Chapter 7
Which of the following has the highest level of liquidity?
A bank checking account
A moral hazard is most closely associated with:
Changes in behavior due to not facing costs of risky behavior.
High deductibles are used in which financial market to help address the moral hazard problem?
Insurance market
A bank can resolve a liquidity mismatch by
Offering short-term deposits and long-term loans
Which government regulatory agency was created, in great part, to help overcome the adverse selection problem in equity markets?
The Securities and Exchange Commission
Liquidity is
The ease at which one asset can be converted into another
A moral hazard occurs with auto insurance when:
The insurance policy allows the driver avoid the costs of risky driving.
According to the simple deposit multiplier, what happens if there is a deposit and the required reserve ratio is zero?
The money supply grows forever.
Adverse selection happens before a financial transaction because
The two parties involved have very different information
Which of the following is not an assumption of the simple deposit multiplier?
There is one required reserve ratio
Akerlof changed the conditions of perfect competition by adding in what factor that often occurs in real life?
Uncertainty
A one-time deposit in a bank will result in
an expansion in the money supply that is larger than the size of the one-time deposit.
An example of adverse selection in financial markets is:
both : A car insurance company accepting a risk to sell insurance when a risky driver knows he will drive recklessly A lenders accepting a risk to make a loan when a risky borrower knows he will likely default
If bankers lose their confidence about the future, they may become very conservative about making loans, creating a credit crunch which
can result in a significant decline in real output
Holly goes to her bank to take out a loan, and the bank agrees to the loan on the condition that Holly maintain a balance of $1,000 in her savings account with the bank. This is an example of a bank using a
compensating balance as a way to mitigate the problem of moral hazard
In the market for used cars, asymmetric information will tend to
drive the better used cars out of the market
Petra has an automobile accident and finds that as a result her auto insurance premium will increase by 25%. This is an example of an adjustable premium that insurance companies often use as a mechanism to combat
moral hazard
Imagine that Roland goes to his bank and deposits $10,000 in cash into his savings account. The bank, wanting to use those funds to generate revenue for itself, will look to make a loan with this cash. An important determinant of how much of that $10,000 the bank can lend is the
required reserve ratio
Which of the following qualifies as a liability to a bank?
Demand deposits
The loan application process that banks require potential borrowers to go through is an attempt to deal with
adverse selection
The bond rating system, in which companies like Moody's and Standard & Poor's provide ratings for a company's default risk, is one way to deal with
adverse selection.
An example of asymmetric information in financial markets is that, in banking,
borrowers know more about their capacity to repay loans than lenders.
In the absence of banks and other lending institutions, when Sally is looking to borrow some money to buy a house, one of the biggest problems she faces is
the cost associated with searching for a suitable lender.
