Question 1

If bad credit risks are the ones who most actively seek loans then financial intermediaries face the problem of ________.

Accepted Answer

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

Question 2

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 3

As information technology improves, the lending role of financial institutions such as banks should ________.

Accepted Answer

A) increase somewhat 
B) decrease 
C) stay the same 
D) increase significantly 
A) increase somewhat 
B) decrease 
C) stay the same 
D) increase significantly

Question 4

Why does the free-rider problem occur in the debt market?

Accepted Answer

Restrictive covenants can reduce moral h

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

Commercial and farm mortgages, in which property is pledged as collateral, account for ________.

Accepted Answer

A) one-quarter of borrowing by nonfinancial businesses 
B) one-half of borrowing by nonfinancial businesses 
C) one-twentieth of borrowing by nonfinancial businesses 
D) two-thirds of borrowing by nonfinancial businesses 
A) one-quarter of borrowing by nonfinancial businesses 
B) one-half of borrowing by nonfinancial businesses 
C) one-twentieth of borrowing by nonfinancial businesses 
D) two-thirds of borrowing by nonfinancial businesses

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

Adverse selection is a problem associated with equity and debt contracts arising from ________.

Accepted Answer

A) the lender's relative lack of information about the borrower's potential returns and risks of his investment activities 
B) the lender's inability to legally require sufficient collateral to cover a 100 percent loss if the borrower defaults 
C) the borrower's lack of incentive to seek a loan for highly risky investments 
D) the lender's inability to restrict the borrower from changing his behavior once given a loan 
A) the lender's relative lack of information about the borrower's potential returns and risks of his investment activities 
B) the lender's inability to legally require sufficient collateral to cover a 100 percent loss if the borrower defaults 
C) the borrower's lack of incentive to seek a loan for highly risky investments 
D) the lender's inability to restrict the borrower from changing his behavior once given a loan

Question 9

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 10

Of the sources of external funds for nonfinancial businesses in Canada, loans from banks and other financial intermediaries account for ________ of the total.

Accepted Answer

A) 6 percent 
B) 40 percent 
C) 56 percent 
D) over 70 percent 
A) 6 percent 
B) 40 percent 
C) 56 percent 
D) over 70 percent

Question 11

Which of the following is not one of the eight basic puzzles about financial structure?

Accepted Answer

A) Debt contracts are typically extremely complicated legal documents that place substantial restrictions on the behavior of the borrower. 
B) Indirect finance, which involves the activities of financial intermediaries, is many times more important than direct finance, in which businesses raise funds directly from lenders in financial markets. 
C) Collateral is a prevalent feature of debt contracts for both households and business. 
D) There is very little regulation of the financial system. 
A) Debt contracts are typically extremely complicated legal documents that place substantial restrictions on the behavior of the borrower. 
B) Indirect finance, which involves the activities of financial intermediaries, is many times more important than direct finance, in which businesses raise funds directly from lenders in financial markets. 
C) Collateral is a prevalent feature of debt contracts for both households and business. 
D) There is very little regulation of the financial system.

Question 12

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 13

Debt contracts ________.

Accepted Answer

A) are agreements by the borrowers to pay the lenders fixed dollar amounts at periodic intervals 
B) have a higher cost of state verification than equity contracts 
C) are used less frequently to raise capital than are equity contracts 
D) never result in a loss for the lender 
A) are agreements by the borrowers to pay the lenders fixed dollar amounts at periodic intervals 
B) have a higher cost of state verification than equity contracts 
C) are used less frequently to raise capital than are equity contracts 
D) never result in a loss for the lender

Question 14

How does a mutual fund lower transactions costs through economies of scale?

Accepted Answer

The mutual fund takes the funds of the i

Question 15

The two ways financial intermediaries can reduce transactions costs are ________ and ________.

Accepted Answer

A) economies of scale; expertise 
B) moral hazard; adverse selection 
C) direct finance; indirect finance 
D) stocks; bonds 
A) economies of scale; expertise 
B) moral hazard; adverse selection 
C) direct finance; indirect finance 
D) stocks; bonds

Question 16

If you default on your auto loan, your car will be repossessed because it has been pledged as ________ for the loan.

