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| 1 | |
If financial intermediaries did not have the ability to pool the resources of small savers: |
| | A) | The economy would grow faster. |
| | B) | The risk associated with lending would decrease. |
| | C) | People would likely save more. |
| | D) | Borrowers needing large amounts of money would find it more costly to obtain the funds. |
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| 2 | |
Financial intermediaries, through their ability to lower transaction costs: |
| | A) | Take people away from their comparative advantage. |
| | B) | Reduce the number of financial transactions that occur. |
| | C) | Increase the amount of trading that occurs in an economy. |
| | D) | Allow for people to be more self-sufficient. |
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| 3 | |
Asymmetric information poses two important obstacles to the smooth flow of funds from savers to investors. They are: |
| | A) | Adverse selection, which arises before the transaction occurs, and moral hazard, which occurs after the transaction. |
| | B) | Adverse selection and moral hazard, both of which occur before the transaction. |
| | C) | Adverse selection and moral hazard, both of which occur after the transaction. |
| | D) | Moral hazard, which arises before the transaction occurs, and adverse selection, which occurs after the transaction. |
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| 4 | |
The usual situation in banking regarding asymmetric information is: |
| | A) | Lenders and borrowers have perfect information. |
| | B) | Borrowers know more than lenders. |
| | C) | Borrowers and lenders have the same information. |
| | D) | Lenders know more than borrowers. |
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| 5 | |
Which of the following is a problem of adverse selection? |
| | A) | Individuals use more medical services as a result of their purchase of a health insurance plan. |
| | B) | A person takes up the hobby of bungee jumping after purchasing health insurance. |
| | C) | The lender has a problem of distinguishing good risk from bad risk borrowers. |
| | D) | The lender has a problem determining that the proceeds from a loan are being used as the borrower stated. |
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| 6 | |
Which of the following is a problem of moral hazard? |
| | A) | An individual who purchases full auto insurance begins to leave his or her keys in the car while running into a store. |
| | B) | A lender cannot distinguish good risk from bad risk borrowers. |
| | C) | Life insurance companies offer an average premium to smokers and non-smokers so they do not have to have two different premiums. |
| | D) | An auto insurance company charges higher premiums to younger drivers than what they charge to older drivers. |
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| 7 | |
Mary Jones is the president of a local bank. She knows that half of the loan applicants in town she would classify as high risk and the other half as low risk. She observes that the other banks in town charge two different interest rates, a lower rate for low-risk borrowers, and the higher rate for high-risk borrowers. She decides that to have an advantage over the other banks she will offer an average rate to everyone. The likely result will be: |
| | A) | Mary's bank will be highly successful as this will provide the bank with a large competitive advantage. |
| | B) | Mary's bank is likely to see a dramatic increase in both types of borrowers. |
| | C) | Mary's bank will experience adverse selection and have a disproportionate number of high risk borrowers. |
| | D) | Mary's bank will experience adverse selection and have a disproportionate number of low risk borrowers. |
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| 8 | |
Direct finance: |
| | A) | Has recently become a much more important source of finance. |
| | B) | Is a greater source of finance for business than indirect finance. |
| | C) | Involves borrowing through a financial intermediary. |
| | D) | Make banks a critical source of lending. |
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| 9 | |
Requiring that borrowers put up collateral to obtain a loan is a tool designed to treat: |
| | A) | The free-rider problem. |
| | B) | The Lemons Problem. |
| | C) | The problem of moral hazard. |
| | D) | The problem of adverse selection. |
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| 10 | |
Which of the following could the lemons problem, applied to financial markets, explain? |
| | A) | An average interest rate that is too high for the actual risk obtained. |
| | B) | High quality potential borrowers relying more on internally generated funds to finance investment. |
| | C) | Profits for many lenders increasing significantly. |
| | D) | Lenders seeing a disproportionate share of high quality loan applicants. |
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| 11 | |
The principal-agent problem is quite common in large public corporations due to: |
| | A) | Too little regulation by government. |
| | B) | The fact that large corporations generate large sales volumes. |
| | C) | The fact that the people making the operational decisions are usually not the owners. |
| | D) | The fact that large companies employ many people. |
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| 12 | |
The fact that many companies employ supervisors to oversee the actions of workers is a way to treat: |
| | A) | Moral hazard. |
| | B) | The free-rider problem. |
| | C) | The law of diminishing returns. |
| | D) | Adverse selection. |
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| 13 | |
Providing stock options to corporate managers was an idea designed to: |
| | A) | Hide increases in pay of corporate executives from stockholders. |
| | B) | Treat the free-rider problem. |
| | C) | Treat adverse selection. |
| | D) | Align managers' interest with the stockholders' interest. |
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| 14 | |
The moral hazard that can result from debt financing is mainly due to the: |
| | A) | Borrower taking greater risk in hopes of obtaining a larger return. |
| | B) | Borrower wanting to refinance the loan. |
| | C) | Economy turning sour and the borrower defaulting. |
| | D) | Borrower not working as hard once he or she obtains the loan. |
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| 15 | |
Often a bank will require a loan officer to make personal visits on customers with loans outstanding. This is encouraged because: |
| | A) | The bank wants to make sure the business is busy. |
| | B) | This is an effective monitoring technique and should reduce moral hazard. |
| | C) | The bank has excess funds available and hopes to make another loan to the business. |
| | D) | The bank worries about another bank trying to steal their customers. |
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