Question 1

One financial intermediary in our financial structure that helps to reduce the moral hazard from arising from the principal-agent problem is the

Accepted Answer

A) venture capital firm. 
B) money market mutual fund. 
C) pawn broker. 
D) savings and loan association. 
A) venture capital firm. 
B) money market mutual fund. 
C) pawn broker. 
D) savings and loan association.

Question 2

A problem for equity contracts is a particular type of ________ called the ________ problem.

Accepted Answer

A) adverse selection;principal-agent 
B) moral hazard;principal-agent 
C) adverse selection;free-rider 
D) moral hazard;free-rider 
A) adverse selection;principal-agent 
B) moral hazard;principal-agent 
C) adverse selection;free-rider 
D) moral hazard;free-rider

Question 3

Of the sources of external funds for nonfinancial businesses in the United States,stocks account for approximately ________ of the total.

Accepted Answer

A) 2% 
B) 11% 
C) 20% 
D) 40% 
A) 2% 
B) 11% 
C) 20% 
D) 40%

Question 4

American businesses get their external funds primarily from

Accepted Answer

A) bank loans. 
B) bonds and commercial paper issues. 
C) stock issues. 
D) loans from nonbank financial intermediaries. 
A) bank loans. 
B) bonds and commercial paper issues. 
C) stock issues. 
D) loans from nonbank financial intermediaries.

Question 5

Managers (________)may act in their own interest rather than in the interest of the stockholder-owners (________)because the managers have less incentive to maximize profits than the stockholder-owners do.

Accepted Answer

A) principals;agents 
B) principals;principals 
C) agents;agents 
D) agents;principals 
A) principals;agents 
B) principals;principals 
C) agents;agents 
D) agents;principals

Question 6

The concept of adverse selection helps to explain all of the following EXCEPT

Accepted Answer

A) why firms are more likely to obtain funds from banks and other financial intermediaries,rather than from the securities markets. 
B) why indirect finance is more important than direct finance as a source of business finance. 
C) why direct finance is more important than indirect finance as a source of business finance. 
D) why the financial system is so heavily regulated. 
A) why firms are more likely to obtain funds from banks and other financial intermediaries,rather than from the securities markets. 
B) why indirect finance is more important than direct finance as a source of business finance. 
C) why direct finance is more important than indirect finance as a source of business finance. 
D) why the financial system is so heavily regulated.

Question 7

An example of the ________ problem would be if Brian borrowed money from Sean in order to purchase a used car and instead took a trip to Atlantic City using those funds.

Accepted Answer

A) moral hazard 
B) adverse selection 
C) costly state verification 
D) agency 
A) moral hazard 
B) adverse selection 
C) costly state verification 
D) agency

Question 8

Moral hazard in equity contracts is known as the ________ problem because the manager of the firm has fewer incentives to maximize profits than the stockholders might ideally prefer.

Accepted Answer

A) principal-agent 
B) adverse selection 
C) free-rider 
D) debt deflation 
A) principal-agent 
B) adverse selection 
C) free-rider 
D) debt deflation

Question 9

Government regulations designed to reduce the moral hazard problem include

Accepted Answer

A) laws that force firms to adhere to standard accounting principles. 
B) light sentences for those who commit the fraud of hiding and stealing profits. 
C) state verification subsidies. 
D) state licensing restrictions. 
A) laws that force firms to adhere to standard accounting principles. 
B) light sentences for those who commit the fraud of hiding and stealing profits. 
C) state verification subsidies. 
D) state licensing restrictions.

Question 10

In the United States,the government agency requiring that firms that sell securities in public markets adhere to standard accounting principles and disclose information about their sales,assets,and earnings is the

Accepted Answer

A) Federal Communications Commission. 
B) Federal Trade Commission. 
C) Securities and Exchange Commission. 
D) Federal Reserve System. 
A) Federal Communications Commission. 
B) Federal Trade Commission. 
C) Securities and Exchange Commission. 
D) Federal Reserve System.

Question 11

The predominant form of household debt is

Accepted Answer

A) consumer installment debt. 
B) collateralized debt. 
C) unsecured debt. 
D) unrestricted debt. 
A) consumer installment debt. 
B) collateralized debt. 
C) unsecured debt. 
D) unrestricted debt.

Question 12

Net worth can perform a similar role to

Accepted Answer

A) diversification. 
B) collateral. 
C) intermediation. 
D) economies of scale. 
A) diversification. 
B) collateral. 
C) intermediation. 
D) economies of scale.

Question 13

Government regulations require publicly traded firms to provide information,reducing

Accepted Answer

A) transactions costs. 
B) the need for diversification. 
C) the adverse selection problem. 
D) economies of scale. 
A) transactions costs. 
B) the need for diversification. 
C) the adverse selection problem. 
D) economies of scale.

Question 14

One way the venture capital firm avoids the free-rider problem is by

Accepted Answer

A) prohibiting the sale of equity in the firm to anyone except the venture capital firm. 
B) prohibiting members from serving on the board of directors. 
C) prohibiting the borrowing firm from replacing management. 
D) requiring collateral equal to the value of the borrowed funds. 
A) prohibiting the sale of equity in the firm to anyone except the venture capital firm. 
B) prohibiting members from serving on the board of directors. 
C) prohibiting the borrowing firm from replacing management. 
D) requiring collateral equal to the value of the borrowed funds.

