Question 1

The price for private information is likely higher than it should be due to the problem of:

Accepted Answer

A)  adverse selection. 
B)  free-riders. 
C)  the government regulations regarding information. 
D)  moral hazard. 
A)  adverse selection. 
B)  free-riders. 
C)  the government regulations regarding information. 
D)  moral hazard.

Question 2

When the amount of direct and indirect financing are summed, the result is usually:

Accepted Answer

A)  greater than 100% of GDP. 
B)  equal to GDP. 
C)  less than GDP. 
D)  approximately 50% of GDP. 
A)  greater than 100% of GDP. 
B)  equal to GDP. 
C)  less than GDP. 
D)  approximately 50% of GDP.

Question 3

When a bank takes savings from many small savers and lends it to many borrowers, the bank:

Accepted Answer

A)  decreases the risk to savers through diversification. 
B)  increases the risk to borrowers through high transaction costs. 
C)  decreases the risk to savers through economies of scale. 
D)  decreases the return to savers and increases the cost to borrowers. 
A)  decreases the risk to savers through diversification. 
B)  increases the risk to borrowers through high transaction costs. 
C)  decreases the risk to savers through economies of scale. 
D)  decreases the return to savers and increases the cost to borrowers.

Question 4

Requiring a home buyer to have a large down payment reduces the risk to a mortgage lender because:

Accepted Answer

A)  it means that if the price of the house falls, the owner suffers the loss. 
B)  the buyer is less likely to sell the house. 
C)  it means the buyer likely underpaid when she bought the house. 
D)  it means there is more information available on the buyer. 
A)  it means that if the price of the house falls, the owner suffers the loss. 
B)  the buyer is less likely to sell the house. 
C)  it means the buyer likely underpaid when she bought the house. 
D)  it means there is more information available on the buyer.

Question 5

It is not uncommon to read about highly successful mutual fund managers that spend considerable amounts of time visiting the companies that they have placed their clients' funds with. What might be the motive(s) behind these visits?

Accepted Answer

The chapter discussed ways to reduce mor

Question 6

Explain what is likely to happen to the rate of mortgage loan default given the following: "For years home values across the country have increased on average 3 to 4% percent each year. Mortgage lenders have come to expect this to always be the case and so begin to offer mortgages with little to nothing down and not requiring PMI insurance. An economic slowdown occurs hitting a few areas of the country harder than others. Home values across the country begin to decrease with some areas seeing decreases of as much as 10%."

Accepted Answer

It is likely that mortgage default rates

Question 7

The First Bank of Podunk has recently suffered some extraordinary losses on its loan portfolio due to the closing of the largest employer in town. As a result, the bank's management decides to raise the interest rate to new loan applicants. This move is likely to:

Accepted Answer

A)  increase the profitability of the bank. 
B)  cause even greater losses. 
C)  significantly increase both loan applicants and profits. 
D)  treat the problem of adverse selection that contributed to the losses the bank is experiencing. 
A)  increase the profitability of the bank. 
B)  cause even greater losses. 
C)  significantly increase both loan applicants and profits. 
D)  treat the problem of adverse selection that contributed to the losses the bank is experiencing.

Question 8

One lesson that Akerlof's Lemons model provides is:

Accepted Answer

A)  that for high quality providers to survive they must provide a way that customers can distinguish high quality from low quality. 
B)  low quality will not survive in a market. 
C)  people always prefer high quality to low quality goods. 
D)  moral hazard is unavoidable. 
A)  that for high quality providers to survive they must provide a way that customers can distinguish high quality from low quality. 
B)  low quality will not survive in a market. 
C)  people always prefer high quality to low quality goods. 
D)  moral hazard is unavoidable.

Question 9

Financial intermediation exists, in part, because:

Accepted Answer

A)  financial markets work so well. 
B)  direct finance through stocks and bonds is the dominant form of financing. 
C)  transaction costs of financial intermediation is always higher than direct finance. 
D)  the transaction costs associated with direct finance can at times be prohibitive. 
A)  financial markets work so well. 
B)  direct finance through stocks and bonds is the dominant form of financing. 
C)  transaction costs of financial intermediation is always higher than direct finance. 
D)  the transaction costs associated with direct finance can at times be prohibitive.

Question 10

Asymmetric information poses two important obstacles to the smooth flow of funds from savers to investors. They are:

Accepted Answer

A)  adverse selection, which arises before the transaction occurs, and moral hazard, which occurs after the transaction. 
B)  moral hazard, which arises before the transaction occurs, and adverse selection, which occurs after the transaction. 
C)  adverse selection and moral hazard, both of which occur after the transaction. 
D)  adverse selection and moral hazard, both of which occur before the transaction. 
A)  adverse selection, which arises before the transaction occurs, and moral hazard, which occurs after the transaction. 
B)  moral hazard, which arises before the transaction occurs, and adverse selection, which occurs after the transaction. 
C)  adverse selection and moral hazard, both of which occur after the transaction. 
D)  adverse selection and moral hazard, both of which occur before the transaction.

Question 11

Explain the difference between a secured and an unsecured loan, and the interest rate you would expect to see charged on each (all other factors equal).

Accepted Answer

A secured loan is a loan that is backed

Question 12

Often a bank will require a loan officer to make personal visits on customers with loans outstanding. This is encouraged because:

Accepted Answer

A)  the bank worries about another bank trying to steal their customers. 
B)  the bank wants to make sure the business is busy. 
C)  this is an effective monitoring technique and should reduce moral hazard. 
D)  the bank has excess funds available and hopes to make another loan to the business. 
A)  the bank worries about another bank trying to steal their customers. 
B)  the bank wants to make sure the business is busy. 
C)  this is an effective monitoring technique and should reduce moral hazard. 
D)  the bank has excess funds available and hopes to make another loan to the business.

