Question 1

If information in a financial market is symmetric, this means:

Accepted Answer

A) borrowers and lenders have perfect information. 
B) borrowers would have more information than lenders. 
C) borrowers and lenders have the same information. 
D) lenders have more information than borrowers. 
A) borrowers and lenders have perfect information. 
B) borrowers would have more information than lenders. 
C) borrowers and lenders have the same information. 
D) lenders have more information than borrowers. C

Question 2

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. C

Question 3

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 originators-eased standards and reduced screening to increase the volume of lending and the short-term profitability of their businesses.The result was many risky mortgages: When housing prices began to fall in 2006, defaults soared.
2.The firms that assembled these mortgages into securities for sale-the distributors-did little to forestall the decline of lending standards by originators.
3.Rating agencies might have halted the game early.Instead, they awarded their top ratings to a large share of mortgage-backed securities, severely underestimating the riskiness of the loans.In retrospect, we can now see that the agencies had little incentive to expend the resources necessary to adequately screen the underlying loans or the lenders.
4.Finally, many investors (and government officials responsible for overseeing intermediaries) assumed they could rely on other people-they were free riders.Rather than undertake their own costly screening efforts, they assumed the assessment of the rating agencies was accurate.

Question 4

Since one function of financial intermediaries is to provide liquidity:

Accepted Answer

A) they must keep all of their funds in short-term securities. 
B) they keep almost all of their funds in cash. 
C) they must know approximately how much liquidity their customers will need each day and have these funds available. 
D) regulations require financial intermediaries to keep 50% of their assets in cash. 
A) they must keep all of their funds in short-term securities. 
B) they keep almost all of their funds in cash. 
C) they must know approximately how much liquidity their customers will need each day and have these funds available. 
D) regulations require financial intermediaries to keep 50% of their assets in cash.

Question 5

Adverse selection:

Accepted Answer

A) increases the efficiency of most markets. 
B) usually causes prices to adjust faster than they otherwise would. 
C) makes it easier for all customers to find what they want. 
D) results in fewer market transactions. 
A) increases the efficiency of most markets. 
B) usually causes prices to adjust faster than they otherwise would. 
C) makes it easier for all customers to find what they want. 
D) results in fewer market transactions.

Question 6

When the amount of direct and indirect financing are summed, the result is usually:

Accepted Answer

A) greater than 100% of GDP. 
B) equal to GDP. 
C) less than GDP. 
D) approximately 50% of GDP. 
A) greater than 100% of GDP. 
B) equal to GDP. 
C) less than GDP. 
D) approximately 50% of GDP.

Question 7

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

Accepted Answer

Financial intermediaries can lower the c

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

The publication, Consumer's Reports, is one tool designed to address:

Accepted Answer

A) adverse selection. 
B) moral hazard. 
C) the free-rider problem. 
D) symmetric information. 
A) adverse selection. 
B) moral hazard. 
C) the free-rider problem. 
D) symmetric information.

Question 10

What are the five functions performed by financial intermediaries?

Accepted Answer

(1) Pooling the resources of small saver

Question 11

Private mortgage insurance is usually required in situations where:

Accepted Answer

A) the lender feels the buyers have overpaid for the house. 
B) the buyers have no down payment. 
C) the buyers have a down payment less than 20 percent of the purchase price. 
D) in the lenders' view the buyers do not have adequate monthly income to handle the mortgage payment. 
A) the lender feels the buyers have overpaid for the house. 
B) the buyers have no down payment. 
C) the buyers have a down payment less than 20 percent of the purchase price. 
D) in the lenders' view the buyers do not have adequate monthly income to handle the mortgage payment.

Question 12

Private Mortgage Insurance (PMI) is often required by mortgage lenders when the borrowers have less than a 20% down payment.Link the requirement of PMI to the concepts of net worth, moral hazard, and transfer of risk.

Accepted Answer

As we saw in the chapter, requiring the

Question 13

A home mortgage is a good example of:

Accepted Answer

A) an unsecured loan. 
B) a secured loan. 
C) a high risk loan. 
D) the problem of adverse selection. 
A) an unsecured loan. 
B) a secured loan. 
C) a high risk loan. 
D) the problem of adverse selection.

Question 14

Often a bank will require a loan officer to make personal visits on customers with loans outstanding.This is encouraged because:

Accepted Answer

A) the bank worries about another bank trying to steal their customers. 
B) the bank wants to make sure the business is busy. 
C) this is an effective monitoring technique and should reduce moral hazard. 
D) the bank has excess funds available and hopes to make another loan to the business. 
A) the bank worries about another bank trying to steal their customers. 
B) the bank wants to make sure the business is busy. 
C) this is an effective monitoring technique and should reduce moral hazard. 
D) the bank has excess funds available and hopes to make another loan to the business.

Question 15

Mutual funds are attractive because:

Accepted Answer

A) they provide high returns from purchasing the financial securities of a few select companies. 
B) they provide the investor with greater diversification at a lower cost than what most investors could obtain individually. 
C) they have inside information that is not available to other investors. 
D) they usually have inside information because they run most of the companies they invest in. 
A) they provide high returns from purchasing the financial securities of a few select companies. 
B) they provide the investor with greater diversification at a lower cost than what most investors could obtain individually. 
C) they have inside information that is not available to other investors. 
D) they usually have inside information because they run most of the companies they invest in.

Question 16

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 17

Moody's, Value Line, and Dun and Bradstreet are examples of companies that:

Accepted Answer

A) provide information free to investors but charge the companies for the ratings provided on the company. 
B) provide information free to investors but recoup expenses through advertising done by the companies being rated. 
C) charge investors who subscribe to the services for the information. 
D) duplicate information that is available to investors at no cost. 
A) provide information free to investors but charge the companies for the ratings provided on the company. 
B) provide information free to investors but recoup expenses through advertising done by the companies being rated. 
C) charge investors who subscribe to the services for the information. 
D) duplicate information that is available to investors at no cost.

Question 18

Recent history has shown that the government regulations requiring the disclosure of information from public corporations have:

Accepted Answer

A) all but eliminated the problems of asymmetric information. 
B) reduced but not eliminated the problems of asymmetric information. 
C) just about eliminated the market for information services. 
D) resulted in symmetric information. 
A) all but eliminated the problems of asymmetric information. 
B) reduced but not eliminated the problems of asymmetric information. 
C) just about eliminated the market for information services. 
D) resulted in symmetric information.

Question 19

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 20

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.

Exam 11: The Economics of Financial Intermediation

If information in a financial market is symmetric, this means:

The problem of adverse selection created the opportunity for:

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

Since one function of financial intermediaries is to provide liquidity:

Adverse selection:

When the amount of direct and indirect financing are summed, the result is usually:

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

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:

The publication, Consumer's Reports, is one tool designed to address:

What are the five functions performed by financial intermediaries?

Private mortgage insurance is usually required in situations where:

Private Mortgage Insurance (PMI) is often required by mortgage lenders when the borrowers have less than a 20% down payment.Link the requirement of PMI to the concepts of net worth, moral hazard, and transfer of risk.

A home mortgage is a good example of:

Often a bank will require a loan officer to make personal visits on customers with loans outstanding.This is encouraged because:

Mutual funds are attractive because:

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

Moody's, Value Line, and Dun and Bradstreet are examples of companies that:

Recent history has shown that the government regulations requiring the disclosure of information from public corporations have:

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

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