Question 1

Which of the following could the lemons problem, applied to financial markets, explain?

Accepted Answer

A)  Lenders seeing a disproportionate share of high quality loan applicants 
B)  An average interest rate that is too high for the actual risk obtained 
C)  Profits for many lenders increasing significantly 
D)  High quality potential borrowers relying more on internally generated funds to finance investment 
A)  Lenders seeing a disproportionate share of high quality loan applicants 
B)  An average interest rate that is too high for the actual risk obtained 
C)  Profits for many lenders increasing significantly 
D)  High quality potential borrowers relying more on internally generated funds to finance investment

Question 2

The fact that financial intermediaries employ experts to carry out particular activities and so lower transactions costs is usually associated with the following economic concept:

Accepted Answer

A)  the law of demand. 
B)  economies of scale. 
C)  comparative advantage. 
D)  information costs. 
A)  the law of demand. 
B)  economies of scale. 
C)  comparative advantage. 
D)  information costs.

Question 3

Recent history has shown that the government regulations requiring the disclosure of information from public corporations have:

Accepted Answer

A)  all but eliminated the problems of asymmetric information. 
B)  reduced but not eliminated the problems of asymmetric information. 
C)  just about eliminated the market for information services. 
D)  resulted in symmetric information. 
A)  all but eliminated the problems of asymmetric information. 
B)  reduced but not eliminated the problems of asymmetric information. 
C)  just about eliminated the market for information services. 
D)  resulted in symmetric information.

Question 4

The fact that many companies employ supervisors to oversee the actions of workers is a way to treat:

Accepted Answer

A)  moral hazard. 
B)  adverse selection. 
C)  the law of diminishing returns. 
D)  the free-rider problem. 
A)  moral hazard. 
B)  adverse selection. 
C)  the law of diminishing returns. 
D)  the free-rider problem.

Question 5

If a bank has 1,000 depositors, each of whom deposits $1,000 in the bank, and the bank makes loans of $10,000 each, then each depositor has contributed:

Accepted Answer

A)  $100 to each loan. 
B)  $1 to each loan. 
C)  $10 to each loan. 
D)  $1000 to each loan. 
A)  $100 to each loan. 
B)  $1 to each loan. 
C)  $10 to each loan. 
D)  $1000 to each loan.

Question 6

Two problems that arise from asymmetric information are:

Accepted Answer

A)  adverse selection and diseconomies of scale. 
B)  moral hazard and the free-rider problem. 
C)  moral hazard and adverse selection. 
D)  the free-rider problem and adverse selection. 
A)  adverse selection and diseconomies of scale. 
B)  moral hazard and the free-rider problem. 
C)  moral hazard and adverse selection. 
D)  the free-rider problem and adverse selection.

Question 7

Explain how mutual funds offer small investors a low-cost way to achieve diversification.

Accepted Answer

Mutual fund companies offer small invest

Question 8

Lines of credit provided by financial intermediaries:

Accepted Answer

A)  decrease liquidity for customers but increase income for the intermediary. 
B)  are pre-approved loans that can increase liquidity and lowering transaction costs. 
C)  are costly for intermediaries to provide so are only available to large commercial customers. 
D)  require deposits in the intermediary that equal or exceed the amount of the line of credit. 
A)  decrease liquidity for customers but increase income for the intermediary. 
B)  are pre-approved loans that can increase liquidity and lowering transaction costs. 
C)  are costly for intermediaries to provide so are only available to large commercial customers. 
D)  require deposits in the intermediary that equal or exceed the amount of the line of credit.

Question 9

One reason that financial intermediaries exist is that they:

Accepted Answer

A)  are required by government regulation. 
B)  have developed low-cost methods to obtain information. 
C)  are the only way to obtain information. 
D)  earn high returns from lending their own funds. 
A)  are required by government regulation. 
B)  have developed low-cost methods to obtain information. 
C)  are the only way to obtain information. 
D)  earn high returns from lending their own funds.

Question 10

A friend of yours tells you she has an idea for a new product. She believes that once the prototype is built she can sell the rights to the product for $250,000. The problem is she needs
$20,000 to build the prototype and she only has $5,000. She asks you to invest $15,000 in the idea and she will give you 75% of whatever amount she obtains when she sells the rights. You have the money available but should be reluctant to provide the money. Why?

Accepted Answer

Your reluctance should come from the pro

Question 11

A friend who is taking her first class in investments asks you why the regulatory bodies place so much emphasis on minimizing insider information if many of the potential problems associated with financial transactions stem from information asymmetry or a lack of information. How would you respond?

Accepted Answer

While it is true that more information i

Question 12

Why is it that financial intermediaries are so important in most economies?

Accepted Answer

Financial intermediaries provide a varie

Question 13

Providing stock options to corporate managers was an idea designed to:

Accepted Answer

A)  hide increases in pay of corporate executives from stockholders. 
B)  align managers' interest with the stockholders' interest. 
C)  treat adverse selection. 
D)  treat the free-rider problem. 
A)  hide increases in pay of corporate executives from stockholders. 
B)  align managers' interest with the stockholders' interest. 
C)  treat adverse selection. 
D)  treat the free-rider problem.

