Question 1

A bank advertises a very competitive loan interest rate.Explain what measures the bank can take to address adverse selection.

Accepted Answer

The advertisement will attract both high

Question 2

Examples of economies of scale are:

Accepted Answer

A) the additional fees financial intermediaries charge on small accounts. 
B) the decrease in overall transaction costs that occur as volume increases. 
C) the reduction in the cost per transaction that occurs as the number of transactions increase. 
D) the decrease in overall information costs that occurs as more transactions are handled. 
A) the additional fees financial intermediaries charge on small accounts. 
B) the decrease in overall transaction costs that occur as volume increases. 
C) the reduction in the cost per transaction that occurs as the number of transactions increase. 
D) the decrease in overall information costs that occurs as more transactions are handled.

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

Why is it that financial intermediaries are so important in most economies?

Accepted Answer

Financial intermediaries provide a varie

Question 5

Moral hazard problems arise because:

Accepted Answer

A) lenders cannot distinguish good from bad risks. 
B) borrowers have incentives to act in ways that do not reflect the lender's interest. 
C) firms hire incompetent employees. 
D) lenders charge interest rates that are too low. 
A) lenders cannot distinguish good from bad risks. 
B) borrowers have incentives to act in ways that do not reflect the lender's interest. 
C) firms hire incompetent employees. 
D) lenders charge interest rates that are too low.

Question 6

Which of the following statements is true?

Accepted Answer

A) Unsecured loans generally involve very high interest rates as a result of the free-rider problem. 
B) Unsecured loans generally involve very high interest rates as a result of adverse selection. 
C) Unsecured loans are no longer made; all loans now must have some form of collateral. 
D) Unsecured loans are only made to individuals with very high net worth because it is the only way to limit the risk. 
A) Unsecured loans generally involve very high interest rates as a result of the free-rider problem. 
B) Unsecured loans generally involve very high interest rates as a result of adverse selection. 
C) Unsecured loans are no longer made; all loans now must have some form of collateral. 
D) Unsecured loans are only made to individuals with very high net worth because it is the only way to limit the risk.

Question 7

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 8

Mutual funds offer investors:

Accepted Answer

A) a greater return for greater risk than what an investor can earn on his own. 
B) a lower return for more risk than what the investor could earn on his own. 
C) a lower return for less risk than what the investor could earn on his own. 
D) a way for individuals to eliminate the idiosyncratic risk associated with any single investment. 
A) a greater return for greater risk than what an investor can earn on his own. 
B) a lower return for more risk than what the investor could earn on his own. 
C) a lower return for less risk than what the investor could earn on his own. 
D) a way for individuals to eliminate the idiosyncratic risk associated with any single investment.

Question 9

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 10

The price for private information is likely higher than it should be due to the problem of:

Accepted Answer

A) adverse selection. 
B) free-riders. 
C) the government regulations regarding information. 
D) moral hazard. 
A) adverse selection. 
B) free-riders. 
C) the government regulations regarding information. 
D) moral hazard.

Question 11

Two problems that arise from asymmetric information are:

Accepted Answer

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

Question 12

Financial intermediaries reduce the problems in lending associated with information asymmetries by all of the following except:

Accepted Answer

A) collecting and processing standardized information. 
B) screening applicants to be sure they are creditworthy. 
C) monitoring loan recipients to be sure the funds are used properly. 
D) charging interest rates high enough to discourage undesirable borrowers. 
A) collecting and processing standardized information. 
B) screening applicants to be sure they are creditworthy. 
C) monitoring loan recipients to be sure the funds are used properly. 
D) charging interest rates high enough to discourage undesirable borrowers.

Question 13

Which of the following could the lemons problem, applied to financial markets, explain?

Accepted Answer

A) Lenders seeing a disproportionate share of high quality loan applicants 
B) An average interest rate that is too high for the actual risk obtained 
C) Profits for many lenders increasing significantly 
D) High quality potential borrowers relying more on internally generated funds to finance investment 
A) Lenders seeing a disproportionate share of high quality loan applicants 
B) An average interest rate that is too high for the actual risk obtained 
C) Profits for many lenders increasing significantly 
D) High quality potential borrowers relying more on internally generated funds to finance investment

Question 14

In the bond market, the assigning of a risk premium is a tool designed to address the problem of:

Accepted Answer

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

Question 15

Which of the following statements is true?

Accepted Answer

A) Adverse selection is a problem that occurs after a transaction. 
B) Moral hazard is a problem that occurs before a transaction. 
C) Adverse selection is a problem stemming from asymmetric information. 
D) Both adverse selection and moral hazard occur before a transaction. 
A) Adverse selection is a problem that occurs after a transaction. 
B) Moral hazard is a problem that occurs before a transaction. 
C) Adverse selection is a problem stemming from asymmetric information. 
D) Both adverse selection and moral hazard occur before a transaction.

Question 16

If a bank has 1,000 depositors, each of whom deposits $1,000 in the bank, and the bank makes loans of $10,000 each, then each depositor has contributed:

Accepted Answer

A) $100 to each loan. 
B) $1 to each loan. 
C) $10 to each loan. 
D) $1000 to each loan. 
A) $100 to each loan. 
B) $1 to each loan. 
C) $10 to each loan. 
D) $1000 to each loan.

Question 17

Explain how the threat of a leveraged buyout or a takeover can actually address the problem of moral hazard.

Accepted Answer

The potential for moral hazard exists in

Question 18

Most individuals save at banks rather than lend directly because:

Accepted Answer

A) the bank creates information asymmetry. 
B) moral hazard exists only when individuals make loans directly to borrowers, it does not occur when banks issue loans. 
C) banks can reduce the cost of information asymmetry. 
D) information asymmetry is a problem for individuals but not for banks. 
A) the bank creates information asymmetry. 
B) moral hazard exists only when individuals make loans directly to borrowers, it does not occur when banks issue loans. 
C) banks can reduce the cost of information asymmetry. 
D) information asymmetry is a problem for individuals but not for banks.

Question 19

Explain why deflation can be so troubling to borrowers and lenders.

Accepted Answer

Deflation is troubling because it aggrav

Question 20

Requiring a large net worth on the part of an applicant is one way lenders treat the problem of:

Accepted Answer

A) free-riders. 
B) adverse selection. 
C) moral hazard. 
D) the Lemons market. 
A) free-riders. 
B) adverse selection. 
C) moral hazard. 
D) the Lemons market.

Exam 11: The Economics of Financial Intermediation

A bank advertises a very competitive loan interest rate.Explain what measures the bank can take to address adverse selection.

Examples of economies of scale are:

Financial intermediation is:

Why is it that financial intermediaries are so important in most economies?

Moral hazard problems arise because:

Which of the following statements is true?

Which of the following statements is true?

Mutual funds offer investors:

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

The price for private information is likely higher than it should be due to the problem of:

Two problems that arise from asymmetric information are:

Financial intermediaries reduce the problems in lending associated with information asymmetries by all of the following except:

Which of the following could the lemons problem, applied to financial markets, explain?

In the bond market, the assigning of a risk premium is a tool designed to address the problem of:

Which of the following statements is true?

If a bank has 1,000 depositors, each of whom deposits $1,000 in the bank, and the bank makes loans of $10,000 each, then each depositor has contributed:

Explain how the threat of a leveraged buyout or a takeover can actually address the problem of moral hazard.

Most individuals save at banks rather than lend directly because:

Explain why deflation can be so troubling to borrowers and lenders.

Requiring a large net worth on the part of an applicant is one way lenders treat the problem of:

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

Filters