econ 135 ch11

Multiple Select Question Select all that apply Which of the following are examples of monitoring to reduce moral hazard? Multiple select question. A bank employee verifying cars in a new car lot eBay buyers' insurance A bank doing a credit check on a potential borrower Financial intermediaries holding a large number of shares in a firm

A bank employee verifying cars in a new car lot eBay buyers' insurance Financial intermediaries holding a large number of shares in a firm

Which of the following is not a method used to reduce moral hazard? Multiple choice question. Credit screening Monitoring borrower activities Threat of takeover Covenants

Credit screening

Of the four listed, which of the following nations receives the highest percentage of business financing from financial intermediaries? Multiple choice question. Germany United States United Kingdom Japan

Japan Firms in Japan receive the highest percentage of business financing from financial intermediaries

Which of the following is true? Multiple choice question. Moral hazard and asymmetric information are two obstacles presented by adverse selection. Adverse selection and asymmetric information are two obstacles presented by moral hazard. Moral hazard and adverse selection are two obstacles presented by asymmetric information.

Moral hazard and adverse selection are two obstacles presented by asymmetric information.

Select all that apply Which of the following states is true as it relates to financial systems? Multiple select question. Rich countries have advanced levels of financial development. Credit to the private sector and GDP are negatively related. Ensuring that high-quality borrowers are funded is extremely important. Credit to the private sector and GDP are positively related.

Rich countries have advanced levels of financial development. Ensuring that high-quality borrowers are funded is extremely important. Credit to the private sector and GDP are positively related.

Select all that apply Financial intermediaries tend to lower the cost of lending and borrowing. Which of the following functions help lower the cost? Multiple select question. Safekeeping and accounting services Diversifying risk Pooling resources for large savers Pooling resources for small savers Supplying liquidity

Safekeeping and accounting services Diversifying risk Pooling resources for small savers Supplying liquidity

Which of the following is not a key role played by financial intermediaries, according to the text? Multiple choice question. Setting interest rates Collecting and processing information Providing liquidity Pooling savings

Setting interest rates

Which of the following is true about solving principal-agent problems in debt and equity markets? Multiple choice question. The problem may be reduced if firm managers share more in the upside of risk. The problem may be reduced if managers report more directly to owners. In the last few years, firms have had great success in reducing moral hazard problems by tying manager compensation to firm performance. The problem may be reduced if covenants force firm managers to pledge their own personal assets toward firm success or failure.

The problem may be reduced if managers report more directly to owners.

How does a mutual fund assist in diversification? Multiple choice question. Mutual funds combine risk associated with single, large investments. They force investors to purchase complete portfolios. They allow investors to purchase fractions of shares. Mutual funds do not assist with diversification.

They allow investors to purchase fractions of shares.

Which of the following is true about adverse selection and loan contracts? Multiple choice question. Unsecured contracts tend to have higher interest rates. Adverse selection problems are less severe with unsecured loans. Net worth and collateral serve very different functions. The higher the firm's net worth, the higher the chance of adverse selection problems.

Unsecured contracts tend to have higher interest rates.

Adverse selection problems happen _______ a loan is made; moral hazard problems happen _______ a loan is made. Multiple choice question. after; after before; before after; before before; after

before; after

Select all that apply Historically, goldsmiths _____. Multiple select question. opposed loaning holding gold for people as a way of safekeeping began to hold gold for people as a way of safekeeping held gold for people in lieu of a receipt began to loan gold from wealthy people to the less fortunate

began to hold gold for people as a way of safekeeping held gold for people in lieu of a receipt began to loan gold from wealthy people to the less fortunate

Lending and borrowing involve _____________ costs; the text credits financial intermediaries' skill in lowering _________ costs with their continued importance. Multiple choice question. both transactions and information; transactions only transactions; transactions both transactions and information; information only information; information

both transactions and information; information

As a firm's net worth rises, adverse selection problems tend to _______, and pledging personal items as collateral becomes _______ necessary. Multiple choice question. increase; less decrease; less increase; more decrease; more

decrease; less

Liquidity for a bank means Multiple choice question. customer deposits are kept only in the form of cash. depositors have easy access to funds. bank loans can be called in at any time. banks make as few loans as possible.

depositors have easy access to funds. Reason: Liquidity for a bank means that depositors have easy access to funds. Banks will lend the funds from deposits responsibly so that borrowers will not have their loans called in without warning.

Consider a $100,000 loan made by a bank. The bank would be most likely to provide risk diversification by Multiple choice question. forming the loan from $100,000 from a single, safe account of more than $100,000 - say, $1 million. making up most of the loan from the bank's own cash account. forming the loan from small amounts - say, $100 each - from many deposits. forming the loan from the entirety of a single, safe account of exactly $100,000.

forming the loan from small amounts - say, $100 each - from many deposits.

Moral hazard problems occur in stock transactions when Multiple choice question. buyers pay too much for a given share of stock. funds are used for reasons that benefit managers instead of owners. brokers and dealers spend too much money on information services from research firms. the stock buyer requests stock from one firm but his broker buys from another.

funds are used for reasons that benefit managers instead of owners.

The original bankers were _________. Multiple choice question. brokers and dealers loan sharks goldsmiths the government

goldsmiths

The original bankers were _________. Multiple choice question. loan sharks goldsmiths brokers and dealers the government

goldsmiths

Financial intermediaries can reduce adverse selection problems in lending by _____. Multiple choice question. helping small- and medium-sized businesses issue securities directly monitoring borrowers after loans are made having access to borrower credit information and account history asking borrowers to report their credit scores directly

having access to borrower credit information and account history

Restrictive covenants Multiple choice question. create a moral hazard. are often associated with bonds and loans. generate adverse selection. help solve the moral hazard in debt finance.

help solve the moral hazard in debt finance.

Diversification on the part of banks can be achieved by Multiple choice question. making loans from a few, large depositors. charging higher interest rates to well-qualified borrowers. making loans from many different depositors. charging low interest rates to less-qualified borrowers.

making loans from many different depositors.

The insurance industry tend to be recognized as the starting point for Multiple choice question. moral hazard. adverse selection. mutual funds. bonds markets.

moral hazard.

Mutual funds Multiple choice question. are not meant for "small savers" like families and individuals. have extremely high costs. have a minimum buy-in of at least $20,000. offer a low-cost way for savers to diversify.

offer a low-cost way for savers to diversify.

Solutions to the moral hazard in equity financing are complicated unless Multiple choice question. there is clear separation between managers and owners. managers don't own a stake in the profitability of the firm. owners can easily fire managers. managers can misrepresent the profitability off the firm.

owners can easily fire managers.

Debt financing Multiple choice question. completely eliminate the problem of moral hazard. exists when managers are also the owners. partially eliminates the problem of moral hazard. does not exist if managers are owners.

partially eliminates the problem of moral hazard.

The network that transfers funds from one account to another is called the _________. Multiple choice question. payments system exchange system central bank barter system

payments system

Services offered by banks include Multiple choice question. setting interest rates and making loans. making discount loans and providing monthly bank statements. providing Internet access to bank information and ATM machines. controlling the payments system and making loans to other banks.

providing Internet access to bank information and ATM machines.

Services offered by banks include Multiple choice question. setting interest rates and making loans. providing Internet access to bank information and ATM machines. controlling the payments system and making loans to other banks. making discount loans and providing monthly bank statements.

providing Internet access to bank information and ATM machines.

Today, banks make depositors feel that their deposited funds will be safe in part by Multiple choice question. having large vaults in plain view of customers. advertising how much money they print each day. relying on their strong reputations. setting interest rates at high levels.

relying on their strong reputations

One way to help with adverse selection problems in financial markets is to Multiple choice question. lower interest rates on unsecured loans. make companies publish more information about them. require more collateral from borrowers. encourage more free riders.

require more collateral from borrowers.

To be able to find funds to make large loans, it's essential that banks attract sufficient ____. Multiple choice question. loans from the Federal Reserve profits interest savers

savers

Select all that apply Venture capital firms Multiple select question. tend to NOT monitor new firms. specialize in non-risky ventures. specialize in risky ventures. monitor new companies.

specialize in risky ventures. monitor new companies.

Banks must lessen asymmetric information problems because when loans are made Multiple choice question. the borrower knows more than the lender. banks know more than the borrower and less than the lender. the lender knows more than the borrower. both the borrower and the lender know more than the bank.

the borrower knows more than the lender.

The concept of moral hazard originated in ________. Multiple choice question. the stock market banking bond markets the insurance industry

the insurance industry

The payments system refers to Multiple choice question. the network that verifies a borrower's credit-worthiness the network that allows 24 hour access to money virtual access to credit and debit statements the network that transfers funds from one account to another

the network that transfers funds from one account to another

Which of the following is the most liquid asset? Multiple choice question. Google stock A certificate of deposit $20 bill Home equity

$20 bill Reason: A measure of the ease and cost with which an asset can be turned into the means of payment refers to liquidity

Which of the following is true about banks as a source of funding? Multiple choice question. Banks have always been a dominant source of funding, and that importance has only grown over time. Banks are not as dominant a source of funding as they once were, but they are still quite important. Banks were not a dominant source of funding in the past, but they are increasingly important today. Banks were once the dominant source of funding, but they are of very little importance today.

Banks are not as dominant a source of funding as they once were, but they are still quite important.

Select all that apply Financial intermediaries tend to lower the cost of lending and borrowing. Which of the following functions help lower the cost? Diversifying risk Collecting and processing information services Pooling the resources of small savers Acting as a lender of last resort

Diversifying risk Pooling the resources of small savers

Select all that apply Why do we keep money in commercial banks? (Check all that apply.) Multiple select question. For debit cards For virtual access to accounts For safekeeping No other place to keep money

For debit cards For virtual access to accounts For safekeeping

Indicate the purpose of financial institutions. Multiple choice question. To determine interest rates and money supply For financial intermediation To print money To create monetary policy

For financial intermediation

Which of the following best summarizes the information available when a loan is made? Multiple choice question. Information is asymmetric (uneven) because the lender knows more than the borrower. Information is symmetric (even) because the lender knows more than the borrower. Information is asymmetric (uneven) because the borrower knows more than the lender. Information is symmetric (even) because the borrower knows more than the lender. Need help? Rev

Information is asymmetric (uneven) because the borrower knows more than the lender.

Which of the following is a key role played by financial intermediaries, according to the text? Multiple choice question. Keeping unemployment low Helping firms issue new stock Providing liquidity Setting interest rates

Providing liquidity Reason: The text lists five key roles for financial intermediaries: pooling savings; safekeeping and accounting; providing liquidity; diversifying risk; and collecting and processing information services. The Federal Reserve influences (but does not directly set) interest rates.

Select all that apply Which of the following functions of financial intermediaries help reduce transactions costs? (Check all that apply.) Multiple select question. Providing liquidity Collecting and processing information services Safekeeping and accounting Issuing letters of credit

Providing liquidity Safekeeping and accounting

Which of the following functions of financial intermediaries help reduce transactions costs? (Check all that apply.) Multiple select question. Issuing letters of credit Collecting and processing information services Providing liquidity Safekeeping and accounting

Providing liquidity Safekeeping and accounting

Select all that apply Which of the following is a solution to the moral hazard in equity finance? Multiple select question. The ability to fire managers Align managers' interests with stockholders' interests The inability to fire managers Require managers to own a stake in the firm

The ability to fire managers Align managers' interests with stockholders' interests Require managers to own a stake in the firm

Borrowers and lenders come together through banks. As such, this financial institution acts as Multiple choice question. a policymaker. a lender of last resort. a member of the FOMC. a financial intermediary.

a financial intermediary.

According to Akerlof's paper on adverse selection in used car markets, if used cars can be classified as either "peaches" (above-average quality) or "lemons" (below-average quality), then used cars will sell for ____________ and the supply of used cars will be made up of __________. Multiple choice question. a price between a peach and a lemon; half peaches and half lemons a price between a peach and a lemon; lemons only the price of a lemon; lemons only the price of a lemon; half peaches and half lemons

a price between a peach and a lemon; lemons only

The text showed in an exhibit that the United States, the United Kingdom, Germany and Japan all fund the majority of their business finance through Multiple choice question. financial markets. internal funds. financial intermediaries. the government.

internal funds.

The ease with which an asset can be converted into a means of payment refers to ____. Multiple choice question. liquidity payment system information and accounting credit worthiness

liquidity

A measure of the ease and cost with which an asset can be turned into the means of payment refers to _________; a highly ______ asset can be transformed into money quickly, easily, and at low cost.

liquidity; liquid

Figure 11.1, which puts domestic credit as a percent of GDP on the horizontal axis and real GDP per capita on the vertical axis, indicates that _____. Multiple choice question. there is a weak negative relationship between a nation's financial development and its per-capita real GDP there is a strong positive relationship between a nation's financial development and its per-capita real GDP there is a strong negative relationship between a nation's financial development and its per-capita real GDP there is a weak positive relationship between a nation's financial development and its per-capita real GDP

there is a strong positive relationship between a nation's financial development and its per-capita real GDP

When adverse selection problems exist in stock and bond markets, high-quality stocks will be priced ________ and high-quality bonds will pay a risk premium that is ___________. Multiple choice question. too low; too low too high; too low too high; too high too low; too high

too low; too high