FI 412 Exam 2 (Chapters 7,9,11 Homework Questions)

False

(T or F) According to the​ Sarbanes-Oxley Act, an accounting firm cannot provide consultancy on business strategy and advice on accounting to the same​ firm

False

(T or F) Publishing the​ analysts' recommendation for bonds and other products to the general public and investor as per the Global Legal Settlement will cause a decline in U.S. capital​ markets:

False

(T or F) The Fed can still be influenced by political​ pressure

True

(T or F) The members of the board generally cannot be reappointed to their​ position; they do not need to do favors in order to keep their job in the future.

False

(T or F) The​ Fed's lack of accountability may make the Fed more​ irresponsible:

True

(T or F) The​ Fed's personnel are not directly affected by the outcome of the next ​election; therefore, it has some level of ​ independence

A. long legal documents with substantial provisions

Debt Contracts are A. long legal documents with substantial provisions B. very simple legal documents that place restrictions on the borrower. C. established by borrowers to differentiate themselves from other individuals or firms. D. meant to guide relatively small businesses obtain some additional investment.

C. are used more frequently to raise capital than are equity contracts

Debt​ contracts: A. have a higher cost of state verification than equity contract B. never result in a loss for the lender C. are used more frequently to raise capital than are equity contracts D. are informal agreements between borrowers and lenders

C. They pool many small deposits together and specialize in loan risk assessment and other forms of expertise.

Describe two ways in which financial intermediaries help lower transaction costs in the economy. A. They attract funds from many depositors and only make loans available to​ large-scale borrowers. B. They accept only​ large-denomination deposits and make only a small number of large loans. C. They pool many small deposits together and specialize in loan risk assessment and other forms of expertise. D. They offer​ safety-deposit box services to depositors and make only a few loans per year.

D. ​Yes, because the banking industry is subject to more regulations than the money markets are.

Do we need money markets in the presence of the banking​ industry? A. ​No, because the money markets are subject to more governmental costs than the banks are. B. ​No, because money markets never have a cost advantage over banks in providing​ short-term funds. C. ​Yes, because​ short-term securities offered by money markets are more liquid and safer than the bank securities are. D. ​Yes, because the banking industry is subject to more regulations than the money markets are.

B. ​Yes, because government revenues and government expenses occur at different times.

Does the government borrow from money​ markets? Why? A. ​No, because money markets cannot cater​ short-term fund needs. B. ​Yes, because government revenues and government expenses occur at different times. C. ​No, because money market securities are a high cost source of funds. D. ​Yes, because money markets provide funds for longer terms.

directly reduce conflict of interest

Establishing a divide in research and underwriting services for investment banks and a separation of audit and​ non-audit services for the public accounting firm are measures to ____

C. are better able to provide expertise in lowering transaction costs.

Financial intermediaries: A. would be better if they offered liquidity services. B. do not make it easier for customers to conduct transactions. C. are better able to provide expertise in lowering transaction costs. . D. do not take advantage of expertise in computer technology

insurance companies, finance companies, investment companies, pension funds

Identify the money market participants based on the given information. These companies must maintain liquidity because of their unpredictable need for​ funds: These companies raise funds by selling commercial paper and then lend these funds to consumers for the purchase of durable​ goods: The companies​ "make a​ market" for money market​ securities: They invest a portion of their cash in the money markets to take advantage of investment opportunities that might be identified in the stock or bond markets.

C. The Fed is free to interpret exactly what these objectives mean

If the Federal Reserve has a specific mandate from Congress to achieve​ "maximum employment and​ low, stable​ prices," then how does the Fed have goal​ independence? A. The Fed is free to discuss the assigned goals with Congress. B. The Fed can choose any method it wants in order to achieve the assigned goal. C. The Fed is free to interpret exactly what these objectives mean. D. The Fed is able to change its goals frequently.

A. less goal independence

In England​, the Chancellor of the Exchequer (the equivalent of the US Secretary of Treasury) sets the goal of monetary​ policy, a target for inflation.​ Thus, when compared to the​ Fed, the Bank of England ​has: A. less goal independence B. less instrument independence C. more instrument independence D. more goal independence

direct placement

In a ____, the issuer bypasses the dealer and sells securities directly to the end investor.

noncompetitive bid, same as, competitive bidders

In his bid for​ 91-day $100 Treasury​ bills, Ted only includes the amount of securities he wants. His bid is would be called a ____ bid. The price Ted would pay for these bills would be ____ the price paid by ____

D. All of the above are correct.

In what ways can the regional Federal Reserve Banks influence the conduct of monetary​ policy? A. Through their administration of the discount facilities at each bank. B. By having members serve on the Federal Advisory Council. C. By having five of their presidents sit on the FOMC. D. All of the above are correct.

United States

In which country do firms use bonds to the greatest degree, when compared to other countries?

Germany

In which country do firms use bonds to the least degree, when compared to other countries?

A. is more likely to produce higher inflation and more likely to produce a political business cycle.

A dependent Federal Reserve A. is more likely to produce higher inflation and more likely to produce a political business cycle. B. is more likely to produce higher inflation and less likely to produce a political business cycle. C. is less likely to produce higher inflation and less likely to produce a political business cycle. D. is less likely to produce higher inflation and more likely to produce a political business cycle

B. higher inflation and no change in unemployment.

A lower level of central bank independence is associated with A. no change in either unemployment or inflation. B. higher inflation and no change in unemployment. C. lower inflation and no change in unemployment. D. lower inflation and lower unemployment

negotiable certificate of deposit

A money market instrument worth​ $10 million with a maturity of 3​ months, is issued by a bank. This instrument has a specified maturity date and it can be bought and sold until maturity. The trader who holds the instrument at maturity gets the principal and interest. Such an instrument is likely to be a

political business cycle

A situation in which monetary policy is expansionary prior to an election and contractionary after an election is known as the ____

D. Only A and B are correct

Advocates of Fed independence fear that subjecting the Fed to direct presidential or congressional control​ would: A. impart an inflationary bias to monetary policy. B. force monetary authorities to sacrifice the​ long-run objective of price stability. C. make the​ so-called political business cycle less pronounced. D. Only A and B are correct. E. All of the above are correct.

B. venture capital firm.

An institution in our financial structure that helps reduce the moral hazard arising from the​ principal-agent problem is​ the: A. pawn broker. B. venture capital firm. C. savings and loan association. D. money market mutual fund.

A. making private, nontraded loans so other lenders cannot benefit from the information they have collected about the borrower.

Banks reduce the​ free-rider problem in information production by A. making private, nontraded loans so other lenders cannot benefit from the information they have collected about the borrower. B. serving as an intermediary that holds scarcely any nontraded loans. C. charging others for information about the financial condition of potential borrowers. D. buying tradable securities with their​ depositors' funds.

mutual fund

Because it buys large blocks of stocks or​ bonds, a ____ can take advantage of lower transaction costs.

C. some investors may find it more profitable to invest in something else other than financial markets.

Because of transaction costs in financial​ markets, we can say that A. investors are more inclined to invest in different stocks. B. investors choose to invest a smaller amount on stocks. C. some investors may find it more profitable to invest in something else other than financial markets. D. more investors will find it profitable to keep their money in the financial markets.

are

Money market instruments ___ priced competively

offer

Money market mutual funds ____ liquidity intervention.

low, one year or less, are

Money market securities have ____ default risk. They mature in ______ from their original issue date. Flexibility and innovation ____ the characteristics of the money market.

economies of scale

One solution to the problem of high transaction costs is to bundle the funds of many investors to take advantage of ____

B. very closely together as all have very low risk and are short term.

Over​ time, the interest rates on many of the money market instruments appear to move​ __________. A. very closely together as all have very high risk and are long term. B. very closely together as all have very low risk and are short term. C. remotely together as all have very high risk and are long term. D. remotely together as all have very low risk and are short term.

D. moral​ hazard; adverse selection

Problems created by asymmetric information after the transaction occurs is called​ ________, while the problem created before a transaction occurs is called​ ________. A. free​ riding; costly state verification B. adverse​ selection; moral hazard C. costly state​ verification; free riding D. moral​ hazard; adverse selection

D. greater control would help coordinate fiscal and monetary policies.

Proponents of a Fed under greater control of the president or Congress argue that A. it is undemocratic to have monetary policy controlled by an elite group. B. the Fed has always used its independence successfully. C. some sacrifices in unemployment is necessary to lower inflation. D. greater control would help coordinate fiscal and monetary policies.

banks

Relatively smaller companies are more likely than large, well-known to acquire funds through

B. make debt contracts more incentive compatible.

Restrictive covenants: A. reduce adverse selection. B. make debt contracts more incentive compatible. C. solve the lemons problem. D. are most common in equity contracts.

interim investment in the money market

Suppose Peninsula Corporation does not prefer to hold idle cash balances. It holds​ $200m surplus cash in December 2016 that it plans to use for paying bonuses to its employees in April 2017. In this​ case, it would make an ___

bankers acceptance, bank

Suppose that Ciaz Corporation from the U.S. wants to buy mobile phones from Nicolas manufacturing corporation in China. Nicolas manufacturing corporation does not want to ship the phones without being​ paid, and Ciaz Corporation is reluctant to send money to China before receiving the equipment. In this​ case, issue of a ____by a ____ could solve the problem.

higher

Suppose you go to a​ bank, intending to buy a certificate of deposit with your savings. Assume that the bank offers to pay you​ 2% interest on this certificate of deposit. A customer who comes into the same bank for a car loan is likely to be charged an interest rate ____ than the​ 2% that you will receive.

B. ​No, the bank is more efficient than you at dealing with asymmetric information problems

Suppose you go to a​ bank, intending to buy a certificate of deposit with your savings. Assume that the bank offers to pay you​ 2% interest on this certificate of deposit. A customer who comes into the same bank for a car loan is likely to be charged an interest rate higher than the​ 2% that you will receive. Since the customer will be paying more than you are​ receiving, would it make sense for you to offer a loan to that individual at a higher rate than you will receive on your certificate of funds​ (but still competitively lower than the rate currently offered to the car loan​ borrower)? A. Yes, you are better able to monitor the​ borrower's activities than the bank. B. ​No, the bank is more efficient than you at dealing with asymmetric information problems. C. No, the law restricts such lending activities to licensed financial intermediaries. D. ​Yes, you will make more money and the borrower will pay less.

more independent

The European Central Bank​ (ECB) has complete control over monetary policy in eleven euro countries and has a charter that cannot be changed by legislation. In comparison to the Federal Reserve System, the ECB​ is:

D. it is structured such that the central banks for each country have a similar role to that of the Federal Reserve banks.

The European System of Central Banks​ (ESCB) is similar to the Federal Reserve System in​ that: A. it is structured such that the central banks for each country control their own budgets as Federal Reserve banks do. B. the ECB is involved in supervision and regulation of financial institutions. C. monetary operations are centralized. D. it is structured such that the central banks for each country have a similar role to that of the Federal Reserve banks.

purchase

The Fed will ____ Treasury securities if it believes interest rates should be lowered.

D. gives the ECB more independence than the federal reserve

The Maastricht Treaty A. enhances the ability of Eurozone countries to influence the ECB. B. established the unique structure of central banking in the United States. C. subjects Federal Reserve monetary policy actions to audits by the GAO. D. gives the ECB more independence than the federal reserve

demander, borrowers

The U.S. Treasury Department is always a ____ of money market funds. It is the largest of all money market ____ worldwide.

SEC

The ____ made it a mandate for the credit rating agencies to disclose the method of research they used to rate the various products.

National Central Banks

The budget of the ECB is controlled by the ____

spinning

The financial institutions providing multiple services develop a​ long-term relationship with their clients. The top finance executive of a public listed company prefers investment bank A compared to investment bank B for its future business because of the previous personal equity gains from an IPO through investment bank A. This could be a result of ____

B. Increase in the cost of producing information

The financial institutions providing multiple services develop a​ long-term relationship with their clients. Which of the following could not be a result of the​ same? A. Benefits to the financial institution B. Increase in the cost of producing information. C. The economy becomes less efficient D. Increase in asymmetric information problems

A. over 90% of American households own securities.

The following statements are true except the one that indicates that A. over 90% of American households own securities. B. in the United​ States, bonds are a more important source of external funds than stocks. C. although banks are the most important source of external funds to businesses worldwide, their role is shrinking slightly over time. D. stocks are not the most important source of external funds for businesses in the United States.

B. asymmetric information

The inequality of information between borrowers and lenders in financial markets is broadly known​ as: A. moral hazard. B. asymmetric information. C. adverse selection. D. noncollateralized risk.

bank and nonbank loans

The largest source of external finance for U.S. businesses is ___

C. a private central bank and those favoring a government institution.

The many regional Federal Reserve banks resulted from a compromise between parties​ favoring: A. a Board of Governors in​ Washington, D.C., and those who favored its establishment in New York City. B. the establishment of a central bank and those who opposed its establishment. C. a private central bank and those favoring a government institution. D. None of the above are correct.

D. extremely deep and liquid

The market for Treasury bills is​ _____________. A. neither deep nor liquid B. extremely deep but not liquid C. extremely liquid but not deep D. extremely deep and liquid

C. reducing the​ Fed's net earnings.

The president of the United States can exert influence over the Federal Reserve in all of the following ways except​: A. appointing a new chairman to the Board of Governors. B. influencing congressional decisions that might reduce the independence of the Fed. C. reducing the​ Fed's net earnings. D. appointing new members to the Board of Governors.

C. Venture capital firms provide funds to new firms in exchange for equity and membership on the board of directors.

Which of the following is a tool used to reduce the​ principal-agent problem? A. Firms issue equity instead of debt because the principal-agent problem is smaller with equity. B. Governments avoid regulating firms. C. Venture capital firms provide funds to new firms in exchange for equity and membership on the board of directors. D. Stockholders reject plans for costly state verification.

B. requiring borrowers to have life insurance

Which of the following is an example of a restrictive covenant in a debt​ contract? A. allowing firms to opt out of periodic accounting reports B. requiring borrowers to have life insurance C. encouraging borrowers to keep their collateral valuable D. requiring borrowers to pay high interest rate

A. It provides a greater opportunity for nonvoting members to become voting members in the future.

Which of the following is not an important reason for the regional Federal Reserve bank presidents to attend the FOMC​ meetings, even if they are nonvoting​ members? A. It provides a greater opportunity for nonvoting members to become voting members in the future. B. By attending​ meetings, nonvoting members can participate in deliberations and discussions of the FOMC. C. By attending​ meetings, bank presidents may have an opportunity to influence the​ committee's decisions. D. It provides an opportunity for bank presidents to contribute information about economic conditions in their district.

C. Highly liquid securities

Which of the following is traded in the money​ market? A. Coins B. Paper notes C. Highly liquid securities D. Long term securities

A. Screening is used before the​ transaction; monitoring is used after the transaction.

Which of the following is true about techniques used to reduce asymmetric information​ problems? A. Screening is used before the​ transaction; monitoring is used after the transaction. B. Monitoring is used before the​ transaction; screening is used after the transaction. C. Both screening and monitoring are used after the transaction. D. Both screening and monitoring are used before the transaction.