Accepted Answer

A) interest 
B) collateral 
C) dividend 
D) commodity 
A) interest 
B) collateral 
C) dividend 
D) commodity

Question 17

The concept of adverse selection helps to explain ________.

Accepted Answer

A) why collateral is not a common feature of many debt contracts 
B) why large, well-established corporations find it so difficult to borrow funds in securities markets 
C) why financial markets are among the most heavily regulated sectors of the economy 
D) why stocks are the most important source of external financing for businesses 
A) why collateral is not a common feature of many debt contracts 
B) why large, well-established corporations find it so difficult to borrow funds in securities markets 
C) why financial markets are among the most heavily regulated sectors of the economy 
D) why stocks are the most important source of external financing for businesses

Question 18

Because information is scarce ________.

Accepted Answer

A) helps explain why equity contracts are used so much more frequently to raise capital than are debt contracts 
B) monitoring managers gives rise to costly state verification 
C) government regulations, such as standard accounting principles, have no impact on problems such as moral hazard 
D) developing nations do not rely heavily on banks for business financing 
A) helps explain why equity contracts are used so much more frequently to raise capital than are debt contracts 
B) monitoring managers gives rise to costly state verification 
C) government regulations, such as standard accounting principles, have no impact on problems such as moral hazard 
D) developing nations do not rely heavily on banks for business financing

Question 19

A debt contract is incentive compatible ________.

Accepted Answer

A) if the borrower has the incentive to behave in the way that the lender expects and desires, since doing otherwise jeopardizes the borrower's net worth in the business 
B) if the borrower's net worth is sufficiently low so that the lender's risk of moral hazard is significantly reduced 
C) if the debt contract is treated like an equity 
D) if the lender has the incentive to behave in the way that the borrower expects and desires 
A) if the borrower has the incentive to behave in the way that the lender expects and desires, since doing otherwise jeopardizes the borrower's net worth in the business 
B) if the borrower's net worth is sufficiently low so that the lender's risk of moral hazard is significantly reduced 
C) if the debt contract is treated like an equity 
D) if the lender has the incentive to behave in the way that the borrower expects and desires

Question 20

How does collateral help to reduce the adverse selection problem in credit market?

Accepted Answer

Collateral is property that is promised

Exam 8: An Economic Analysis of Financial Structure

If bad credit risks are the ones who most actively seek loans then financial intermediaries face the problem of ________.

One purpose of regulation of financial markets is to ________.

As information technology improves, the lending role of financial institutions such as banks should ________.

Why does the free-rider problem occur in the debt market?

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

Commercial and farm mortgages, in which property is pledged as collateral, account for ________.

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

Adverse selection is a problem associated with equity and debt contracts arising from ________.

The predominant form of household debt is ________.

Of the sources of external funds for nonfinancial businesses in Canada, loans from banks and other financial intermediaries account for ________ of the total.

Which of the following is not one of the eight basic puzzles about financial structure?

Government regulations designed to reduce the moral hazard problem include ________.

Debt contracts ________.

How does a mutual fund lower transactions costs through economies of scale?

The two ways financial intermediaries can reduce transactions costs are ________ and ________.

If you default on your auto loan, your car will be repossessed because it has been pledged as ________ for the loan.

The concept of adverse selection helps to explain ________.

Because information is scarce ________.

A debt contract is incentive compatible ________.

How does collateral help to reduce the adverse selection problem in credit market?

Why Study Money, Banking, and Financial Markets

An Overview of the Financial System

What Is Money

Understanding Interest Rates

The Behaviour of Interest Rates

The Risk and Term Structure of Interest Rates

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

Financial Crises

Economic Analysis of Financial Regulation

Banking Industry: Structure and Competition

Banking and the Management of Financial Institutions

Risk Management With Financial Derivatives

Central Banks and the Bank of Canada

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

Financial Crises in Emerging Markets

The ISLM Model

Non-Bank Finance

Filters

The two ways financial intermediaries can reduce transactions costs are and .