Exam 11: The Economics of Financial Intermediation

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

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

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

In looking at the figure showing the sources of business finance, the largest source in the United States is:

A home mortgage is a good example of:

A bank has 10,000 depositors, each of whom deposits $100 in the bank.If the bank makes 1000 loans for $1,000 each then each depositor has contributed:

Explain what is likely to happen to the rate of mortgage loan default given the following: "For years home values across the country have increased on average 3 to 4% percent each year.Mortgage lenders have come to expect this to always be the case and so begin to offer mortgages with little to nothing down and not requiring PMI insurance.An economic slowdown occurs hitting a few areas of the country harder than others.Home values across the country begin to decrease with some areas seeing decreases of as much as 10%."

The screening process a bank follows for a loan applicant:

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.

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 principal-agent problem is:

Recent history has shown that the government regulations requiring the disclosure of information from public corporations have:

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

One reason lenders usually require a lot of information from loan applicants is to avoid:

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

Mutual funds are attractive because:

Often a bank will require a loan officer to make personal visits on customers with loans outstanding.This is encouraged because:

Which of the following statements is true?

Requiring a large net worth on the part of an applicant is one way lenders treat the problem of:

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: