Question 1

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

Accepted Answer

A)  Borrowers and lenders have perfect information
B)  Borrowers would have more information than lenders
C)  Borrowers and lenders have the same information
D)  Lenders have more information than borrowersE) A) and C)
F) A) and B)

Question 2

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.

Accepted Answer

As we saw in the chapter, requiring the ...

Question 3

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:

Accepted Answer

A)  The shares of the low quality firm will disappear from the market
B)  The shares of both companies will trade on the market
C)  The shares of the high quality firm will disappear from the market
D)  This is an example of moral hazard and the shares of both companies will cease to tradeE) A) and D)
F) All of the above

Question 4

Financial intermediaries:

Accepted Answer

A)  Increase the cost of financial transactions but offset these higher costs by providing safekeeping of customer funds
B)  Provide handling of payments but usually less efficiently than other firms
C)  Reduce the cost of financial transactions
D)  Provide safety of resources, but only for the large borrowing customers who can afford itE) B) and C)
F) A) and D)

Question 5

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

Accepted Answer

A)  Provide information free to investors but charge the companies for the ratings provided on the company
B)  Provide information free to investors but recoup expenses through advertising done by the companies being rated
C)  Charge investors who subscribe to the services for the information
D)  Duplicate information that is available to investors at no costE) A) and B)
F) None of the above

Question 6

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.

Accepted Answer

If the company cannot distinguish applic...

Question 7

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.

Accepted Answer

No, the lender will suffer adverse selec...

Question 8

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:

Accepted Answer

A)  Buyers having more information about the product than the seller
B)  The seller having more information about the product than the buyer
C)  Symmetric information
D)  Adverse selectionE) B) and D)
F) A) and B)

Question 9

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:

Accepted Answer

A)  The law of demand
B)  Economies of scale
C)  Comparative advantage
D)  Information costsE) None of the above
F) A) and C)

Question 10

Examples of economies of scale are:

Accepted Answer

A)  The additional fees financial intermediaries charge on small accounts
B)  The decrease in overall transaction costs that occur as volume increases
C)  The reduction in the cost per transaction that occurs as the number of transactions increase
D)  The decrease in overall information costs that occurs as more transactions are handledE) All of the above
F) A) and B)

Question 11

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

Accepted Answer

A)  Borrower not working as hard once he or she obtains the loan
B)  Borrower wanting to refinance the loan
C)  Borrower taking greater risk in hopes of obtaining a larger return
D)  Economy turning sour and the borrower defaultingE) A) and B)
F) None of the above

Question 12

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

Accepted Answer

A)  High quality goods will drive low quality goods out of the market
B)  Lacking the ability to distinguish high from low quality, the quality the market will end up offering will be the average quality
C)  Lacking the ability to distinguish high from low quality, low quality may drive high quality out of the market
D)  High quality is always demanded by consumers over low qualityE) B) and D)
F) None of the above

Question 13

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).

Accepted Answer

A secured loan is a loan that is backed ...

Question 14

One reason financial intermediaries earn profits is because:

Accepted Answer

A)  Individuals are not aware of the true cost of using an intermediary
B)  Financial intermediaries are charging for services people do not value
C)  Individuals are willing to pay for the reduction in transaction costs financial intermediaries provide
D)  They raise the cost of transactions and pass these higher costs on to customersE) A) and B)
F) A) and C)

Question 15

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?

Accepted Answer

While it is True that credit cards usual...

Question 16

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:

Accepted Answer

A)  Symmetric information in the financial markets
B)  Perfect information in the financial markets
C)  Asymmetric information in the financial markets
D)  Perfect information in the pizza marketE) B) and C)
F) A) and B)

Question 17

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

Accepted Answer

A)  Minimize the monopoly profits some corporations earn
B)  Give small corporations a better chance of competing against large corporations
C)  Address the potential harm from asymmetric information
D)  Discourage risk-taking by investorsE) A) and D)
F) A) and C)

Question 18

Financial intermediation is:

Accepted Answer

A)  Far less important than direct finance through stock and bond markets
B)  Only a little more important than direct finance in the United States
C)  Much more important than direct finance through stock and bond markets
D)  The same thing as finance through stock and bond marketsE) B) and C)
F) All of the above

Question 19

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

Accepted Answer

A)  Charge fees to these small savers and earn substantial income
B)  Obtain the funds necessary to make loans to borrowers seeking large amounts
C)  Lower their transaction costs of obtaining funds
D)  Avoid paying any interest to obtain funds to lendE) B) and D)
F) A) and D)

Question 20

Mutual funds offer investors:

Accepted Answer

A)  A greater return for greater risk than what an investor can earn on his own
B)  A lower return for more risk than what the investor could earn on his own
C)  A lower return for less risk than what the investor could earn on his own
D)  A way for individuals to eliminate the idiosyncratic risk associated with any single investmentE) B) and C)
F) A) and D)

Exam 11: The Economics of Financial Intermediation

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.

Correct Answer
verified
No, the lender will suffer adverse selec...
View Answer

Correct Answer
verified

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:

Correct Answer
verified

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).

Correct Answer
verified
A secured loan is a loan that is backed ...
View Answer

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.

Correct Answer
verified
As we saw in the chapter, requiring the ...
View Answer

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.

Correct Answer
verified
If the company cannot distinguish applic...
View Answer

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

Correct Answer
verified

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

Correct Answer
verified

One reason financial intermediaries earn profits is because:

Correct Answer
verified

Financial intermediaries:

Correct Answer
verified

Financial intermediation is:

Correct Answer
verified

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

Correct Answer
verified

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?

Correct Answer
verified
While it is True that credit cards usual...
View Answer

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

Correct Answer
verified

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

Correct Answer
verified

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:

Correct Answer
verified

Examples of economies of scale are:

Correct Answer
verified

Mutual funds offer investors:

Correct Answer
verified

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

Correct Answer
verified

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:

Correct Answer
verified

Exam 11: The Economics of Financial Intermediation

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.

Correct AnswerverifiedNo, the lender will suffer adverse selec...View AnswerShow Answer

Correct AnswerverifiedShow Answer

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:

Correct AnswerverifiedShow Answer

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).

Correct AnswerverifiedA secured loan is a loan that is backed ...View AnswerShow Answer

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.

Correct AnswerverifiedAs we saw in the chapter, requiring the ...View AnswerShow Answer

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.

Correct AnswerverifiedIf the company cannot distinguish applic...View AnswerShow Answer

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

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

One reason financial intermediaries earn profits is because:

Correct AnswerverifiedShow Answer

Financial intermediaries:

Correct AnswerverifiedShow Answer

Financial intermediation is:

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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?

Correct AnswerverifiedWhile it is True that credit cards usual...View AnswerShow Answer

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

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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:

Correct AnswerverifiedShow Answer

Examples of economies of scale are:

Correct AnswerverifiedShow Answer

Mutual funds offer investors:

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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:

Correct AnswerverifiedShow Answer

Correct Answer
verified
No, the lender will suffer adverse selec...
View Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
A secured loan is a loan that is backed ...
View Answer

Correct Answer
verified
As we saw in the chapter, requiring the ...
View Answer

Correct Answer
verified
If the company cannot distinguish applic...
View Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
While it is True that credit cards usual...
View Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified