Question 1

Adverse selection:

Accepted Answer

A) Increases the efficiency of most markets 
B) Usually causes prices to adjust faster than they otherwise would 
C) Makes it easier for all customers to find what they want 
D) Results in fewer market transactions 
A) Increases the efficiency of most markets 
B) Usually causes prices to adjust faster than they otherwise would 
C) Makes it easier for all customers to find what they want 
D) Results in fewer market transactions D

Question 2

Is the lender/borrower (owner) conflict, an example of adverse selection or moral hazard? Explain.

Accepted Answer

This is an example of moral hazard.The owner (borrower) is encouraged to take more risk since if the greater risk results in a higher return, the lender obtains just what the loan agreement specifies, usually a return of principal and interest.The owner (borrower) keeps anything above that, so the gains from taking the greater risk all belong to the borrower.

Question 3

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 A

Question 4

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 5

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

Accepted Answer

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

Question 6

Economies of scale associated with financial intermediaries means:

Accepted Answer

A) The total cost of handling transactions falls as more transactions 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 size of the transaction 
A) The total cost of handling transactions falls as more transactions 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 size of the transaction

Question 7

What are the five functions performed by financial intermediaries?

Accepted Answer

(1) Pooling the resources of small saver

Question 8

Private mortgage insurance is usually required in situations where:

Accepted Answer

A) The lender feels the buyers have overpaid for the house 
B) The buyers have no down payment 
C) The buyers have a down payment less than 20 percent of the purchase price 
D) In the lenders' view the buyers do not have adequate monthly income to handle the mortgage payment 
A) The lender feels the buyers have overpaid for the house 
B) The buyers have no down payment 
C) The buyers have a down payment less than 20 percent of the purchase price 
D) In the lenders' view the buyers do not have adequate monthly income to handle the mortgage payment

Question 9

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

Accepted Answer

A) Then the borrower does not need the funds 
B) It tells the lender the firm has good employees 
C) It is one way to treat the problem of moral hazard 
D) Banking laws require firms have significant net worth before a bank can make a loan 
A) Then the borrower does not need the funds 
B) It tells the lender the firm has good employees 
C) It is one way to treat the problem of moral hazard 
D) Banking laws require firms have significant net worth before a bank can make a loan

Question 10

Financial intermediaries, through their ability to lower transaction costs:

Accepted Answer

A) Allow for people to be more self-sufficient 
B) Increase the amount of trading that occurs in an economy 
C) Take people away from their comparative advantage 
D) Reduce the number of financial transactions that occur 
A) Allow for people to be more self-sufficient 
B) Increase the amount of trading that occurs in an economy 
C) Take people away from their comparative advantage 
D) Reduce the number of financial transactions that occur

Question 11

In a financial market where information is symmetric:

Accepted Answer

A) All information would be known by both parties in a transaction 
B) One party to a transaction knows information the other party does not 
C) The ability to obtain information is available to only one party 
D) There would be no adverse selection 
A) All information would be known by both parties in a transaction 
B) One party to a transaction knows information the other party does not 
C) The ability to obtain information is available to only one party 
D) There would be no adverse selection

Question 12

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 13

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?

Accepted Answer

Your reluctance should come from the pro

Question 14

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 15

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 16

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

Accepted Answer

Financial intermediaries are important d

Question 17

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 18

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 19

Lines of credit provided by financial intermediaries:

Accepted Answer

A) Decrease liquidity for customers but increase income for the intermediary 
B) Are pre-approved loans that can increase liquidity and lowering transaction costs 
C) Are costly for intermediaries to provide so are only available to large commercial customers 
D) Require deposits in the intermediary that equal or exceed the amount of the line of credit 
A) Decrease liquidity for customers but increase income for the intermediary 
B) Are pre-approved loans that can increase liquidity and lowering transaction costs 
C) Are costly for intermediaries to provide so are only available to large commercial customers 
D) Require deposits in the intermediary that equal or exceed the amount of the line of credit

Question 20

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

Exam 11: The Economics of Financial Intermediation

Adverse selection:

Is the lender/borrower (owner) conflict, an example of adverse selection or moral hazard? Explain.

The usual situation in banking regarding asymmetric information is:

Two problems that arise from asymmetric information are:

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

Economies of scale associated with financial intermediaries means:

What are the five functions performed by financial intermediaries?

Private mortgage insurance is usually required in situations where:

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

Financial intermediaries, through their ability to lower transaction costs:

In a financial market where information is symmetric:

The interest rates charged on most credit cards is:

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

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

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

Which of the following statements is 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?

Lines of credit provided by financial intermediaries:

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

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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