Question 1

Emerging market economies, compared to industrialized economies, have financial markets that:

Accepted Answer

A) differ in composition and size. 
B) differ in composition but not in size. 
C) are the same in composition but differ in size. 
D) are similar in composition and size. 
A) differ in composition and size. 
B) differ in composition but not in size. 
C) are the same in composition but differ in size. 
D) are similar in composition and size.

Question 2

Automated teller machines provided by financial intermediaries are an example of:

Accepted Answer

A) high transactions costs associated with financial intermediaries. 
B) diseconomies of scale. 
C) the ability of financial intermediaries to provide liquidity. 
D) the ability of financial intermediaries to earn profits by raising transaction costs above the norm. 
A) high transactions costs associated with financial intermediaries. 
B) diseconomies of scale. 
C) the ability of financial intermediaries to provide liquidity. 
D) the ability of financial intermediaries to earn profits by raising transaction costs above the norm.

Question 3

Financial markets do not function as well as they could due to:

Accepted Answer

A) the fact that banking is highly monopolized. 
B) the cost of obtaining information can be high. 
C) regulation by governments. 
D) fluctuations in the inflation rate. 
A) the fact that banking is highly monopolized. 
B) the cost of obtaining information can be high. 
C) regulation by governments. 
D) fluctuations in the inflation rate.

Question 4

Is the conflict between a lender to a firm and the borrower/owner an example of adverse selection or moral hazard? Explain.

Accepted Answer

This is an example of moral hazard.The o

Question 5

Explain the difference between a secured and an unsecured loan, and the interest rate you would expect to see charged on each (all other factors equal).

Accepted Answer

A secured loan is a loan that is backed

Question 6

The United States, the United Kingdom, Germany and Japan are all developed countries with highly developed and efficient financial markets.However, in all four countries the main source of business finance is internal funding.Why is this so?

Accepted Answer

The only possible explanation for this f

Question 7

The scandals involving Enron, World Com, Global Crossing and other large firms:

Accepted Answer

A) are examples of asymmetric information and have led, at least temporarily, to a less well functioning stock market. 
B) is what should have been expected on the part of investors, that is why there is a risk premium. 
C) have resulted in a cry for less government regulation of public corporations. 
D) demonstrate that the government should be responsible for collecting and distributing financial information on firms. 
A) are examples of asymmetric information and have led, at least temporarily, to a less well functioning stock market. 
B) is what should have been expected on the part of investors, that is why there is a risk premium. 
C) have resulted in a cry for less government regulation of public corporations. 
D) demonstrate that the government should be responsible for collecting and distributing financial information on firms.

Question 8

Financial intermediaries, through their ability to lower transaction costs:

Accepted Answer

A) reduce the opportunity cost of specialization. 
B) decrease the efficiency of an economy. 
C) allow for people to be more self-sufficient. 
D) make collecting and processing information unprofitable. 
A) reduce the opportunity cost of specialization. 
B) decrease the efficiency of an economy. 
C) allow for people to be more self-sufficient. 
D) make collecting and processing information unprofitable.

Question 9

The screening process a bank follows for a loan applicant:

Accepted Answer

A) uses information that anyone can obtain, the bank can usually obtain it cheaper. 
B) includes information that can be available to other firms, as well as proprietary information that only the bank would have. 
C) is based on just public information. 
D) uses only confidential information. 
A) uses information that anyone can obtain, the bank can usually obtain it cheaper. 
B) includes information that can be available to other firms, as well as proprietary information that only the bank would have. 
C) is based on just public information. 
D) uses only confidential information.

Question 10

Assume there are two companies.Both issue stock, but one is high quality and the other low quality.If potential investors cannot distinguish the quality of the company:

Accepted Answer

A) the shares of the low quality firm will disappear from the market. 
B) the shares of both companies will trade on the market. 
C) the shares of the high quality firm will disappear from the market. 
D) this is an example of moral hazard and the shares of both companies will cease to trade. 
A) the shares of the low quality firm will disappear from the market. 
B) the shares of both companies will trade on the market. 
C) the shares of the high quality firm will disappear from the market. 
D) this is an example of moral hazard and the shares of both companies will cease to trade.

Question 11

Which of the following statements is not true?

Accepted Answer

A) Home mortgage loans are secured loans. 
B) Credit card loans are secured. 
C) Most automobile loans are secured loans. 
D) Secured loans usually carry less risk than unsecured loans. 
A) Home mortgage loans are secured loans. 
B) Credit card loans are secured. 
C) Most automobile loans are secured loans. 
D) Secured loans usually carry less risk than unsecured loans.

Question 12

Tom borrows $100,000 from his local bank to purchase inventory for his store for the upcoming holiday season.Tom's neighbor tells him about a get-rich-quick scheme that can take this $100,000 and triple it in a month.Tom decides to buy into this scheme figuring he can repay the bank and still have plenty left for inventory.This is an example of:

Accepted Answer

A) adverse selection. 
B) sound risk analysis on Tom's part. 
C) diversification. 
D) moral hazard. 
A) adverse selection. 
B) sound risk analysis on Tom's part. 
C) diversification. 
D) moral hazard.