A. Federal Funds

Which of the following money market instruments usually have the shortest​ maturity? A. Federal funds B. Negotiable certificates of deposit C. Treasury Bills D. ​Banker's acceptance

B. Treasury bills

Which of the following money market securities offers the highest liquidity through a secondary​ market? A. Eurodollar deposits B. Treasury bills C. Commercial paper D. Federal funds

B. requiring that the borrower have high net worth

Which of the following reduces both adverse selection and moral hazard in a loan​ arrangement? A. monitoring the borrower closely after the loan is made. B. requiring that the borrower have high net worth C. asking the minimum wage worker to work harder to increase the profits of a store. D. asking for the​ borrower's credit history

C. In recent​ years, there has been a remarkable trend toward increasing independence.

Which of the following statements about central bank structure and independence is​ true? A. In recent​ years, greater independence has been granted to many central banks with the exception of the Bank of England and the Bank of​ Japan, which are still subject to strict governmental control. B. In​ theory, central banks subject to government control produce better monetary​ policy, but experience suggests that more independent central banks have produced superior monetary policy results. C. In recent​ years, there has been a remarkable trend toward increasing independence. D. Only A and C are correct. E. All of the above are correct.

A. Inflation pushed​ short-term interest rates above the level that banks could legally pay.

Which of the following statements explains the situation in late the 1970s and early​ 1980s? A. Inflation pushed​ short-term interest rates above the level that banks could legally pay. B. There was rapid expansion of the banking industry. C. Investors pulled their money out of money markets and put it into banks. D. There was no commercial bank​ interest-rate ceiling.

D. Firms raise more funds with bonds than with stocks.

Which of the following statements is​ true? A. Stocks and bonds are the largest source of external funds to businesses. B. Firms raise more funds with bonds than with bank loans. C. Direct finance is much more important than indirect finance as a source of external funds to businesses. D. Firms raise more funds with bonds than with stocks.

D. The​ 14-year non-renewable terms for governors effectively insulate the Board of Governors from political pressure

Which of the following statements regarding Federal Reserve independence is​ incorrect? A. The Fed may feel pressure to support the​ president's policies since the president can veto legislation that might limit the​ Fed's discretionary power and authority B. In order to gain additional power to regulate the financial​ system, the governors need the support of Congress and the president to pass favourable legislation C. The Board of Governors knows that their bureaucratic power can be reined in by congressional legislation and so must still curry favour with both Congress and the president D. The​ 14-year non-renewable terms for governors effectively insulate the Board of Governors from political pressure

B. It has an underdeveloped secondary market.

Which of the following statements regarding the money market is not​ true? A. It provides a​ low-cost source of funds. B. It has an underdeveloped secondary market. C. It enables the ability to meet investment or deposit outflows. D. It is a short term investment avenue that provides means to invest idle funds.

C. The Treasury bills are very close to being​ risk-free

Which of the following statements regarding the​ T-bills is​ true? A. The real interest rate on Treasury bills is always positive. B. The Treasury bills are not a discount instrument. C. The Treasury bills are very close to being​ risk-free D. The Treasury bills always keep up with inflation.

C. its independence is limited by the Ministry of​ Finance's veto power over part of the​ Bank's budget

While legislation enacted in 1998 granted the Bank of Japan new powers and greater​ autonomy, its critics contend​ that: A. its independence is too great since the Ministry of Finance no longer has veto power over the​ Bank's budget. B. its independence is too great because it need not pursue a policy of price stability even if that is the popular will of the people C. its independence is limited by the Ministry of​ Finance's veto power over part of the​ Bank's budget D. its independence is limited since the Ministry of Finance can dismiss senior bank officials E. None of the above are correct

D. Until​ 1997, the power to set interest rates was determined exclusively by Her​ Majesty's Treasury

Why did the Bank of England up until 1997 have a low degree of​ independence? A. Until​ 1997, the inflation target was determined solely by the Bank of England. B. The Bank of England was not a member of the European Monetary Union until 1997. C. The Bank of England was formally independent of the government until 1997. D. Until​ 1997, the power to set interest rates was determined exclusively by Her​ Majesty's Treasury.

