Question 1

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 2

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

Accepted Answer

A) Moral hazard 
B) Adverse selection 
C) The law of diminishing returns 
D) The free-rider problem 
A) Moral hazard 
B) Adverse selection 
C) The law of diminishing returns 
D) The free-rider problem

Question 3

When the amount of direct and indirect financing are summed, the result is usually:

Accepted Answer

A) Greater than 100% of GDP 
B) Equal to GDP 
C) Less than GDP 
D) Approximately 50% of GDP 
A) Greater than 100% of GDP 
B) Equal to GDP 
C) Less than GDP 
D) Approximately 50% of GDP

Question 4

In the bond market, the assigning of a risk premium is a tool designed to address the problem of:

Accepted Answer

A) Adverse selection 
B) Information asymmetry 
C) The free-rider 
D) Moral hazard 
A) Adverse selection 
B) Information asymmetry 
C) The free-rider 
D) Moral hazard

Question 5

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 6

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

Accepted Answer

A) Lemons problem 
B) Monopoly problem 
C) Problem of people preferring foreign cars 
D) Adverse selection problem of buyers preferring new versus used cars 
A) Lemons problem 
B) Monopoly problem 
C) Problem of people preferring foreign cars 
D) Adverse selection problem of buyers preferring new versus used cars

Question 7

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 8

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 9

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

Accepted Answer

A) Information costs 
B) High transaction costs 
C) Complexity of a lot of financial transactions 
D) The composition of GDP 
A) Information costs 
B) High transaction costs 
C) Complexity of a lot of financial transactions 
D) The composition of GDP

Question 10

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:

Accepted Answer

A) The problem of adverse selection 
B) The free-rider 
C) The moral hazard problem 
D) Lax government regulation 
A) The problem of adverse selection 
B) The free-rider 
C) The moral hazard problem 
D) Lax government regulation

Question 11

If buyers cannot distinguish quality, and on average, people value a good used car at $15,000 and a "lemon" at $5,000, explain why an average price of $10,000 for used cars will not bring the average of quality used cars to the market.

Accepted Answer

If buyers cannot distinguish good qualit

Question 12

Which of the following is a problem of moral hazard?

Accepted Answer

A) A lender cannot distinguish good risk from bad risk borrowers 
B) An individual who purchases auto insurance begins to leave his or her keys in the car while running into a store 
C) Life insurance companies offer an average premium to smokers and non-smokers so they do not have to have two different premiums 
D) An auto insurance company charges higher premiums to younger drivers than what they charge to older drivers 
A) A lender cannot distinguish good risk from bad risk borrowers 
B) An individual who purchases auto insurance begins to leave his or her keys in the car while running into a store 
C) Life insurance companies offer an average premium to smokers and non-smokers so they do not have to have two different premiums 
D) An auto insurance company charges higher premiums to younger drivers than what they charge to older drivers

Question 13

A bank advertises a very competitive loan interest rate.Explain how this strategy can avoid the problem of adverse selection.

Accepted Answer

If the lender advertises a low interest

Question 14

The function of providing liquidity by financial intermediaries:

Accepted Answer

A) Includes depositors withdrawing funds but not borrowers 
B) Only considers people who borrow on a short-term basis, but not depositors 
C) Affects people who need to borrow and depositors who withdraw their funds 
D) Only affects customers with savings accounts 
A) Includes depositors withdrawing funds but not borrowers 
B) Only considers people who borrow on a short-term basis, but not depositors 
C) Affects people who need to borrow and depositors who withdraw their funds 
D) Only affects customers with savings accounts

Question 15

Which of the following is a problem of adverse selection?

Accepted Answer

A) The lender has a problem of distinguishing good risk from bad risk borrowers 
B) The lender has a problem determining that the proceeds from a loan are being used as the borrower stated 
C) A person takes up the hobby of bungee jumping after purchasing health insurance 
D) Individuals use more medical services as a result of their purchase of a health insurance plan 
A) The lender has a problem of distinguishing good risk from bad risk borrowers 
B) The lender has a problem determining that the proceeds from a loan are being used as the borrower stated 
C) A person takes up the hobby of bungee jumping after purchasing health insurance 
D) Individuals use more medical services as a result of their purchase of a health insurance plan

Question 16

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

Accepted Answer

A) If the price of the home falls the buyer is still likely to stay 
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) If the price of the home falls the buyer is still likely to stay 
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 17

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 18

How did information asymmetries in the home mortgage market contribute to the financial crisis of 2007-2009?

Accepted Answer

In several ways:
1.Mortgage lenders-the

Question 19

Moral hazard problems arise because:

Accepted Answer

A) Lenders cannot distinguish good from bad risks 
B) Borrowers have incentives to act in ways that do not reflect the lender's interest 
C) Firms hire incompetent employees 
D) Lenders charge interest rates that are too low 
A) Lenders cannot distinguish good from bad risks 
B) Borrowers have incentives to act in ways that do not reflect the lender's interest 
C) Firms hire incompetent employees 
D) Lenders charge interest rates that are too low

Question 20

Requiring that borrowers put up collateral to obtain a loan is a tool designed to treat:

Accepted Answer

A) The Lemons Problem 
B) The problem of adverse selection 
C) The problem of moral hazard 
D) The free-rider problem 
A) The Lemons Problem 
B) The problem of adverse selection 
C) The problem of moral hazard 
D) The free-rider problem

Exam 11: The Economics of Financial Intermediation

Which of the following statements is not true?

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

When the amount of direct and indirect financing are summed, the result is usually:

In the bond market, the assigning of a risk premium is a tool designed to address the problem of:

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

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

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

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

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:

If buyers cannot distinguish quality, and on average, people value a good used car at $15,000 and a "lemon" at $5,000, explain why an average price of $10,000 for used cars will not bring the average of quality used cars to the market.

Which of the following is a problem of moral hazard?

A bank advertises a very competitive loan interest rate.Explain how this strategy can avoid the problem of adverse selection.

The function of providing liquidity by financial intermediaries:

Which of the following is a problem of adverse selection?

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

One lesson that Akerlof's Lemons model provides is:

How did information asymmetries in the home mortgage market contribute to the financial crisis of 2007-2009?

Moral hazard problems arise because:

Requiring that borrowers put up collateral to obtain a loan is a tool designed to treat:

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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