Question 1

Explain how mutual funds offer small investors a low-cost way to achieve diversification.

Accepted Answer

Mutual fund companies offer small invest

Question 2

The reduction in transaction costs provided by financial intermediaries benefit:

Accepted Answer

A) small borrowers and small savers. 
B) large borrowers but not small savers. 
C) society in the net, but small savers bear much of the cost. 
D) small borrowers but not small savers. 
A) small borrowers and small savers. 
B) large borrowers but not small savers. 
C) society in the net, but small savers bear much of the cost. 
D) small borrowers but not small savers.

Question 3

A bank can usually offer a saver a higher return for the same risk for all of the following reasons except:

Accepted Answer

A) the bank can usually purchase assets at a lower cost than any one saver. 
B) the bank can pool the resources of small savers and purchase higher valued assets. 
C) economies of scale can also be applied by the bank in its purchase of assets. 
D) savers do not have good enough information to know if the return is sufficient. 
A) the bank can usually purchase assets at a lower cost than any one saver. 
B) the bank can pool the resources of small savers and purchase higher valued assets. 
C) economies of scale can also be applied by the bank in its purchase of assets. 
D) savers do not have good enough information to know if the return is sufficient.

Question 4

Deflation compounds information problems because it:

Accepted Answer

A) increases a company's net worth. 
B) tends to understate a company's assets and overstate their liabilities. 
C) reduces the dollar value of assets while the dollar value of liabilities stays constant. 
D) always harms lenders. 
A) increases a company's net worth. 
B) tends to understate a company's assets and overstate their liabilities. 
C) reduces the dollar value of assets while the dollar value of liabilities stays constant. 
D) always harms lenders.

Question 5

The usual situation in banking regarding asymmetric information is:

Accepted Answer

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

Question 6

You have a friend that has run up a pretty large balance on his credit card.He mentions to you that he has missed a few payments but doesn't think it is that big of a deal since all it cost him is a little more interest on his balance.You tell him it may end up costing him a lot more that.He presses you for an explanation.Explain to him how his handling of this debt can impact what he pays for future debt.

Accepted Answer

Lenders often screen loan applicants.One

Question 7

Life insurance companies usually offer a lower premium to non-smokers than the premium charged to smokers.Discuss first the potential for adverse selection and moral hazard and then ways the company can seek to reduce or eliminate these problems.

Accepted Answer

If the company cannot distinguish applic

Question 8

One lesson that Akerlof's Lemons model provides is:

Accepted Answer

A) that for high quality providers to survive they must provide a way that customers can distinguish high quality from low quality. 
B) low quality will not survive in a market. 
C) people always prefer high quality to low quality goods. 
D) moral hazard is unavoidable. 
A) that for high quality providers to survive they must provide a way that customers can distinguish high quality from low quality. 
B) low quality will not survive in a market. 
C) people always prefer high quality to low quality goods. 
D) moral hazard is unavoidable.

Question 9

Credit may dry up at the start of an economic downturn because of all of the following except:

Accepted Answer

A) lenders require information and accurate information is more difficult to obtain. 
B) it becomes more difficult for lenders to determine the creditworthiness of borrowers. 
C) lenders see greater risk in making loans to borrowers. 
D) the free-rider problem worsens during a downturn. 
A) lenders require information and accurate information is more difficult to obtain. 
B) it becomes more difficult for lenders to determine the creditworthiness of borrowers. 
C) lenders see greater risk in making loans to borrowers. 
D) the free-rider problem worsens during a downturn.

Question 10

If financial intermediaries did not have the ability to pool the resources of small savers:

Accepted Answer

A) borrowers needing large amounts of money would find it more costly to obtain the funds. 
B) the economy would grow faster. 
C) people would likely save more. 
D) the risk associated with lending would decrease. 
A) borrowers needing large amounts of money would find it more costly to obtain the funds. 
B) the economy would grow faster. 
C) people would likely save more. 
D) the risk associated with lending would decrease.

Question 11

A firm that has a well-earned reputation for providing high quality:

Accepted Answer

A) has found a way to address the free-rider problem. 
B) has found a way to address the moral hazard problem. 
C) has found a way to address the problem of adverse selection. 
D) will not survive in a market if low quality is provided at a lower price. 
A) has found a way to address the free-rider problem. 
B) has found a way to address the moral hazard problem. 
C) has found a way to address the problem of adverse selection. 
D) will not survive in a market if low quality is provided at a lower price.

Question 12

Requiring a home buyer to have a large down payment reduces the risk to a mortgage lender because:

Accepted Answer

A) it means that if the price of the house falls, the owner suffers the loss. 
B) the buyer is less likely to sell the house. 
C) it means the buyer likely underpaid when she bought the house. 
D) it means there is more information available on the buyer. 
A) it means that if the price of the house falls, the owner suffers the loss. 
B) the buyer is less likely to sell the house. 
C) it means the buyer likely underpaid when she bought the house. 
D) it means there is more information available on the buyer.

Question 13

Asymmetric information poses two important obstacles to the smooth flow of funds from savers to investors.They are:

Accepted Answer

A) adverse selection, which arises before the transaction occurs, and moral hazard, which occurs after the transaction. 
B) moral hazard, which arises before the transaction occurs, and adverse selection, which occurs after the transaction. 
C) adverse selection and moral hazard, both of which occur after the transaction. 
D) adverse selection and moral hazard, both of which occur before the transaction. 
A) adverse selection, which arises before the transaction occurs, and moral hazard, which occurs after the transaction. 
B) moral hazard, which arises before the transaction occurs, and adverse selection, which occurs after the transaction. 
C) adverse selection and moral hazard, both of which occur after the transaction. 
D) adverse selection and moral hazard, both of which occur before the transaction.

Question 14

Providing stock options to corporate managers was an idea designed to:

Accepted Answer

A) hide increases in pay of corporate executives from stockholders. 
B) align managers' interest with the stockholders' interest. 
C) treat adverse selection. 
D) treat the free-rider problem. 
A) hide increases in pay of corporate executives from stockholders. 
B) align managers' interest with the stockholders' interest. 
C) treat adverse selection. 
D) treat the free-rider problem.

Question 15

A lender usually knows less about the creditworthiness of a borrower than the borrower does.This is an example of:

Accepted Answer

A) opportunistic behavior. 
B) economies of scale. 
C) diminishing marginal returns. 
D) information asymmetry. 
A) opportunistic behavior. 
B) economies of scale. 
C) diminishing marginal returns. 
D) information asymmetry.

Question 16

If diversification is such a good idea for a saver, why do so many people put a lot of their savings in the same bank?

Accepted Answer

The answer lies in the fact that the ban

Question 17

Please explain how Federal Deposit Insurance (FDIC) could potentially create a moral hazard for the managers of deposit institutions.

Accepted Answer

FDIC insurance pays off depositors (up t

Explain how mutual funds offer small investors a low-cost way to achieve diversification.

The reduction in transaction costs provided by financial intermediaries benefit:

A bank can usually offer a saver a higher return for the same risk for all of the following reasons except:

Deflation compounds information problems because it:

The usual situation in banking regarding asymmetric information is:

Life insurance companies usually offer a lower premium to non-smokers than the premium charged to smokers.Discuss first the potential for adverse selection and moral hazard and then ways the company can seek to reduce or eliminate these problems.

One lesson that Akerlof's Lemons model provides is:

Credit may dry up at the start of an economic downturn because of all of the following except:

If financial intermediaries did not have the ability to pool the resources of small savers:

A firm that has a well-earned reputation for providing high quality:

Requiring a home buyer to have a large down payment reduces the risk to a mortgage lender because:

Asymmetric information poses two important obstacles to the smooth flow of funds from savers to investors.They are:

Providing stock options to corporate managers was an idea designed to:

A lender usually knows less about the creditworthiness of a borrower than the borrower does.This is an example of:

If diversification is such a good idea for a saver, why do so many people put a lot of their savings in the same bank?

Please explain how Federal Deposit Insurance (FDIC) could potentially create a moral hazard for the managers of deposit institutions.

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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Exam 11: The Economics of Financial Intermediation

Explain how mutual funds offer small investors a low-cost way to achieve diversification.

The reduction in transaction costs provided by financial intermediaries benefit:

A bank can usually offer a saver a higher return for the same risk for all of the following reasons except:

Deflation compounds information problems because it:

The usual situation in banking regarding asymmetric information is:

Life insurance companies usually offer a lower premium to non-smokers than the premium charged to smokers.Discuss first the potential for adverse selection and moral hazard and then ways the company can seek to reduce or eliminate these problems.

One lesson that Akerlof's Lemons model provides is:

Credit may dry up at the start of an economic downturn because of all of the following except:

If financial intermediaries did not have the ability to pool the resources of small savers:

A firm that has a well-earned reputation for providing high quality:

Requiring a home buyer to have a large down payment reduces the risk to a mortgage lender because:

Asymmetric information poses two important obstacles to the smooth flow of funds from savers to investors.They are:

Providing stock options to corporate managers was an idea designed to:

A lender usually knows less about the creditworthiness of a borrower than the borrower does.This is an example of:

If diversification is such a good idea for a saver, why do so many people put a lot of their savings in the same bank?

Please explain how Federal Deposit Insurance (FDIC) could potentially create a moral hazard for the managers of deposit institutions.

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