Question 1

Financial intermediaries, through their ability to lower transaction costs:

Accepted Answer

A)  reduce the opportunity cost of specialization. 
B)  decrease the efficiency of an economy. 
C)  allow for people to be more self-sufficient. 
D)  make collecting and processing information unprofitable. 
A)  reduce the opportunity cost of specialization. 
B)  decrease the efficiency of an economy. 
C)  allow for people to be more self-sufficient. 
D)  make collecting and processing information unprofitable.

Question 2

Mary Jones is the president of a local bank. She knows that half of the loan applicants in town she would classify as high risk and the other half as low risk. She observes that the other banks in town charge two different interest rates, a lower rate for low risk borrowers and the higher rate for high risk borrowers. She decides that to have an advantage over the other banks she will offer an average rate to everyone. The likely result will be:

Accepted Answer

A)  Mary's bank will be highly successful as this will provide the bank with a large competitive advantage. 
B)  Mary's bank is likely to see a dramatic increase in both types of borrowers. 
C)  Mary's bank will experience adverse selection and have a disproportionate number of low risk borrowers. 
D)  Mary's bank will experience adverse selection and have a disproportionate number of high risk borrowers. 
A)  Mary's bank will be highly successful as this will provide the bank with a large competitive advantage. 
B)  Mary's bank is likely to see a dramatic increase in both types of borrowers. 
C)  Mary's bank will experience adverse selection and have a disproportionate number of low risk borrowers. 
D)  Mary's bank will experience adverse selection and have a disproportionate number of high risk borrowers.

Question 3

If buyers cannot distinguish a good used car, worth $15,000, from a "lemon," worth $5,000; explain what will happen to the market for used cars.

Accepted Answer

If buyers cannot distinguish good qualit

Question 4

If financial intermediaries did not have the ability to pool the resources of small savers:

Accepted Answer

A)  borrowers needing large amounts of money would find it more costly to obtain the funds. 
B)  the economy would grow faster. 
C)  people would likely save more. 
D)  the risk associated with lending would decrease. 
A)  borrowers needing large amounts of money would find it more costly to obtain the funds. 
B)  the economy would grow faster. 
C)  people would likely save more. 
D)  the risk associated with lending would decrease.

Question 5

In a financial market where information is symmetric:

Accepted Answer

A)  there would be moral hazard. 
B)  one party to a transaction knows information the other party does not. 
C)  the ability to obtain information is available to only one party. 
D)  there would be no adverse selection. 
A)  there would be moral hazard. 
B)  one party to a transaction knows information the other party does not. 
C)  the ability to obtain information is available to only one party. 
D)  there would be no adverse selection.

Question 6

The interest rates charged on most credit cards is:

Accepted Answer

A)  high due to the problem of adverse selection. 
B)  high because Visa and MasterCard have a virtual monopoly on this business. 
C)  high due to diseconomies of scale that exist in this market. 
D)  lower than they should be given the problem of adverse selection. 
A)  high due to the problem of adverse selection. 
B)  high because Visa and MasterCard have a virtual monopoly on this business. 
C)  high due to diseconomies of scale that exist in this market. 
D)  lower than they should be given the problem of adverse selection.

Question 7

Financial institutions, acting as financial intermediaries, perform all of the following, except:

Accepted Answer

A)  provide ways to diversify risk. 
B)  pooling resources of small savers. 
C)  increase transactions costs. 
D)  provide safekeeping and accounting services. 
A)  provide ways to diversify risk. 
B)  pooling resources of small savers. 
C)  increase transactions costs. 
D)  provide safekeeping and accounting services.

Question 8

Mom's Bakery goes out of business due to decreasing sales resulting from the dramatic increase in people on low carbohydrate diets. The decrease in business also results in Mom's defaulting on the loan they have with the bank. This is an example of:

Accepted Answer

A)  lack of perfect information in financial markets. 
B)  asymmetric information in financial markets. 
C)  moral hazard in financial markets. 
D)  symmetric information in financial markets. 
A)  lack of perfect information in financial markets. 
B)  asymmetric information in financial markets. 
C)  moral hazard in financial markets. 
D)  symmetric information in financial markets.

Question 9

What are the five functions performed by financial intermediaries?

Accepted Answer

(1) Pooling the resources of small saver

Question 10

The screening process a bank follows for a loan applicant:

Accepted Answer

A)  uses information that anyone can obtain, the bank can usually obtain it cheaper. 
B)  includes information that can be available to other firms, as well as proprietary information that only the bank would have. 
C)  is based on just public information. 
D)  uses only confidential information. 
A)  uses information that anyone can obtain, the bank can usually obtain it cheaper. 
B)  includes information that can be available to other firms, as well as proprietary information that only the bank would have. 
C)  is based on just public information. 
D)  uses only confidential information.

Question 11

The United States, the United Kingdom, Germany and Japan are all developed countries with highly developed and efficient financial markets. However, in all four countries the main source of business finance is internal funding. Why is this so?