A. It provides higher return than the money in banks. B. It reduces the opportunity cost of holding idle funds

Why do investors temporarily warehouse funds in the money​ market? ​(Check all that apply.​) A. It provides higher return than the money in banks. B. It reduces the opportunity cost of holding idle funds. C. It enables them to earn exceptionally high returns. D. It is the only investment option available for interim investment.

C. The issuers are able to save more even after considering payment of bank fees.

Why do issuers of commercial paper back up their paper with a line of credit at a​ bank? A. It completely frees the issuer from the responsibility of paying for the outstanding paper. B. It increases the risk for the purchasers of the paper. C. The issuers are able to save more even after considering payment of bank fees. D. It increases the interest rate for the purchasers of the paper.

E. All of the above are correct

Why is the New York Federal Reserve always a voting member on the​ FOMC? A. The New York Federal Reserve is actively involved in the bond and foreign exchange markets. B. It is the only Federal Reserve bank that is a member of the Bank for International Settlements​ (BIS). C. The New York Federal Reserve district contains many of the largest commercial banks in the United States. D. Only A and C are correct. E. All of the above are correct

D. the​ principal-agent problem.

You go into an electronics store to buy a​ big-screen television. A salesperson rudely tells you that​ he's too busy to help you now. He says​ you'll just have to wait. Then you watch him get a cup of coffee and take his break.​ You've just seen a demonstration of A. how collateral reduces moral hazard. B. the lemons problem. C. adverse selection. D. the​ principal-agent problem.

C. moral hazard

Your parents loan you money to pay your​ tuition, and you use the money to play online poker instead. This is an example of A. the​ free-rider problem B. adverse selection C. moral hazard D. financial intermediation

Eurodollars

____ are similar to the Federal funds in the sense that they are most commonly used by banks to meet an overnight shortfall of funds and their rate tends to be very close to the Federal funds rate.

Free rider problem

____ is an issue that occurs when people who do not pay for information take advantage of the information that other people have paid for

Collateral

____ is property that is pledged to a lender to guarantee payment in the event that the borrower is unable to make debt payments.

Financial Intermediaries

are the most important source of external funds to finance businesses.

C. Maybe. A formal approval process is​ lengthy, which might leave some Federal Reserve districts without​ leadership, possibly creating more problems than it solves.

The presidents of each of the district Federal Reserve banks​ (including the New York Federal Reserve​ bank) are currently not required to undergo a formal political appointment and approval process. Do you think this is​ appropriate? A. Yes. Since only five of the Federal Reserve bank presidents have a​ vote, they are not able to influence policy​ matters, thus a formal political appointment and approval process is unnecessary. B. No. Because private banks can influence the appointment of their district Federal Reserve​ president, the benefits of eliminating this potential conflict of interest far outweigh the costs of the approval process. C. Maybe. A formal approval process is​ lengthy, which might leave some Federal Reserve districts without​ leadership, possibly creating more problems than it solves.

C. to reduce or eliminate future bank panics.

The primary reason for the creation of the Federal Reserve System was: A. to eliminate​ state-chartered banks. B. to stabilize​ short-term interest rates. C. to reduce or eliminate future bank panics. D. to create a single central bank similar to the Bank of England.

C. monitoring of activities of the risky party after the transaction

The tool to solve adverse selection problems are the following except A. private production and sale of information B. financial intermediation C. monitoring of activities of the risky party after the transaction D. government regulation to increase information

D. incentivize the investment banks not to derive benefits from conflicts of interest.

The two major policy measures of​ Sarbanes-Oxley Act and Global Legal Settlement of increased criminal charges on accounting firms and fines on investment banks were meant to A. improve quality of information in financial markets. B. reduce the cost of producing information. C. improve supervision of the securities market. D. incentivize the investment banks not to derive benefits from conflicts of interest.

asymmetric information

The type of problems that occur when ____ arises are Moral Hazard and Adverse Selection

twelve

There are ____ regional Federal Reserve banks in the Federal Reserve system.

treasury securities, not all

There are no restrictions on commercial​ banks' holding of ____. ____ commercial banks deal in the secondary money market for their customers.

