Question 1

By bundling share purchases of many investors together mutual funds can take advantage of economies of scale and thereby lower

Accepted Answer

A) adverse selection. 
B) moral hazard. 
C) transactions costs. 
D) diversification. 
A) adverse selection. 
B) moral hazard. 
C) transactions costs. 
D) diversification.

Question 2

A clause in a mortgage loan contract requiring the borrower to purchase homeowner's insurance is an example of a

Accepted Answer

A) proscriptive covenant. 
B) prescriptive covenant. 
C) restrictive covenant. 
D) constraint-imposed covenant. 
A) proscriptive covenant. 
B) prescriptive covenant. 
C) restrictive covenant. 
D) constraint-imposed covenant.

Question 3

Credit card debt is

Accepted Answer

A) secured debt. 
B) unsecured debt. 
C) restricted debt. 
D) unrestricted debt. 
A) secured debt. 
B) unsecured debt. 
C) restricted debt. 
D) unrestricted debt.

Question 4

Which of the following is NOT a benefit to an individual purchasing a mutual fund?

Accepted Answer

A) reduced risk 
B) lower transactions costs 
C) free-riding 
D) diversification 
A) reduced risk 
B) lower transactions costs 
C) free-riding 
D) diversification

Question 5

The current structure of financial markets can be best understood as the result of attempts by financial market participants to

Accepted Answer

A) adapt to continually changing government regulations. 
B) deal with the great number of small firms in the United States. 
C) reduce transaction costs. 
D) cartelize the provision of financial services. 
A) adapt to continually changing government regulations. 
B) deal with the great number of small firms in the United States. 
C) reduce transaction costs. 
D) cartelize the provision of financial services.

Question 6

Equity contracts account for a small fraction of external funds raised by American businesses because

Accepted Answer

A) costly state verification makes the equity contract less desirable than the debt contract. 
B) of the reduced scope for moral hazard problems under equity contracts,as compared to debt contracts. 
C) equity contracts do not permit borrowing firms to raise additional funds by issuing debt. 
D) there is no moral hazard problem when using a debt contract. 
A) costly state verification makes the equity contract less desirable than the debt contract. 
B) of the reduced scope for moral hazard problems under equity contracts,as compared to debt contracts. 
C) equity contracts do not permit borrowing firms to raise additional funds by issuing debt. 
D) there is no moral hazard problem when using a debt contract.

Question 7

High net worth helps to diminish the problem of moral hazard problem by

Accepted Answer

A) requiring the state to verify the debt contract. 
B) collateralizing the debt contract. 
C) making the debt contract incentive compatible. 
D) giving the debt contract characteristics of equity contracts. 
A) requiring the state to verify the debt contract. 
B) collateralizing the debt contract. 
C) making the debt contract incentive compatible. 
D) giving the debt contract characteristics of equity contracts.

Question 8

The ________ problem helps to explain why the private production and sale of information cannot eliminate ________.

Accepted Answer

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

Question 9

Analysis of adverse selection indicates that financial intermediaries,especially banks

Accepted Answer

A) have advantages in overcoming the free-rider problem,helping to explain why indirect finance is a more important source of business finance than is direct finance. 
B) despite their success in overcoming free-rider problems,nevertheless play a minor role in moving funds to corporations. 
C) provide better-known and larger corporations a higher percentage of their external funds than they do to newer and smaller corporations which rely to a greater extent on the new issues market for funds. 
D) must buy securities from corporations to diversify the risk that results from holding non-tradable loans. 
A) have advantages in overcoming the free-rider problem,helping to explain why indirect finance is a more important source of business finance than is direct finance. 
B) despite their success in overcoming free-rider problems,nevertheless play a minor role in moving funds to corporations. 
C) provide better-known and larger corporations a higher percentage of their external funds than they do to newer and smaller corporations which rely to a greater extent on the new issues market for funds. 
D) must buy securities from corporations to diversify the risk that results from holding non-tradable loans.

Question 10

The problem created by asymmetric information before the transaction occurs is called ________,while the problem created after the transaction occurs is called ________.

Accepted Answer

A) adverse selection;moral hazard 
B) moral hazard;adverse selection 
C) costly state verification;free-riding 
D) free-riding;costly state verification 
A) adverse selection;moral hazard 
B) moral hazard;adverse selection 
C) costly state verification;free-riding 
D) free-riding;costly state verification

Question 11

One reason China has been able to grow so rapidly even though its financial development is still in its early stages is

Accepted Answer

A) the high savings rate of around 40%. 
B) the shift of labor to the agricultural sector. 
C) the stringent enforcement of financial contracts. 
D) the ease of obtaining high-quality information about creditors. 
A) the high savings rate of around 40%. 
B) the shift of labor to the agricultural sector. 
C) the stringent enforcement of financial contracts. 
D) the ease of obtaining high-quality information about creditors.

Question 12

The problem faced by the lender that the borrower may take on additional risk after receiving the loan is called

Accepted Answer

A) adverse selection. 
B) moral hazard. 
C) transactions costs. 
D) diversification. 
A) adverse selection. 
B) moral hazard. 
C) transactions costs. 
D) diversification.

Question 13

Solutions to the moral hazard in equity contracts include all of the following EXCEPT

Accepted Answer

A) government regulations to increase information. 
B) the use of financial intermediaries. 
C) the use of debt contracts. 
D) government ownership of resources. 
A) government regulations to increase information. 
B) the use of financial intermediaries. 
C) the use of debt contracts. 
D) government ownership of resources.

Exam 8: An Economic Analysis of Financial Structure

By bundling share purchases of many investors together mutual funds can take advantage of economies of scale and thereby lower

A clause in a mortgage loan contract requiring the borrower to purchase homeowner's insurance is an example of a

Credit card debt is

Which of the following is NOT a benefit to an individual purchasing a mutual fund?

The current structure of financial markets can be best understood as the result of attempts by financial market participants to

Equity contracts account for a small fraction of external funds raised by American businesses because

High net worth helps to diminish the problem of moral hazard problem by

The ________ problem helps to explain why the private production and sale of information cannot eliminate ________.

Analysis of adverse selection indicates that financial intermediaries,especially banks

The problem created by asymmetric information before the transaction occurs is called ________,while the problem created after the transaction occurs is called ________.

One reason China has been able to grow so rapidly even though its financial development is still in its early stages is

The problem faced by the lender that the borrower may take on additional risk after receiving the loan is called

Solutions to the moral hazard in equity contracts include all of the following EXCEPT

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

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The problem helps to explain why the private production and sale of information cannot eliminate .

The problem created by asymmetric information before the transaction occurs is called ,while the problem created after the transaction occurs is called .