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Quiz 2
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1
Which of the following statements is correct concerning the relative importance of direct and indirect finance in the U.S.?
A)Financial intermediaries provide a larger share of total financing than is provided by stocks and bonds.
B)Stocks and bonds provide a larger share of total financing that is provided by financial intermediaries.
C)Bonds are the most important source of total financing.
D)Both b and c are correct.
2
In industrialized economies, the sum of direct and indirect finance is typically:
A)less than 5% of GDP.
B)roughly 10% of GDP.
C)about half of GDP.
D)over 100% of GDP.
3
In less developed and emerging market economies, indirect finance is _______ than in industrialized economies.
A)smaller (relative to GDP)
B)larger (relative to GDP)
C)of roughly equal importance (relative to GDP)
D)sometimes smaller and sometimes larger (relative to GDP)
4
Compared to direct finance, the use of financial intermediaries:
A)raises transaction and information costs.
B)lowers transaction and information costs.
C)raises transaction costs but lowers information costs.
D)lowers transaction costs but raises information costs.
5
Which of the following advantages is not provided by financial intermediaries?
A)pooling the savings from many small savers
B)providing liquidity to savers
C)offering higher interest rates on savings deposits than are available under direct finance
D)collecting and processing information
6
The use of financial intermediaries:
A)increases the cost of engaging in financial transactions.
B)reduces the cost of engaging in financial transactions.
C)has no effect on the cost of engaging in any financial transaction.
D)reduces economic efficiency by raising transaction costs.
7
One of the advantages of indirect finance over direct finance is that:
A)direct finance always provides a more diversified portfolio of assets.
B)indirect finance allows borrowers to borrow for long time periods while lenders may give up the use of their funds for short time periods.
C)economies of scale are less likely to be realized with indirect finance.
D)None of the above is correct.
8
Large banks are often able to make loans at a lower cost per loan than occurs for smaller banks even when both large and small banks offer an equivalent mix of services. This is most likely an example of:
A)economies of scope.
B)economies of scale.
C)the law of diminishing returns.
D)the law of diminishing marginal utility.
9
If a bank has 2,000 depositors, each of whom deposits $500 in the bank, and the bank makes 100 loans of $10,000, then each depositor has contributed:
A)$5 to each loan.
B)$50 to each loan
C)$100 to each loan.
D)$500 to each loan.
E)$250 to each loan.
10
Asymmetric information in financial markets:
A)occurs because borrowers have more relevant information than do lenders.
B)may result in a moral hazard problem.
C)may result in an adverse selection problem.
D)All of the above are correct.
11
Which of the following is the best example of an adverse selection problem?
A)A business owner hires some local youth to set fire to his unprofitable business so that he may collect on his insurance.
B)Individuals that apply for high interest rate credit cards are more likely to default on their debt than a typical person in the population.
C)Individual borrowers sometimes pay more interest than necessary because they have not shopped around for the best available interest rate.
D)None of the above is an example of the adverse selection problem.
12
Which of the following is the best example of a moral hazard problem?
A)A business owner hires some local youth to set fire to his unprofitable business so that he may collect on his insurance.
B)Individuals that apply for high interest rate credit cards are more likely to default on their debt than a typical person in the population.
C)Individual borrowers sometimes pay more interest than necessary because they have not shopped around for the best available interest rate.
D)None of the above is an example of the adverse selection problem.
13
The work by Akerlof suggests that the "lemons problem" occurs in the market for loans because:
A)once someone receives a loan, he or she may choose to not pay it back.
B)individuals that are willing to borrow money, particularly at high interest rates, are relatively poor credit risks.
C)some banks provide deceptive terms in their loan contracts, inducing more people to borrow money than is optimal.
D)bank loans always leave a sour taste in all parties' mouths.
14
The adverse selection problem associated with bank loans may be reduced by:
A)relying on information from credit reporting agencies.
B)charging a higher interest rate on loans.
C)making loans available to more customers.
D)None of the above is correct.
15
Restrictive covenants in loan agreements are introduced primarily to reduce the:
A)adverse selection problem.
B)moral hazard problem.
C)diminishing returns problem.
D)symmetric information problem.
16
Banks monitor firms receiving commercial loans to reduce the:
A)adverse selection problem.
B)moral hazard problem.
C)diminishing returns problem.
D)economies of scale problem.
17
The use of stock options as a substantial component of CEO compensation became more common in the 1990s in an attempt to:
A)reduce the adverse selection problem in hiring CEOs.
B)reduce the moral hazard problem by aligning the interests of CEOs with those of stockholders.
C)benefit the CEO at the expense of the firm's profitability.
D)None of the above is correct.





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