Exam 11: The Economics of Financial Intermediation

The First Bank of Podunk has recently suffered some extraordinary losses on its loan portfolio due to the closing of the largest employer in town.As a result, the bank's management decides to raise the interest rate to new loan applicants.This move is likely to:

Which of the following statements is true?

Respond to the following: "If it takes a significant period of time to uncover accounting manipulations by individuals in a major corporation, honesty may be the best policy but dishonesty can be a lot more profitable!"

The reduction in transaction costs provided by financial intermediaries benefit:

Mom's Bakery goes out of business due to decreasing sales resulting from the dramatic increase in people on low carbohydrate diets.The decrease in business also results in Mom's defaulting on the loan they have with the bank.This is an example of:

The price for private information is likely higher than it should be and the number of subscribers is lower than users due to the problem of:

Which of the following is not true of adverse selection?

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

What is the difference between economies of scale and economies of scope? Provide an example of each that pertains to financial institutions.

Deflation compounds information problems because it:

Explain how the threat of a leveraged buyout or a takeover can actually treat the problem of moral hazard.

Financial intermediation exists, in part, because:

It is not uncommon to read about highly successful mutual fund managers that spend considerable amounts of time visiting the companies that they have placed their clients' funds with.What might be the motive(s) behind these visits?

Which of the following could be the lemons problem, applied to financial markets? Explain

Financial intermediaries, through their ability to lower transaction costs:

Large companies seeking to raise funds often will use a well-known investment bank because:

Most individuals save at banks rather than lend directly because:

The principal-agent problem is quite common in large public corporations due to:

Please explain how financial intermediaries contribute to increasing the output of an economy.

If a bank has 1,000 depositors, each of whom deposits $1,000 in the bank, and the bank makes 100 loans of $10,000 each, then each depositor has contributed: