are too low.

Question 14

Adverse selection:

Accepted Answer

A)  increases the efficiency of most markets. 
B)  usually causes prices to adjust faster than they otherwise would. 
C)  makes it easier for all customers to find what they want. 
D)  results in fewer market transactions. 
A)  increases the efficiency of most markets. 
B)  usually causes prices to adjust faster than they otherwise would. 
C)  makes it easier for all customers to find what they want. 
D)  results in fewer market transactions.

Question 15

What is the difference between economies of scale and economies of scope? Provide an example of each that pertains to financial institutions.

Accepted Answer

Economies of scale are the lowering of a

Question 16

You have a friend that has run up a pretty large balance on his credit card. He mentions to you that he has missed a few payments but doesn't think it is that big of a deal since all it cost him is a little more interest on his balance. You tell him it may end up costing him a lot more that. He presses you for an explanation. Explain to him how his handling of this debt can impact what he pays for future debt.

Accepted Answer

Lenders often screen loan applicants. On

Question 17

Deflation compounds information problems because it:

Accepted Answer

A)  increases a company's net worth. 
B)  tends to understate a company's assets and overstate their liabilities. 
C)  reduces the dollar value of assets while the dollar value of liabilities stays constant. 
D)  always harms lenders. 
A)  increases a company's net worth. 
B)  tends to understate a company's assets and overstate their liabilities. 
C)  reduces the dollar value of assets while the dollar value of liabilities stays constant. 
D)  always harms lenders.

Question 18

Examples of economies of scale are:

Accepted Answer

A)  the additional fees financial intermediaries charge on small accounts. 
B)  the decrease in overall transaction costs that occur as volume increases. 
C)  the reduction in the cost per transaction that occurs as the number of transactions increase. 
D)  the decrease in overall information costs that occurs as more transactions are handled. 
A)  the additional fees financial intermediaries charge on small accounts. 
B)  the decrease in overall transaction costs that occur as volume increases. 
C)  the reduction in the cost per transaction that occurs as the number of transactions increase. 
D)  the decrease in overall information costs that occurs as more transactions are handled.

Question 19

Requiring a large net worth on the part of an applicant is one way lenders treat the problem of:

Accepted Answer

A)  free-riders. 
B)  adverse selection. 
C)  moral hazard. 
D)  the Lemons market. 
A)  free-riders. 
B)  adverse selection. 
C)  moral hazard. 
D)  the Lemons market.

Question 20

One reason the government requires public corporations to disclose so much information is to:

Accepted Answer

A)  minimize the monopoly profits some corporations earn. 
B)  give small corporations a better chance of competing against large corporations. 
C)  address the potential harm from asymmetric information. 
D)  discourage risk-taking by investors. 
A)  minimize the monopoly profits some corporations earn. 
B)  give small corporations a better chance of competing against large corporations. 
C)  address the potential harm from asymmetric information. 
D)  discourage risk-taking by investors.

Exam 11: The Economics of Financial Intermediation

Mutual funds offer investors:

A bank usually treats the moral hazard problem by using all of the following, except:

Financial intermediaries pool the resources of many small savers so that they can:

If a lender faces a potential loan applicant pool made up of equal amounts of low risks and high risks, will charging an average interest rate provide the average (expected) return? Explain.

Credit may dry up at the start of an economic downturn because of all of the following except:

Mutual funds are attractive because:

The function of providing liquidity by financial intermediaries:

Since one function of financial intermediaries is to provide liquidity:

Used car dealers that provide warranties on the cars they sell are addressing the:

If diversification is such a good idea for a saver, why do so many people put a lot of their savings in the same bank?

The moral hazard that can result from debt financing is mainly due to the:

Most individuals save at banks rather than lend directly because:

Moral hazard problems arise because:

Adverse selection:

What is the difference between economies of scale and economies of scope? Provide an example of each that pertains to financial institutions.

Deflation compounds information problems because it:

Examples of economies of scale are:

Requiring a large net worth on the part of an applicant is one way lenders treat the problem of:

One reason the government requires public corporations to disclose so much information is to:

An Introduction to Money and the Financial System

Money and the Payments System

Financial Instruments, Financial Markets, and Financial Institutions

Future Value, Present Value and Interest Rates

Understanding Risk

Bonds, Bond Prices, and the Determination of Interest Rates

The Risk and Term Structure of Interest Rates

Stocks, Stock Markets and Market Efficiency

Derivatives: Futures, Options, and Swaps

Foreign Exchange

Depository Institutions: Banks and Bank Management

Financial Industry Structure

Regulating the Financial System

Central Banks in the World Today

The Structure of Central Banks: The Federal Reserve and the European Central Bank

The Central Bank Balance Sheet and the Money Supply Process

Monetary Policy: Stabilizing the Domestic Economy

Exchange Rate Policy and the Central Bank

Money Growth, Money Demand and Modern Monetary Policy

Output, Inflation, and Monetary Policy

Understanding Business Cycle Fluctuations

Modern Monetary Policy and the Challenges Facing Central Bankers

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