Accepted Answer

The only possible explanation for this f

Question 12

Mom's Pizzeria goes out of business due to a dramatic decrease in sales from a local newspaper article highlighting the fact that Mom's Pizzeria has been purchasing expired meat from a distributor at cut rate prices for years. The decrease in business also results in Mom's defaulting on the loan they have with the bank. This is an example of:

Accepted Answer

A)  symmetric information in the financial markets. 
B)  perfect information in the financial markets. 
C)  asymmetric information in the financial markets. 
D)  perfect information in the pizza market. 
A)  symmetric information in the financial markets. 
B)  perfect information in the financial markets. 
C)  asymmetric information in the financial markets. 
D)  perfect information in the pizza market.

Question 13

Explain how the threat of a leveraged buyout or a takeover can actually address the problem of moral hazard.

Accepted Answer

The potential for moral hazard exists in

Question 14

Provide an example of how a bank achieves lower cost in making a large loan to a company than could be achieved without the bank.

Accepted Answer

If a company needed to borrow a large am

Question 15

Is the conflict between a lender to a firm and the borrower/owner an example of adverse selection or moral hazard? Explain.

Accepted Answer

This is an example of moral hazard. The

Question 16

Please explain how financial intermediaries contribute to increasing the output of an economy.

Accepted Answer

Financial intermediaries can lower the c

Question 17

Which of the following statements is true?

Accepted Answer

A)  Unsecured loans generally involve very high interest rates as a result of the free-rider problem. 
B)  Unsecured loans generally involve very high interest rates as a result of adverse selection. 
C)  Unsecured loans are no longer made; all loans now must have some form of collateral. 
D)  Unsecured loans are only made to individuals with very high net worth because it is the only way to limit the risk. 
A)  Unsecured loans generally involve very high interest rates as a result of the free-rider problem. 
B)  Unsecured loans generally involve very high interest rates as a result of adverse selection. 
C)  Unsecured loans are no longer made; all loans now must have some form of collateral. 
D)  Unsecured loans are only made to individuals with very high net worth because it is the only way to limit the risk.

Question 18

Discuss the role that companies like Standard & Poor's, Dun & Bradstreet, and Moody's play in solving the problem of adverse selection.

Accepted Answer

Adverse selection is a problem that stem

Question 19

A bank can usually offer a saver a higher return for the same risk for all of the following reasons except:

Accepted Answer

A)  the bank can usually purchase assets at a lower cost than any one saver. 
B)  the bank can pool the resources of small savers and purchase higher valued assets. 
C)  economies of scale can also be applied by the bank in its purchase of assets. 
D)  savers do not have good enough information to know if the return is sufficient. 
A)  the bank can usually purchase assets at a lower cost than any one saver. 
B)  the bank can pool the resources of small savers and purchase higher valued assets. 
C)  economies of scale can also be applied by the bank in its purchase of assets. 
D)  savers do not have good enough information to know if the return is sufficient.

Question 20

The scandals involving Enron, World Com, Global Crossing and other large firms:

Accepted Answer

A)  are examples of asymmetric information and have led, at least temporarily, to a less well functioning stock market. 
B)  is what should have been expected on the part of investors, that is why there is a risk premium. 
C)  have resulted in a cry for less government regulation of public corporations. 
D)  demonstrate that the government should be responsible for collecting and distributing financial information on firms. 
A)  are examples of asymmetric information and have led, at least temporarily, to a less well functioning stock market. 
B)  is what should have been expected on the part of investors, that is why there is a risk premium. 
C)  have resulted in a cry for less government regulation of public corporations. 
D)  demonstrate that the government should be responsible for collecting and distributing financial information on firms.

Exam 11: The Economics of Financial Intermediation

Financial intermediaries, through their ability to lower transaction costs:

If buyers cannot distinguish a good used car, worth $15,000, from a "lemon," worth $5,000; explain what will happen to the market for used cars.

If financial intermediaries did not have the ability to pool the resources of small savers:

In a financial market where information is symmetric:

The interest rates charged on most credit cards is:

Financial institutions, acting as financial intermediaries, perform all of the following, except:

Mom's Bakery goes out of business due to decreasing sales resulting from the dramatic increase in people on low carbohydrate diets. The decrease in business also results in Mom's defaulting on the loan they have with the bank. This is an example of:

What are the five functions performed by financial intermediaries?

The screening process a bank follows for a loan applicant:

The United States, the United Kingdom, Germany and Japan are all developed countries with highly developed and efficient financial markets. However, in all four countries the main source of business finance is internal funding. Why is this so?

Explain how the threat of a leveraged buyout or a takeover can actually address the problem of moral hazard.

Provide an example of how a bank achieves lower cost in making a large loan to a company than could be achieved without the bank.

Is the conflict between a lender to a firm and the borrower/owner an example of adverse selection or moral hazard? Explain.

Please explain how financial intermediaries contribute to increasing the output of an economy.

Which of the following statements is true?

Discuss the role that companies like Standard & Poor's, Dun & Bradstreet, and Moody's play in solving the problem of adverse selection.

A bank can usually offer a saver a higher return for the same risk for all of the following reasons except:

The scandals involving Enron, World Com, Global Crossing and other large firms:

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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