Question 13

A home mortgage is a good example of:

Accepted Answer

A)  an unsecured loan. 
B)  a secured loan. 
C)  a high risk loan. 
D)  the problem of adverse selection. 
A)  an unsecured loan. 
B)  a secured loan. 
C)  a high risk loan. 
D)  the problem of adverse selection.

Question 14

Which of the following statements is true?

Accepted Answer

A)  Adverse selection is a problem that occurs after a transaction. 
B)  Moral hazard is a problem that occurs before a transaction. 
C)  Adverse selection is a problem stemming from asymmetric information. 
D)  Both adverse selection and moral hazard occur before a transaction. 
A)  Adverse selection is a problem that occurs after a transaction. 
B)  Moral hazard is a problem that occurs before a transaction. 
C)  Adverse selection is a problem stemming from asymmetric information. 
D)  Both adverse selection and moral hazard occur before a transaction.

Question 15

The usual situation in banking regarding asymmetric information is:

Accepted Answer

A)  borrowers know more than lenders. 
B)  lenders know more than borrowers. 
C)  borrowers and lenders have the same information. 
D)  lenders and borrowers have perfect information. 
A)  borrowers know more than lenders. 
B)  lenders know more than borrowers. 
C)  borrowers and lenders have the same information. 
D)  lenders and borrowers have perfect information.

Question 16

The reason financial intermediaries play such an important role in economies has to do with all of the following except:

Accepted Answer

A)  information costs. 
B)  transaction costs. 
C)  complexity of a lot of financial transactions. 
D)  the composition of GDP. 
A)  information costs. 
B)  transaction costs. 
C)  complexity of a lot of financial transactions. 
D)  the composition of GDP.

Question 17

Financial markets do not function as well as they could due to:

Accepted Answer

A)  the fact that banking is highly monopolized. 
B)  the cost of obtaining information which can be high. 
C)  regulation by governments. 
D)  fluctuations in the inflation rate. 
A)  the fact that banking is highly monopolized. 
B)  the cost of obtaining information which can be high. 
C)  regulation by governments. 
D)  fluctuations in the inflation rate.

Question 18

One reason lenders may require a large net worth before making a loan is because:

Accepted Answer

A)  then the borrower does not need the funds. 
B)  it tells the lender the firm has good employees. 
C)  it is one way to treat the problem of moral hazard. 
D)  banking laws require firms have significant net worth before a bank can make a loan. 
A)  then the borrower does not need the funds. 
B)  it tells the lender the firm has good employees. 
C)  it is one way to treat the problem of moral hazard. 
D)  banking laws require firms have significant net worth before a bank can make a loan.

Question 19

A firm that has a well-earned reputation for providing high quality:

Accepted Answer

A)  has found a way to address the free-rider problem. 
B)  has found a way to address the moral hazard problem. 
C)  has found a way to address the problem of adverse selection. 
D)  will not survive in a market if low quality is provided at a lower price. 
A)  has found a way to address the free-rider problem. 
B)  has found a way to address the moral hazard problem. 
C)  has found a way to address the problem of adverse selection. 
D)  will not survive in a market if low quality is provided at a lower price.

Question 20

Assume there are two companies. Both issue stock, but one is high quality and the other low quality. If potential investors cannot distinguish the quality of the company:

Accepted Answer

A)  the shares of the low quality firm will disappear from the market. 
B)  the shares of both companies will trade on the market. 
C)  the shares of the high quality firm will disappear from the market. 
D)  this is an example of moral hazard and the shares of both companies will cease to trade. 
A)  the shares of the low quality firm will disappear from the market. 
B)  the shares of both companies will trade on the market. 
C)  the shares of the high quality firm will disappear from the market. 
D)  this is an example of moral hazard and the shares of both companies will cease to trade.

Exam 11: The Economics of Financial Intermediation

The price for private information is likely higher than it should be due to the problem of:

When the amount of direct and indirect financing are summed, the result is usually:

When a bank takes savings from many small savers and lends it to many borrowers, the bank:

Requiring a home buyer to have a large down payment reduces the risk to a mortgage lender because:

It is not uncommon to read about highly successful mutual fund managers that spend considerable amounts of time visiting the companies that they have placed their clients' funds with. What might be the motive(s) behind these visits?

The First Bank of Podunk has recently suffered some extraordinary losses on its loan portfolio due to the closing of the largest employer in town. As a result, the bank's management decides to raise the interest rate to new loan applicants. This move is likely to:

One lesson that Akerlof's Lemons model provides is:

Financial intermediation exists, in part, because:

Asymmetric information poses two important obstacles to the smooth flow of funds from savers to investors. They are:

Explain the difference between a secured and an unsecured loan, and the interest rate you would expect to see charged on each (all other factors equal).

Often a bank will require a loan officer to make personal visits on customers with loans outstanding. This is encouraged because:

A home mortgage is a good example of:

Which of the following statements is true?

The usual situation in banking regarding asymmetric information is:

The reason financial intermediaries play such an important role in economies has to do with all of the following except:

Financial markets do not function as well as they could due to:

One reason lenders may require a large net worth before making a loan is because:

A firm that has a well-earned reputation for providing high quality:

Assume there are two companies. Both issue stock, but one is high quality and the other low quality. If potential investors cannot distinguish the quality of the company:

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

Filters