Exam 11: The Economics of Financial Intermediation

The fact that financial intermediaries employ experts to carry out particular activities and so lower transactions costs is usually associated with the following economic concept:

One reason lenders may require a large net worth before making a loan is because:

What is the difference between economies of scale and economies of scope? Provide an example of each that pertains to financial institutions.

The reason financial intermediaries play such an important role in economies has to do with all of the following except:

Financial intermediaries:

One reason that financial intermediaries exist is that they:

It is not uncommon to read about highly successful mutual fund managers that spend considerable amounts of time visiting the companies that they have placed their clients' funds with.What might be the motive(s) behind these visits?

Respond to the following: "If it takes a significant period of time to uncover accounting manipulations by individuals in a major corporation, honesty may be the best policy but dishonesty can be a lot more profitable!"

A friend of yours tells you she has an idea for a new product.She believes that once the prototype is built she can sell the rights to the product for $250,000.The problem is she needs $20,000 to build the prototype and she only has $5,000.She asks you to invest $15,000 in the idea and she will give you 75% of whatever amount she obtains when she sells the rights.You have the money available but should be reluctant to provide the money.Why?

Financial intermediaries pool the resources of many small savers so that they can:

Which of the following is not a role of a financial institution acting as a financial intermediary?

A borrower who obtains funds from a lender to purchase additional inventory but uses the funds to finance a trip to Las Vegas for a weekend of gambling at the opening of a new casino is an example of:

Each of the following is an example of a restrictive covenant on a mortgage loan, except:

One reason the government requires public corporations to disclose so much information is to:

Discuss the role that companies like Standard & Poor's, Dun & Bradstreet, and Moody's play in solving the problem of adverse selection.

A lender who wants to avoid the problem of adverse selection could:

The moral hazard that can result from debt financing is mainly due to the:

The principal-agent problem is:

Mary Jones is the president of a local bank.She knows that half of the loan applicants in town she would classify as high risk and the other half as low risk.She observes that the other banks in town charge two different interest rates, a lower rate for low risk borrowers and the higher rate for high risk borrowers.She decides that to have an advantage over the other banks she will offer an average rate to everyone.The likely result will be:

Lines of credit provided by financial intermediaries: