Exam 11: The Economics of Financial Intermediation

Used car dealers that provide warranties on the cars they sell are addressing the:

Most credit cards charge a relatively high rate of interest, yet many people carry them, including people who would be considered low-risk borrowers.Our discussion of adverse selection said that low-risk borrowers should have been discouraged from these.What gives?

Explain what is likely to happen to the rate of mortgage loan default given the following: "For years home values across the country have increased on average 3 to 4% percent each year.Mortgage lenders have come to expect this to always be the case and so begin to offer mortgages with little to nothing down and not requiring PMI insurance.An economic slowdown occurs hitting a few areas of the country harder than others.Home values across the country begin to decrease with some areas seeing decreases of as much as 10%."

A bank usually treats the moral hazard problem by using all of the following, except:

The First Bank of Podunk has recently suffered some extraordinary losses on its loan portfolio due to the closing of the largest employer in town.As a result, the bank's management decides to raise the interest rate to new loan applicants.This move is likely to:

Prosper.com is a San Francisco-based web site that facilitates peer-to-peer micro lending.If you were going to consider making a loan through Prosper, would you be more concerned about adverse selection or moral hazard, and why?

The function of providing liquidity by financial intermediaries:

Large companies seeking to raise funds often will use a well-known investment bank because:

Which of the following is a problem of moral hazard?

Which of the following is a problem of adverse selection?

Which of the following is not true of adverse selection?

Mom's Pizzeria goes out of business due to a dramatic decrease in sales from a local newspaper article highlighting the fact that Mom's Pizzeria has been purchasing expired meat from a distributor at cut rate prices for years.The decrease in business also results in Mom's defaulting on the loan they have with the bank.This is an example of:

A bank has 10,000 depositors, each of whom deposits $100 in the bank.If the bank makes 1000 loans for $1,000 each then each depositor has contributed:

Often times we see companies offering money back guarantees to customers if they are not satisfied.These guarantees are a way to treat the problem of:

Provide an example of how a bank achieves lower cost in making a large loan to a company than could be achieved without the bank.

Financial intermediaries, through their ability to lower transaction costs:

The fact that many companies employ supervisors to oversee the actions of workers is a way to treat:

Financial intermediation exists, in part, because:

An unsecured loan is:

In a financial market where information is symmetric: