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Multiple Choice



1

Financial Intermediation:
A)Is far less important than direct finance through stock and bond markets.
B)Is much more important than direct finance through stock and bond markets.
C)Is only more important than direct finance in The United States.
D)b and c
2

When the amount of direct and indirect financing are summed, the result is usually:
A)Approximately 75% of GDP.
B)Equal to one half of the amount in GDP.
C)The amount in M2.
D)Greater than 100% of GDP.
3

Emerging market economies, compared to industrialized economies:
A)Have financial markets that are the same in composition but differ in size.
B)Have financial markets that differ in composition but not in size.
C)Have financial markets that differ in composition and size.
D)Have financial markets that are similar in composition and size.
4

Which of the following is a role of a financial institution acting as a financial intermediary:
A)Pooling the resources of small savers.
B)Formulating oversight regulations.
C)Sending out free calendars at the holidays.
D)Lobbying legislators.
5

Without the ability of financial intermediaries to pool the resources of small savers:
A)Borrowers needing large amounts of money would find it less costly to obtain the funds.
B)The economy would likely grow faster.
C)People would likely save more.
D)The risk associated with lending would increase.
E)a and c.
6

The fact that a financial intermediary can use the same contract for many customers is an example of:
A)Economies of Scope.
B)The Law of Diminishing Marginal Returns
C)The Law of Increasing Opportunity Cost.
D)Economies of Scale
7

A bank can usually offer a saver a higher return for the same risk because:
A)The bank can usually purchase assets at a higher cost than any one saver.
B)The bank can pool the resources of larger savers and purchase lower denominated assets.
C)Economies of scale can be applied by the bank in its purchase of assets.
D)none of the above.
8

If a bank has 2000 depositors, each of whom deposits $500 in the bank, and the bank makes 100 loans of $10,000 each:
A)Each depositor has contributed $100 to each loan.
B)Each depositor has contributed $5 to each loan.
C)Each depositor has contributed $50 to each loan.
D)Each depositor has contributed $500 to each loan.
9

If information in a financial market is asymmetric, this means:
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 lack any information.
10

Della's Donut Shop goes out of business due to decreasing sales resulting from the dramatic increase in people on low carbohydrate diets. The decrease in business also results in Della's defaulting on the loan they have with the bank. This is an example of:
A)Asymmetric information in financial markets.
B)Lack of perfect information in financial markets.
C)Moral hazard in financial markets.
D)Adverse selection.
11

In a financial market where information is symmetric:
A)The same information would be known by both parties in a transaction.
B)One party to a transaction knows information the other party does not.
C)The ability to obtain information is available to only one party.
D)All of the above.
12

One of the conclusions from Akerlof's paper titled The Market for Lemons was:
A)High quality goods and low quality goods will co-exist in 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)High quality is always demanded by consumers over low quality.
D)Lacking the ability to distinguish high from low quality, low quality may drive high quality out of the market.
E)a and b
13

Requiring a large deductible on the part of an insured is one way insurers treat the problem of:
A)Free-riding.
B)Moral hazard.
C)Adverse selection.
D)The Lemons market.
14

Often a bank will require a loan officer to make personal visits on customers with loans outstanding. This is encouraged because:
A)The bank worries about competitors trying to steal their customers.
B)The bank wants to make sure the business is still there.
C)The bank likely has excess funds available and hopes to make another loan to the business.
D)This is an effective monitoring technique and should reduce moral hazard.
15

Deflation compounds information problems because:
A)It increases a company's net worth.
B)It reduces the dollar value of assets while the dollar value of liabilities stays constant.
C)It tends to understate a company's assets and overstate their liabilities.
D)It always harms lenders.





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