Question 13

A friend who is taking her first class in investments asks you why the regulatory bodies place so much emphasis on minimizing insider information if many of the potential problems associated with financial transactions stem from information asymmetry or a lack of information.How would you respond?

Accepted Answer

While it is True that more information i

Question 14

If a lender faces a potential loan applicant pool made up of equal amounts of low risks and high risks, will charging an average interest rate provide the average (expected) return? Explain.

Accepted Answer

No, the lender will suffer adverse selec

Question 15

If buyers cannot distinguish a good used car, worth $15,000, from a "lemon," worth $5000; explain what will happen to the market for used cars.

Accepted Answer

If buyers cannot distinguish good qualit

Question 16

The interest rates charged on most credit cards is:

Accepted Answer

A) high due to the problem of adverse selection. 
B) high because Visa and MasterCard have a virtual monopoly on this business. 
C) high due to diseconomies of scale that exist in this market. 
D) lower than they should be given the problem of adverse selection. 
A) high due to the problem of adverse selection. 
B) high because Visa and MasterCard have a virtual monopoly on this business. 
C) high due to diseconomies of scale that exist in this market. 
D) lower than they should be given the problem of adverse selection.

Question 17

The fact that a financial intermediary can hire a lawyer to write one contract that works for many customers is an example of:

Accepted Answer

A) economies of scale. 
B) the law of diminishing marginal returns. 
C) the law of increasing opportunity cost. 
D) the law of demand. 
A) economies of scale. 
B) the law of diminishing marginal returns. 
C) the law of increasing opportunity cost. 
D) the law of demand.

Question 18

Economies of scale associated with financial intermediaries means:

Accepted Answer

A) the total cost of handling transactions falls as more transactions of different kinds are handled. 
B) the cost per transaction falls as a larger volume of similar transactions are handled. 
C) the cost per transaction increases as more transactions are handled. 
D) the cost per transaction decreases regardless of the number of transactions. 
A) the total cost of handling transactions falls as more transactions of different kinds are handled. 
B) the cost per transaction falls as a larger volume of similar transactions are handled. 
C) the cost per transaction increases as more transactions are handled. 
D) the cost per transaction decreases regardless of the number of transactions.

Question 19

When a bank takes savings from many small savers and lends it to many borrowers, the bank:

Accepted Answer

A) decreases the risk to savers through diversification. 
B) increases the risk to borrowers through high transaction costs. 
C) decreases the risk to savers through economies of scale. 
D) decreases the return to savers and increases the cost to borrowers. 
A) decreases the risk to savers through diversification. 
B) increases the risk to borrowers through high transaction costs. 
C) decreases the risk to savers through economies of scale. 
D) decreases the return to savers and increases the cost to borrowers.

Question 20

The principal-agent problem is quite common in large public corporations due to:

Accepted Answer

A) the fact that large corporations generate large sales volumes. 
B) the fact that large companies employ many people. 
C) too little regulation by government. 
D) the fact that the people making the operational decisions are usually not the owners. 
A) the fact that large corporations generate large sales volumes. 
B) the fact that large companies employ many people. 
C) too little regulation by government. 
D) the fact that the people making the operational decisions are usually not the owners.

Exam 11: The Economics of Financial Intermediation

Emerging market economies, compared to industrialized economies, have financial markets that:

Automated teller machines provided by financial intermediaries are an example of:

Financial markets do not function as well as they could due to:

Is the conflict between a lender to a firm and the borrower/owner an example of adverse selection or moral hazard? Explain.

Explain the difference between a secured and an unsecured loan, and the interest rate you would expect to see charged on each (all other factors equal).

The United States, the United Kingdom, Germany and Japan are all developed countries with highly developed and efficient financial markets.However, in all four countries the main source of business finance is internal funding.Why is this so?

The scandals involving Enron, World Com, Global Crossing and other large firms:

Financial intermediaries, through their ability to lower transaction costs:

The screening process a bank follows for a loan applicant:

Assume there are two companies.Both issue stock, but one is high quality and the other low quality.If potential investors cannot distinguish the quality of the company:

Which of the following statements is not true?

A friend who is taking her first class in investments asks you why the regulatory bodies place so much emphasis on minimizing insider information if many of the potential problems associated with financial transactions stem from information asymmetry or a lack of information.How would you respond?

If a lender faces a potential loan applicant pool made up of equal amounts of low risks and high risks, will charging an average interest rate provide the average (expected) return? Explain.

If buyers cannot distinguish a good used car, worth $15,000, from a "lemon," worth $5000; explain what will happen to the market for used cars.

The interest rates charged on most credit cards is:

The fact that a financial intermediary can hire a lawyer to write one contract that works for many customers is an example of:

Economies of scale associated with financial intermediaries means:

When a bank takes savings from many small savers and lends it to many borrowers, the bank:

The principal-agent problem is quite common in large public corporations due to:

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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