Question 15

Financial intermediaries' low transaction costs allow them to provide ________ services that make it easier for customers to conduct transactions.

Accepted Answer

A) liquidity 
B) conduction 
C) transcendental 
D) equitable 
A) liquidity 
B) conduction 
C) transcendental 
D) equitable

Question 16

One purpose of regulation of financial markets is to

Accepted Answer

A) limit the profits of financial institutions. 
B) increase competition among financial institutions. 
C) promote the provision of information to shareholders,depositors and the public. 
D) guarantee that the maximum rates of interest are paid on deposits. 
A) limit the profits of financial institutions. 
B) increase competition among financial institutions. 
C) promote the provision of information to shareholders,depositors and the public. 
D) guarantee that the maximum rates of interest are paid on deposits.

Question 17

Tools to help solve the adverse selection problem in financial markets include all of the following EXCEPT

Accepted Answer

A) diversification. 
B) government regulations to increase information. 
C) the use of financial intermediaries. 
D) the private production and sale of information. 
A) diversification. 
B) government regulations to increase information. 
C) the use of financial intermediaries. 
D) the private production and sale of information.

Question 18

Equity contracts

Accepted Answer

A) are claims to a share in the profits and assets of a business. 
B) have the advantage over debt contracts of a lower costly state verification. 
C) are used much more frequently to raise capital than are debt contracts. 
D) are not subject to the moral hazard problem. 
A) are claims to a share in the profits and assets of a business. 
B) have the advantage over debt contracts of a lower costly state verification. 
C) are used much more frequently to raise capital than are debt contracts. 
D) are not subject to the moral hazard problem.

Question 19

The recent Enron and Tyco scandals are an example of

Accepted Answer

A) the free-rider problem. 
B) the adverse selection problem. 
C) the principal-agent problem. 
D) the "lemons problem." 
A) the free-rider problem. 
B) the adverse selection problem. 
C) the principal-agent problem. 
D) the "lemons problem."

Question 20

The problem of adverse selection helps to explain

Accepted Answer

A) why firms are more likely to obtain funds from banks and other financial intermediaries,rather than from securities markets. 
B) why collateral is an important feature of consumer,but not business,debt contracts. 
C) why direct finance is more important than indirect finance as a source of business finance. 
D) why lenders refuse loans to individuals with high net worth. 
A) why firms are more likely to obtain funds from banks and other financial intermediaries,rather than from securities markets. 
B) why collateral is an important feature of consumer,but not business,debt contracts. 
C) why direct finance is more important than indirect finance as a source of business finance. 
D) why lenders refuse loans to individuals with high net worth.

Exam 8: An Economic Analysis of Financial Structure

One financial intermediary in our financial structure that helps to reduce the moral hazard from arising from the principal-agent problem is the

A problem for equity contracts is a particular type of ________ called the ________ problem.

Of the sources of external funds for nonfinancial businesses in the United States,stocks account for approximately ________ of the total.

American businesses get their external funds primarily from

Managers (________)may act in their own interest rather than in the interest of the stockholder-owners (________)because the managers have less incentive to maximize profits than the stockholder-owners do.

The concept of adverse selection helps to explain all of the following EXCEPT

An example of the ________ problem would be if Brian borrowed money from Sean in order to purchase a used car and instead took a trip to Atlantic City using those funds.

Moral hazard in equity contracts is known as the ________ problem because the manager of the firm has fewer incentives to maximize profits than the stockholders might ideally prefer.

Government regulations designed to reduce the moral hazard problem include

In the United States,the government agency requiring that firms that sell securities in public markets adhere to standard accounting principles and disclose information about their sales,assets,and earnings is the

The predominant form of household debt is

Net worth can perform a similar role to

Government regulations require publicly traded firms to provide information,reducing

One way the venture capital firm avoids the free-rider problem is by

Financial intermediaries' low transaction costs allow them to provide ________ services that make it easier for customers to conduct transactions.

One purpose of regulation of financial markets is to

Tools to help solve the adverse selection problem in financial markets include all of the following EXCEPT

Equity contracts

The recent Enron and Tyco scandals are an example of

The problem of adverse selection helps to explain

Why Study Money, banking, and Financial Markets

An Overview of the Financial System

What Is Money

The Meaning of Interest Rates

The Behavior of Interest Rates

The Risk and Term Structure of Interest Rates

The Stock Market, the Theory of Rational Expectations, and the Efficient Market Hypothesis

Banking and the Management of Financial Institutions

Economic Analysis of Financial Regulation

Banking Industry: Structure and Competition

Financial Crises

Central Banks and the Federal Reserve System

The Money Supply Process

Tools of Monetary Policy

The Conduct of Monetary Policy: Strategy and Tactics

The Foreign Exchange Market

The International Financial System

Quantity Theory, inflation, and the Demand for Money

The Is Curve

The Monetary Policy and Aggregate Demand Curves

Aggregate Demand and Supply Analysis

Monetary Policy Theory

The Role of Expectations in Monetary Policy

Transmission Mechanisms of Monetary Policy

Web 1:financial Crises in Emerging Market Economies

Web 2:the Islm Model

Web 3:nonbank Finance

Web 4:financial Derivatives

Web 5:conflicts of Interest in the Financial Services Industry

Filters

A problem for equity contracts is a particular type of called the problem.

Managers ()may act in their own interest rather than in the interest of the stockholder-owners ()because the managers have less incentive to maximize profits than the stockholder-owners do.