A. prominent support for centralized power.

There was no central bank in the United States between 1836 and 1913 because of the following except​: A. prominent support for centralized power. B. distrust of moneyed interests. C. open hostility by the American public to the existence of central banks. D. expiration of the charter of the Second Bank of the United States

D. lenders cannot distinguish good firms from bad.

The​ "lemons problem" applies to financial markets for many reasons including the fact that A. the market is large and efficient. B. only safe borrowers sell securities. C. borrowers know less about the probability of default than lenders. D. lenders cannot distinguish good firms from bad.

B. principals have no incentives to free ride off the monitoring expenditures of other principals.

The​ principal-agent problem arises because of many reasons except the statement that indicates that A. agents have information not readily available to the principal. B. principals have no incentives to free ride off the monitoring expenditures of other principals. C. agents' incentives are not always compatible with those of the principals. D. principals find it difficult and costly to monitor​ agents' activities.

moral hazard

The​ principal-agent problem causes ____

A. The products rated least risky by the credit rating agencies defaulted.

What could be the fundamental reason for the downgrade of the reputation of the credit rating agencies in the​ 2007-2009 financial​ crisis? A. The products rated least risky by the credit rating agencies defaulted. B. The credit rating agencies were providing consultancy services and rating services to the same client. C. The issuers of bonds were paying fees to the credit rating agencies to rate their products. D. There were higher consultancy fees compared to rating fees.

B. A manager does not have sufficient incentive to maximize the​ company's profits.

What is the reason for this​ problem? (principle-agent) A. Stockholder meetings are​ infrequent, and the manager has to wait for these results to get anything done. B. A manager does not have sufficient incentive to maximize the​ company's profits. C. Owners limit the​ manager's ability to run the corporation efficiently. D. A manager does not have access to sufficient resources to run the corporation efficiently.

D. Principal-agent problem.

What might lead to poor management when control and ownership are​ separate, like in many American​ corporations? A. ​Sarbanes-Oxley problem. B. Adverse selection. C. ​Free-rider problem. D. Principal-agent problem.

D. adverse selection

When bad credit risks have the most to gain from a loan so they most actively seek a​ loan, we have a demonstration of: A. the​ free-rider problem. B. financial intermediation. C. moral hazard. D. adverse selection

money market mutual funds

When inflation rose in the late​ 1970s, ____ became a popular individual investment option.

B. there was no lender of last resort to provide reserves to the banking system.

When the charter of the Second Bank of the United States expired in​ 1836: A. it created a central bank to help prevent future bank panics. B. there was no lender of last resort to provide reserves to the banking system. C. the Treasury assumed the role as lender of last resort. D. bank panics and losses to depositors declined.

A. The European Central Bank—Its charter cannot be changed through​ legislation, making it more independent than the Federal Reserve.

Which is more​ independent, the Federal Reserve or the European Central​ Bank? Why? A. The European Central Bank—Its charter cannot be changed through​ legislation, making it more independent than the Federal Reserve. B. The Federal Reserve System—It must be more independent since the European Central Bank was patterned after it. C. The Federal Reserve System—Its charter can be changed through​ legislation, making it more independent than the European Central Bank. D. Because the structures of the Federal Reserve and the European Central Bank are​ similar, it can be argued that the two systems have the same level of independence.

B. Covenants are used to reduce moral hazard.

Which of the following correctly lists a procedure used to reduce asymmetric information problems as well as the type of asymmetric information problem it​ reduces? A. Screening is used to reduce moral hazard. B. Covenants are used to reduce moral hazard. Your answer is correct. C. Monitoring is used to reduce adverse selection. D. All of the above correctly list a procedure and the type of problem it reduces.

C. A builder obtained a loan to build a neighborhood comprised of houses that may sell for much lower than the originally posted price.

Which of the following demonstrates adverse​ selection? A. A borrower takes the funds from a loan to a casino and gambles. B. A scientist applies for a loan but decides to scratch the original idea and proceeds to research a possible cure for cancer with a low probability of success but a high payoff if successful. C. A builder obtained a loan to build a neighborhood comprised of houses that may sell for much lower than the originally posted price. D. A corporate officer uses the funds from the sale of securities to buy art for his office

A. A rise in compliance cost

Which of the following effects of the​ Sarbanes-Oxley Act discourages the foreign firms to list their companies in U.S. capital​ markets? A. A rise in compliance cost B. Improved accounting standards C. An increase in severity of legal actions D. The separation in audit and​ non-audit services

D. The FOMC

Which of the following entities in the Federal Reserve System directs open market operations? A. Member commercial banks B. The Federal Advisory Council C. The Board of Governors D. The FOMC

D. The Board of Governors

Which of the following entities in the Federal Reserve System sets reserve​ requirements? A. The FDIC B. The Federal Advisory Council C. Member commercial banks D. The Board of Governors

B. The Board of Governors

Which of the following entities in the Federal Reserve System... controls the discount rate...​? A. The FDIC B. The Board of Governors C. The Federal Advisory Council D. Member commercial banks

B. Setting the reserve requirement.

Which of the following functions is not performed by the twelve Federal Reserve​ Banks? A. Withdrawing damaged currency and issuing new currency. B. Setting the reserve requirement. C. Clearing checks. D. Acting as liaisons with the business community

C. Repos

Which of the following instruments uses Treasury bills as​ collateral? A. Negotiable certificates of deposit B. Commercial papers C. Repos D. Federal Funds

A. Most participants operate on both sides of the market.

Which of the following is a difficulty faced when money market players are discussed by listing those who borrow and those who​ lend? A. Most participants operate on both sides of the market. B. The data on lenders is not easily available. C. This type of distinction is not at all useful. D. The participants who borrow tend to hide it.

A. An inefficient legal system implies weak property​ rights, and collateral helps banks recoup some of their loan if the borrower defaults.

Gustavo is a young doctor who lives in a country with a relatively inefficient legal and financial system. When Gustavo applied for a​ mortgage, he found that banks usually required collateral for up to​ 300% of the amount of the loan. Why might banks require that much collateral in a financial system like​ Gustavo's country? A. An inefficient legal system implies weak property​ rights, and collateral helps banks recoup some of their loan if the borrower defaults. B. An inefficient legal system implies strong property​ rights, and under such a strong​ system, collateral is more highly valued and hence more desirable. C. An inefficient legal system implies strong property​ rights, and collateral helps banks recoup some of their loan if the borrower defaults. D. An inefficient legal system implies weak property rights but also high property​ values, making collateral more highly valued and hence more desirable.

B. Financial intermediaries are able to operate with lower transaction costs relative to individual lenders or borrowers.

How can economies of scale help explain the existence of financial intermediaries ​? A. Financial intermediaries are relatively large institutions. B. Financial intermediaries are able to operate with lower transaction costs relative to individual lenders or borrowers. C. Financial intermediaries have exclusive access to communications technology in the financial sector. D. Financial intermediaries with their vault technology can specialize in keeping deposits safe.

A. The Federal Reserve can choose any method it wants in order to achieve a given set of policy objectives.

How does the Federal Reserve have a high degree of instrument​ independence? A. The Federal Reserve can choose any method it wants in order to achieve a given set of policy objectives. B. The Federal Reserve is able to set the goals of monetary policy. C. The Federal Reserve is not subject to the influence of Congress. D. The Federal Reserve can contract with independent experts to choose the appropriate fiscal instruments.