Exam 11: The Economics of Financial Intermediation

Private Mortgage Insurance (PMI) is often required by mortgage lenders when the borrowers have less than a 20% down payment.Link the requirement of PMI to the concepts of net worth, moral hazard, and transfer of risk.

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

Explain the difference between a secured and an unsecured loan, and the interest rate you would expect to see charged on each (all other factors equal).

Examples of economies of scale are:

Financial intermediaries:

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

Often times we see companies offering money back guarantees to customers if they are not satisfied.These guarantees are a way to treat the problem of:

One reason financial intermediaries earn profits is because:

Most credit cards charge a relatively high rate of interest, yet many people carry them, including people who would be considered low-risk borrowers.Our discussion of adverse selection said that low-risk borrowers should have been discouraged from these What gives?

Mutual funds offer investors:

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

Financial intermediation 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 of the conclusions from Akerlof's paper titled "The Market for Lemons" was:

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:

Moody's, Value Line, and Dun and Bradstreet are examples of companies that:

Mom's Pizzeria goes out of business due to a dramatic decrease in sales from a local newspaper article highlighting the fact that Mom's Pizzeria has been purchasing expired meat from a distributor at cut rate prices for years.The decrease in business also results in Mom's defaulting on the loan they have with the bank.This is an example of:

If a lender faces a potential loan applicant pool made up of equal amounts of good risks and high risks, will charging an average interest rate provide the average (expected) return? Explain.

If information in a financial market is symmetric, this means:

If the market prices the shares of stock of two companies, one of high quality and the other of lower quality, are the same average price and potential buyers cannot distinguish the prospects of the companies: