Question 1

Explain how Federal Deposit Insurance (FDIC) could potentially create a moral hazard for the managers of deposit institutions.

Accepted Answer

FDIC insurance pays off depositors (up t

Question 2

A lender who wants to avoid the problem of adverse selection could:

Accepted Answer

A)  charge a very high interest rate and assume all loan applicants are high risk. 
B)  charge the same average interest rate to all borrowers. 
C)  charge a low interest rate and make the applicant prove they warrant the low rate by providing information. 
D)  only lend by issuing credit cards. 
A)  charge a very high interest rate and assume all loan applicants are high risk. 
B)  charge the same average interest rate to all borrowers. 
C)  charge a low interest rate and make the applicant prove they warrant the low rate by providing information. 
D)  only lend by issuing credit cards.

Question 3

Financial intermediation is:

Accepted Answer

A)  far less important than direct finance through stock and bond markets. 
B)  only a little more important than direct finance in the United States. 
C)  much more important than direct finance through stock and bond markets. 
D)  the same thing as finance through stock and bond markets. 
A)  far less important than direct finance through stock and bond markets. 
B)  only a little more important than direct finance in the United States. 
C)  much more important than direct finance through stock and bond markets. 
D)  the same thing as finance through stock and bond markets.

Question 4

A bank has 10,000 depositors, each of whom deposits $100 in the bank. If the bank makes 1000 loans for $1,000 each then each depositor has contributed:

Accepted Answer

A)  $1 to each loan. 
B)  $100 to each loan. 
C)  $0.10 to each loan. 
D)  $10 to each loan. 
A)  $1 to each loan. 
B)  $100 to each loan. 
C)  $0.10 to each loan. 
D)  $10 to each loan.

Question 5

Which of the following is a problem of moral hazard?

Accepted Answer

A)  A lender cannot distinguish good risk from bad risk borrowers. 
B)  An individual who purchases auto insurance begins to leave his or her keys in the car while running into a store. 
C)  Life insurance companies offer an average premium to smokers and non-smokers so they do not have to have two different premiums. 
D)  An auto insurance company charges higher premiums to younger drivers than what they charge to older drivers. 
A)  A lender cannot distinguish good risk from bad risk borrowers. 
B)  An individual who purchases auto insurance begins to leave his or her keys in the car while running into a store. 
C)  Life insurance companies offer an average premium to smokers and non-smokers so they do not have to have two different premiums. 
D)  An auto insurance company charges higher premiums to younger drivers than what they charge to older drivers.

Question 6

Requiring that borrowers put up collateral to obtain a loan is a tool designed to treat:

Accepted Answer

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

Question 7

One reason lenders usually require a lot of information from loan applicants is to avoid:

Accepted Answer

A)  the problems of moral hazard. 
B)  the problem of adverse selection. 
C)  being harmed by symmetric information. 
D)  charges of discrimination in lending. 
A)  the problems of moral hazard. 
B)  the problem of adverse selection. 
C)  being harmed by symmetric information. 
D)  charges of discrimination in lending.

Question 8

One of the conclusions from Akerlof's paper titled "The Market for Lemons" was:

Accepted Answer

A)  high quality goods will drive low quality goods out of the market. 
B)  lacking the ability to distinguish high from low quality, the quality the market will end up offering will be the average quality. 
C)  lacking the ability to distinguish high from low quality, low quality may drive high quality out of the market. 
D)  high quality is always demanded by consumers over low quality. 
A)  high quality goods will drive low quality goods out of the market. 
B)  lacking the ability to distinguish high from low quality, the quality the market will end up offering will be the average quality. 
C)  lacking the ability to distinguish high from low quality, low quality may drive high quality out of the market. 
D)  high quality is always demanded by consumers over low quality.

Question 9

Life insurance companies usually offer a lower premium to non-smokers than the premium charged to smokers. Discuss first the potential for adverse selection and moral hazard and then ways the company can seek to reduce or eliminate these problems.

Accepted Answer

If the company cannot distinguish applic

Question 10

Which of the following is a problem of adverse selection?

Accepted Answer

A)  The lender has a problem of distinguishing good risk from bad risk borrowers. 
B)  The lender has a problem determining that the proceeds from a loan are being used as the borrower stated. 
C)  A person takes up the hobby of bungee jumping after purchasing health insurance. 
D)  Individuals use more medical services as a result of their purchase of a health insurance plan. 
A)  The lender has a problem of distinguishing good risk from bad risk borrowers. 
B)  The lender has a problem determining that the proceeds from a loan are being used as the borrower stated. 
C)  A person takes up the hobby of bungee jumping after purchasing health insurance. 
D)  Individuals use more medical services as a result of their purchase of a health insurance plan.

Question 11

Which of the following is not true of adverse selection?

Accepted Answer

A)  It exists because information is perfect. 
B)  It describes the problem a lender faces in identifying loan applicants as good or bad risk borrowers. 
C)  It arises because borrowers have more information than lenders regarding their creditworthiness. 
D)  It arises if lenders try to charge an average price to all applicants. 
A)  It exists because information is perfect. 
B)  It describes the problem a lender faces in identifying loan applicants as good or bad risk borrowers. 
C)  It arises because borrowers have more information than lenders regarding their creditworthiness. 
D)  It arises if lenders try to charge an average price to all applicants.

Question 12

Tom borrows $100,000 from his local bank to purchase inventory for his store for the upcoming holiday season. Tom's neighbor tells him about a get-rich-quick scheme that can take this $100,000 and triple it in a month. Tom decides to buy into this scheme figuring he can repay the bank and still have plenty left for inventory. This is an example of:

Accepted Answer

A)  adverse selection. 
B)  sound risk analysis on Tom's part. 
C)  diversification. 
D)  moral hazard. 
A)  adverse selection. 
B)  sound risk analysis on Tom's part. 
C)  diversification. 
D)  moral hazard.

Question 13

Which of the following statements is true?

Accepted Answer

A)  Adverse selection is a problem of monopoly and moral hazard is a problem of information asymmetry. 
B)  Adverse selection and moral hazard are problems stemming from asymmetric information. 
C)  Adverse selection is a problem that occurs after a transaction. 
D)  Moral hazard is a problem that occurs before a transaction. 
A)  Adverse selection is a problem of monopoly and moral hazard is a problem of information asymmetry. 
B)  Adverse selection and moral hazard are problems stemming from asymmetric information. 
C)  Adverse selection is a problem that occurs after a transaction. 
D)  Moral hazard is a problem that occurs before a transaction.

Question 14

Which of the following statements is not true?

Accepted Answer

A)  Home mortgage loans are secured loans. 
B)  Credit card loans are secured. 
C)  Most automobile loans are secured loans. 
D)  Secured loans usually carry less risk than unsecured loans. 
A)  Home mortgage loans are secured loans. 
B)  Credit card loans are secured. 
C)  Most automobile loans are secured loans. 
D)  Secured loans usually carry less risk than unsecured loans.

Question 15

An unsecured loan is:

Accepted Answer

A)  a loan where the applicant does not have any net worth. 
B)  a loan where the applicant does not post any collateral. 
C)  another name for a mortgage loan. 
D)  usually a low-risk loan. 
A)  a loan where the applicant does not have any net worth. 
B)  a loan where the applicant does not post any collateral. 
C)  another name for a mortgage loan. 
D)  usually a low-risk loan.

Question 16

Financial intermediaries, through their ability to lower transaction costs:

Accepted Answer

A)  allow for people to be more self-sufficient. 
B)  increase the amount of trading that occurs in an economy. 
C)  take people away from their comparative advantage. 
D)  reduce the number of financial transactions that occur. 
A)  allow for people to be more self-sufficient. 
B)  increase the amount of trading that occurs in an economy. 
C)  take people away from their comparative advantage. 
D)  reduce the number of financial transactions that occur.

Question 17

How did information asymmetries in the home mortgage market contribute to the financial crisis of 2007-2009?

Accepted Answer

In several ways:
1. Mortgage lenders-the

Question 18

Often times we see companies offering money back guarantees to customers if they are not satisfied. These guarantees are a way to treat the problem of:

Accepted Answer

A)  buyers having more information about the product than the seller. 
B)  the seller having more information about the product than the buyer. 
C)  symmetric information. 
D)  adverse selection. 
A)  buyers having more information about the product than the seller. 
B)  the seller having more information about the product than the buyer. 
C)  symmetric information. 
D)  adverse selection.

Question 19

The problem of adverse selection created the opportunity for:

Accepted Answer

A)  lenders to profit significantly at the expense of borrowers. 
B)  significant deregulation of financial markets. 
C)  a new market in the trading of information. 
D)  stock prices for many years to be much lower than what they should have been. 
A)  lenders to profit significantly at the expense of borrowers. 
B)  significant deregulation of financial markets. 
C)  a new market in the trading of information. 
D)  stock prices for many years to be much lower than what they should have been.

Question 20

Each of the following is an example of a restrictive covenant on a mortgage loan, except:

Accepted Answer

A)  net worth requirements. 
B)  requiring that the borrower reside in a home for which he or she receives a mortgage. 
C)  insisting the borrower carry physical damage insurance on the property securing the loan. 
D)  requiring the borrower to obtain comprehensive health insurance. 
A)  net worth requirements. 
B)  requiring that the borrower reside in a home for which he or she receives a mortgage. 
C)  insisting the borrower carry physical damage insurance on the property securing the loan. 
D)  requiring the borrower to obtain comprehensive health insurance.

Exam 11: The Economics of Financial Intermediation

Explain how Federal Deposit Insurance (FDIC) could potentially create a moral hazard for the managers of deposit institutions.

A lender who wants to avoid the problem of adverse selection could:

Financial intermediation is:

A bank has 10,000 depositors, each of whom deposits $100 in the bank. If the bank makes 1000 loans for $1,000 each then each depositor has contributed:

Which of the following is a problem of moral hazard?

Requiring that borrowers put up collateral to obtain a loan is a tool designed to treat:

One reason lenders usually require a lot of information from loan applicants is to avoid:

One of the conclusions from Akerlof's paper titled "The Market for Lemons" was:

Life insurance companies usually offer a lower premium to non-smokers than the premium charged to smokers. Discuss first the potential for adverse selection and moral hazard and then ways the company can seek to reduce or eliminate these problems.

Which of the following is a problem of adverse selection?

Which of the following is not true of adverse selection?

Which of the following statements is true?

Which of the following statements is not true?

An unsecured loan is:

Financial intermediaries, through their ability to lower transaction costs:

How did information asymmetries in the home mortgage market contribute to the financial crisis of 2007-2009?

Often times we see companies offering money back guarantees to customers if they are not satisfied. These guarantees are a way to treat the problem of:

The problem of adverse selection created the opportunity for:

Each of the following is an example of a restrictive covenant on a mortgage loan, 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

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