Question 14

Large companies seeking to raise funds often will use a well-known investment bank because:

Accepted Answer

A)  the investment bank's reputation identifies the company as being credit worthy. 
B)  they are required to by government regulation. 
C)  the investment bank is paying the company for the publicity and goodwill it will generate. 
D)  this minimizes moral hazard. 
A)  the investment bank's reputation identifies the company as being credit worthy. 
B)  they are required to by government regulation. 
C)  the investment bank is paying the company for the publicity and goodwill it will generate. 
D)  this minimizes moral hazard.

Question 15

Emerging market economies, compared to industrialized economies, have financial markets that:

Accepted Answer

A)  differ in composition and size. 
B)  differ in composition but not in size. 
C)  are the same in composition but differ in size. 
D)  are similar in composition and size. 
A)  differ in composition and size. 
B)  differ in composition but not in size. 
C)  are the same in composition but differ in size. 
D)  are similar in composition and size.

Question 16

Respond to the following: "If it takes a significant period of time to uncover accounting manipulations by individuals in a major corporation, honesty may be the best policy but dishonesty can be a lot more profitable!"

Accepted Answer

As we saw in 2001 and 2002, as a result

Question 17

The fact that a financial intermediary can hire a lawyer to write one contract that works for many customers is an example of:

Accepted Answer

A)  economies of scale. 
B)  the law of diminishing marginal returns. 
C)  the law of increasing opportunity cost. 
D)  the law of demand. 
A)  economies of scale. 
B)  the law of diminishing marginal returns. 
C)  the law of increasing opportunity cost. 
D)  the law of demand.

Question 18

Moody's, Value Line, and Dun and Bradstreet are examples of companies that:

Accepted Answer

A)  provide information free to investors but charge the companies for the ratings provided on the company. 
B)  provide information free to investors but recoup expenses through advertising done by the companies being rated. 
C)  charge investors who subscribe to the services for the information. 
D)  duplicate information that is available to investors at no cost. 
A)  provide information free to investors but charge the companies for the ratings provided on the company. 
B)  provide information free to investors but recoup expenses through advertising done by the companies being rated. 
C)  charge investors who subscribe to the services for the information. 
D)  duplicate information that is available to investors at no cost.

Question 19

In the bond market, the assigning of a risk premium is a tool designed to address the problem of:

Accepted Answer

A)  adverse selection. 
B)  information asymmetry. 
C)  the free-rider. 
D)  moral hazard. 
A)  adverse selection. 
B)  information asymmetry. 
C)  the free-rider. 
D)  moral hazard.

Question 20

Financial intermediaries reduce the problems in lending associated with information asymmetries by all of the following except:

Accepted Answer

A)  collecting and processing standardized information. 
B)  screening applicants to be sure they are creditworthy. 
C)  monitoring loan recipients to be sure the funds are used properly. 
D)  charging interest rates high enough to discourage undesirable borrowers. 
A)  collecting and processing standardized information. 
B)  screening applicants to be sure they are creditworthy. 
C)  monitoring loan recipients to be sure the funds are used properly. 
D)  charging interest rates high enough to discourage undesirable borrowers.

Exam 11: The Economics of Financial Intermediation

Which of the following could the lemons problem, applied to financial markets, explain?

The fact that financial intermediaries employ experts to carry out particular activities and so lower transactions costs is usually associated with the following economic concept:

Recent history has shown that the government regulations requiring the disclosure of information from public corporations have:

The fact that many companies employ supervisors to oversee the actions of workers is a way to treat:

If a bank has 1,000 depositors, each of whom deposits $1,000 in the bank, and the bank makes loans of $10,000 each, then each depositor has contributed:

Two problems that arise from asymmetric information are:

Explain how mutual funds offer small investors a low-cost way to achieve diversification.

Lines of credit provided by financial intermediaries:

One reason that financial intermediaries exist is that they:

A friend who is taking her first class in investments asks you why the regulatory bodies place so much emphasis on minimizing insider information if many of the potential problems associated with financial transactions stem from information asymmetry or a lack of information. How would you respond?

Why is it that financial intermediaries are so important in most economies?

Providing stock options to corporate managers was an idea designed to:

Large companies seeking to raise funds often will use a well-known investment bank because:

Emerging market economies, compared to industrialized economies, have financial markets that:

Respond to the following: "If it takes a significant period of time to uncover accounting manipulations by individuals in a major corporation, honesty may be the best policy but dishonesty can be a lot more profitable!"

The fact that a financial intermediary can hire a lawyer to write one contract that works for many customers is an example of:

Moody's, Value Line, and Dun and Bradstreet are examples of companies that:

In the bond market, the assigning of a risk premium is a tool designed to address the problem of:

Financial intermediaries reduce the problems in lending associated with information asymmetries by all of the following except:

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