CIC3017 - Sample Questions for Mid Term Preparation 1) Financial markets and institutions A) involve the movement of huge quantities of money. B) affect
... [Show More] the profits of businesses. C) affect the types of goods and services produced in an economy. D) do all of the above. E) do only A and B of the above. Answer: D Topic: Chapter 1.1 Why Study Financial Markets 2) Financial market activities affect A) personal wealth. B) spending decisions by individuals and business firms. C) the economy's location in the business cycle. D) all of the above. Answer: D Topic: Chapter 1.1 Why Study Financial Markets 3) Markets in which funds are transferred from those who have excess funds available to those who have a shortage of available funds are called A) commodity markets. B) funds markets. C) derivative exchange markets. D) financial markets. Answer: D 4) A stronger dollar benefits ________ and hurts ________. A) American businesses; American consumers B) American businesses; foreign businesses C) American consumers; American businesses D) foreign businesses; American consumers contact: royfields212@gmail.com Answer: C Topic: Chapter 1.1 Why Study Financial Markets 5) A weaker dollar benefits ________ and hurts ________. A) American businesses; American consumers B) American businesses; foreign consumers C) American consumers; American businesses D) foreign businesses; American consumers Answer: A 6) The organisation responsible for the conduct of monetary policy in the United States is the A) Comptroller of the Currency. B) U.S. Treasury. C) Federal Reserve System. D) Bureau of Monetary Affairs. Answer: C Topic: Chapter 1.2 Why Study Financial Institutions 7) The central bank of the United States is A) Citicorp. B) The Fed. C) Bank of America. D) The Treasury. E) none of the above. Answer: B Topic: Chapter 1.2 Why Study Financial Institutions 8) Monetary policy is chiefly concerned with A) how much money businesses earn. B) the level of interest rates and the nation's money supply. C) how much money people pay in taxes. D) whether people have saved enough money for retirement. Answer: B Topic: Chapter 1.2 Why Study Financial Institutions 9) Economists group commercial banks, savings and loan associations, credit unions, mutual funds, mutual savings banks, insurance companies, pension funds, and finance companies together under the heading financial intermediaries. Financial intermediaries A) act as middlemen, borrowing funds from those who have saved and lending these funds to others. B) produce nothing of value and are therefore a drain on society's resources. C) help promote a more efficient and dynamic economy. D) do all of the above. E) do only A and C of the above. Answer: E Topic: Chapter 1.2 Why Study Financial Institutions 10) Money is anything accepted by anyone as payment for services or goods. Answer: TRUE Topic: Chapter 1.2 Why Study Financial Institutions 11) A stock is a debt security that promises to make periodic payments for a specific period of time. Answer: FALSE 12) Monetary policy affects interest rates but has little effect on inflation or business cycles. Answer: FALSE Topic: Chapter 1.2 Why Study Financial Institutions 13) The government organization responsible for the conduct of monetary policy in the United States is the U.S. Treasury. Answer: FALSE Topic: Chapter 1.2 Why Study Financial Institutions 14) Interest rates can be accurately described as the rental price of money. Answer: TRUE Topic: Chapter 1.1 Why Study Financial Markets 15) Holding everything else constant, as the dollar weakens vacations abroad become less attractive. Answer: TRUE Topic: Chapter 1.1 Why Study Financial Markets 16) Financial innovation has provided more options to both investors and borrowers. Answer: TRUE 17) A financial intermediary borrows funds from people who have saved. Answer: TRUE Topic: Chapter 1.2 Why Study Financial Institutions 18) Holding everything else constant, as the dollar strengthens foreigners will buy more U.S. exports. Answer: FALSE Topic: Chapter 1.1 Why Study Financial Markets 19) In a bull market stock prices are rising, on average. Answer: TRUE Topic: Chapter 1.1 Why Study Financial Markets 20) Financial institutions are among the largest employers in the country and frequently pay very high salaries. Answer: TRUE Topic: Chapter 1.3 Applied Managerial Perspective 21) Interest rates can be accurately described as the rental price of money. Answer: TRUE Topic: Chapter 1.1 Why Study Financial Markets 22) Holding everything else constant, as the dollar weakens vacations abroad become less attractive. Answer: TRUE Topic: Chapter 1.1 Why Study Financial Markets 23) Financial innovation has provided more options to both investors and borrowers. Answer: TRUE Topic: Chapter 1.1 Why Study Financial Markets 24) A financial intermediary borrows funds from people who have saved. Answer: TRUE Topic: Chapter 1.2 Why Study Financial Institutions 25) Holding everything else constant, as the dollar strengthens foreigners will buy more U.S. exports. Answer: FALSE Topic: Chapter 1.1 Why Study Financial Markets 26) In a bull market stock prices are rising, on average. Answer: TRUE Topic: Chapter 1.1 Why Study Financial Markets 27) Financial institutions are among the largest employers in the country and frequently pay very high salaries. Answer: TRUE Topic: Chapter 1.3 Applied Managerial Perspective 28) Different interest rates have a tendency to move in unison. Answer: TRUE Topic: Chapter 1.1 Why Study Financial Markets 29) Financial markets are what makes financial institutions work. Answer: FALSE Topic: Chapter 1.1 Why Study Financial Markets 30) In recent years, financial markets have become more risky. However, only a limited number of tools (such as derivatives) are available to assist in managing this risk. Answer: FALSE Topic: Chapter 1.1 Why Study Financial Markets 31) Although the internet has changed many aspects of our lives, it hasn't proven very useful for collecting and/or analyzing financial and economic data. Answer: FALSE Topic: Chapter 1.4 How We Study Financial Markets and Institutions 32) What are financial intermediaries and what do they do? Topic: Chapter 1.2 Why Study Financial Institutions 33) What is money? Topic: Chapter 1.1 Why Study Financial Markets 34) How does a bond differ from a stock? Topic: Chapter 1.1 Why Study Financial Markets 35) Why is the stock market so important to individuals, firms, and the economy? Topic: Chapter 1.1 Why Study Financial Markets 36) What is the central bank and what does it do? Topic: Chapter 1.2 Why Study Financial Institutions 38) Every financial market performs the following function: A) It determines the level of interest rates. B) It allows common stock to be traded. C) It allows loans to be made. D) It channels funds from lenders-savers to borrowers-spenders. Answer: D Topic: Chapter 2.1 Function of Financial Markets 39) Financial markets have the basic function of A) bringing together people with funds to lend and people who want to borrow funds. B) assuring that the swings in the business cycle are less pronounced. C) assuring that governments need never resort to printing money. D) both A and B of the above. E) both B and C of the above. Answer: A Topic: Chapter 2.1 Function of Financial Markets 40) Which of the following can be described as involving direct finance? A) A corporation's stock is traded in an over-the-counter market. B) People buy shares in a mutual fund. C) A pension fund manager buys commercial paper in the secondary market. D) An insurance company buys shares of common stock in the over-the-counter markets. E) None of the above. Answer: E Topic: Chapter 2.1 Function of Financial Markets 41) Which of the following can be described as involving direct finance? A) A corporation's stock is traded in an over-the-counter market. B) A corporation buys commercial paper issued by another corporation. C) A pension fund manager buys commercial paper from the issuing corporation. D) Both A and B of the above. E) Both B and C of the above. Answer: B Topic: Chapter 2.1 Function of Financial Markets 42) Which of the following can be described as involving indirect finance? A) A corporation takes out loans from a bank. B) People buy shares in a mutual fund. C) A corporation buys commercial paper in a secondary market. D) All of the above. E) Only A and B of the above. Answer: E Topic: Chapter 2.1 Function of Financial Markets 43) Which of the following can be described as involving indirect finance? A) A bank buys a U.S. Treasury bill from one of its depositors. B) A corporation buys commercial paper issued by another corporation. C) A pension fund manager buys commercial paper in the primary market. D) Both A and C of the above. Answer: D Topic: Chapter 2.1 Function of Financial Markets 44) Financial markets improve economic welfare because A) they allow funds to move from those without productive investment opportunities to those who have such opportunities. B) they allow consumers to time their purchases better. C) they weed out inefficient firms. D) they do all of the above. E) they do A and B of the above. Answer: E Topic: Chapter 2.1 Function of Financial Markets 45) A country whose financial markets function poorly is likely to A) efficiently allocate its capital resources. B) enjoy high productivity. C) experience economic hardship and financial crises. D) increase its standard of living. Answer: C Topic: Chapter 2.1 Function of Financial Markets 46) Which of the following are securities? A) A certificate of deposit B) A share of Texaco common stock C) A Treasury bill D) All of the above E) Only A and B of the above Answer: D Topic: Chapter 2.2 Structure of Financial Markets 47) Which of the following statements about the characteristics of debt and equity are true? A) They both can be long-term financial instruments. B) They both involve a claim on the issuer's income. C) They both enable a corporation to raise funds. D) All of the above. E) Only A and B of the above. Answer: D Topic: Chapter 2.2 Structure of Financial Markets 48) The money market is the market in which ________ are traded. A) new issues of securities B) previously issued securities C) short-term debt instruments D) long-term debt and equity instruments Answer: C Topic: Chapter 2.2 Structure of Financial Markets 49) Long-term debt and equity instruments are traded in the ________ market. A) primary B) secondary C) capital D) money Answer: C Topic: Chapter 2.2 Structure of Financial Markets 50) Which of the following are primary markets? A) The New York Stock Exchange B) The U.S. government bond market C) The over-the-counter stock market D) The options markets E) None of the above Answer: E Topic: Chapter 2.2 Structure of Financial Markets 51) Which of the following are secondary markets? A) The New York Stock Exchange B) The U.S. government bond market C) The over-the-counter stock market D) The options markets E) All of the above Answer: E Topic: Chapter 2.2 Structure of Financial Markets 52) A corporation acquires new funds only when its securities are sold in the A) secondary market by an investment bank. B) primary market by an investment bank. C) secondary market by a stock exchange broker. D) secondary market by a commercial bank. Answer: B Topic: Chapter 2.2 Structure of Financial Markets 53) Intermediaries who are agents of investors and match buyers with sellers of securities are called A) investment bankers. B) traders. C) brokers. D) dealers. E) none of the above. Answer: C Topic: Chapter 2.4 Function of Financial Intermediaries: Indirect Finance 54) Intermediaries who link buyers and sellers by buying and selling securities at stated prices are called A) investment bankers. B) traders. C) brokers. D) dealers. E) none of the above. Answer: D Topic: Chapter 2.4 Function of Financial Intermediaries: Indirect Finance 55) An important financial institution that assists in the initial sale of securities in the primary market is the A) investment bank. B) commercial bank. C) stock exchange. D) brokerage house. Answer: A Topic: Chapter 2.5 Types of Financial Intermediaries 56) Which of the following statements about financial markets and securities are true? A) Most common stocks are traded over-the-counter, although the largest corporations have their shares traded at organized stock exchanges such as the New York Stock Exchange. B) A corporation acquires new funds only when its securities are sold in the primary market. C) Money market securities are usually more widely traded than longer-term securities and so tend to be more liquid. D) All of the above are true. E) Only A and B of the above are true. Answer: D Topic: Chapter 2.2 Structure of Financial Markets 57) Which of the following statements about financial markets and securities are true? A) A bond is a long-term security that promises to make periodic payments called dividends to the firm's residual claimants. B) A debt instrument is intermediate term if its maturity is less than one year. C) A debt instrument is long term if its maturity is ten years or longer. D) The maturity of a debt instrument is the time (term) that has elapsed since it was issued. Answer: C Topic: Chapter 2.2 Structure of Financial Markets 58) Which of the following statements about financial markets and securities are true? A) Few common stocks are traded over-the-counter, although the over-the-counter markets have grown in recent years. B) A corporation acquires new funds only when its securities are sold in the primary market. C) Capital market securities are usually more widely traded than longer-term securities and so tend to be more liquid. D) All of the above are true. E) Only A and B of the above are true. Answer: B Topic: Chapter 2.2 Structure of Financial Markets 59) Which of the following markets is sometimes organized as an over-the-counter market? A) The stock market B) The bond market C) The foreign exchange market D) The federal funds market E) all of the above Answer: E Topic: Chapter 2.2 Structure of Financial Markets 60) Bonds that are sold in a foreign country and are denominated in that country's currency are known as A) foreign bonds. B) Eurobonds. C) Eurocurrencies. D) Eurodollars. Answer: A Topic: Chapter 2.3 Internationalization of Financial Markets 61) Bonds that are sold in a foreign country and are denominated in a currency other than that of the country in which they are sold are known as A) foreign bonds. B) Eurobonds. C) Eurocurrencies. D) Eurodollars. Answer: B Topic: Chapter 2.3 Internationalization of Financial Markets 62) Financial intermediaries A) exist because there are substantial information and transaction costs in the economy. B) improve the lot of the small saver. C) are involved in the process of indirect finance. D) do all of the above. E) do only A and B of the above. Answer: D Topic: Chapter 2.4 Function of Financial Intermediaries: Indirect Finance 63) The main sources of financing for businesses, in order of importance, are A) financial intermediaries, issuing bonds, issuing stocks. B) issuing bonds, issuing stocks, financial intermediaries. C) issuing stocks, issuing bonds, financial intermediaries. D) issuing stocks, financial intermediaries, issuing bonds. Answer: A Topic: Chapter 2.4 Function of Financial Intermediaries: Indirect Finance 64) The presence of transaction costs in financial markets explains, in part, why A) financial intermediaries and indirect finance play such an important role in financial markets. B) equity and bond financing play such an important role in financial markets. C) corporations get more funds through equity financing than they get from financial intermediaries. D) direct financing is more important than indirect financing as a source of funds. Answer: A Topic: Chapter 2.4 Function of Financial Intermediaries: Indirect Finance 65 Financial intermediaries can substantially reduce transaction costs per dollar of transactions because their large size allows them to take advantage of A) poorly informed consumers. B) standardization. C) economies of scale. D) their market power. Answer: C Topic: Chapter 2.4 Function of Financial Intermediaries: Indirect Finance 66) The purpose of diversification is to A) reduce the volatility of a portfolio's return. B) raise the volatility of a portfolio's return. C) reduce the average return on a portfolio. D) raise the average return on a portfolio. Answer: A Topic: Chapter 2.4 Function of Financial Intermediaries: Indirect Finance 67) An investor who puts all her funds into one asset ________ her portfolio's ________. A) increases; diversification B) decreases; diversification C) increases; average return D) decreases; average return Answer: B Topic: Chapter 2.4 Function of Financial Intermediaries: Indirect Finance 68) Through risk-sharing activities, a financial intermediary ________ its own risk and ________ the risks of its customers. A) reduces; increases B) increases; reduces C) reduces; reduces D) increases; increases Answer: B Topic: Chapter 2.4 Function of Financial Intermediaries: Indirect Finance 69) The presence of ________ in financial markets leads to adverse selection and moral hazard problems that interfere with the efficient functioning of financial markets. A) noncollateralized risk B) free-riding C) asymmetric information D) costly state verification Answer: C Topic: Chapter 2.4 Function of Financial Intermediaries: Indirect Finance 70) When the lender and the borrower have different amounts of information regarding a transaction, ________ is said to exist. A) asymmetric information B) adverse selection C) moral hazard D) fraud Answer: A Topic: Chapter 2.4 Function of Financial Intermediaries: Indirect Finance 71) When the potential borrowers who are the most likely to default are the ones most actively seeking a loan, ________ is said to exist. A) asymmetric information B) adverse selection C) moral hazard D) fraud Answer: B Topic: Chapter 2.4 Function of Financial Intermediaries: Indirect Finance Question Status: Previous Edition 72) When the borrower engages in activities that make it less likely that the loan will be repaid, ________ is said to exist. A) asymmetric information B) adverse selection C) moral hazard D) fraud Answer: C Topic: Chapter 2.4 Function of Financial Intermediaries: Indirect Finance 73) The concept of adverse selection helps to explain A) which firms are more likely to obtain funds from banks and other financial intermediaries, rather than from the securities markets. B) why indirect finance is more important than direct finance as a source of business finance. C) why direct finance is more important than indirect finance as a source of business finance. D) only A and B of the above. E) only A and C of the above. Answer: D Topic: Chapter 2.4 Function of Financial Intermediaries: Indirect Finance 74) Adverse selection is a problem associated with equity and debt contracts arising from A) the lender's relative lack of information about the borrower's potential returns and risks of his investment activities. B) the lender's inability to legally require sufficient collateral to cover a 100 percent loss if the borrower defaults. C) the borrower's lack of incentive to seek a loan for highly risky investments. D) none of the above. Answer: A Topic: Chapter 2.4 Function of Financial Intermediaries: Indirect Finance 75) What is the distinction between the nominal interest rate and the real interest rate? Which is a better indicator of incentives to borrow and lend? Why? Topic: Chapter 3.2 Distinction Between Real and Nominal Interest Rates 76) What is the model whose equations are estimated using statistical procedures used in forecasting interest rates called? A) Econometric model B) Liquidity preference framework C) Market equilibrium D) Fisher effect Answer: A Topic: Chapter 4.A1 Models of Asset Pricing 77) As expected inflation increases for the coming year, we expected the price of gold to ________ due to a rightward shift the in ________ curve. A) increase; demand B) increase; supply C) decrease; demand D) decrease; supply Answer: A Topic: Chapter 4.A2 Applying the Asset Approach to a Commodity Market: The Case of Gold 78) As expected inflation falls for the coming year, we expected the price of gold to ________ due to a leftward shift the in ________ curve. A) increase; demand B) increase; supply C) decrease; demand D) decrease; supply Answer: C Topic: Chapter 4.A2 Applying the Asset Approach to a Commodity Market: The Case of Gold 79) The efficient market hypothesis A) is based on the assumption that prices of securities fully reflect all available information. B) holds that the expected return on a security equals the equilibrium return. C) both A and B. D) neither A nor B. Answer: C Topic: Chapter 6.1 The Efficient Market Hypothesis 80) If the optimal forecast of the return on a security exceeds the equilibrium return, then A) the market is inefficient. B) an unexploited profit opportunity exists. C) the market is in equilibrium. D) only A and B of the above are true. E) only B and C of the above are true. Answer: D Topic: Chapter 6.1 The Efficient Market Hypothesis 81) According to the efficient market hypothesis A) one cannot expect to earn an abnormally high return by purchasing a security. B) information in newspapers and in the published reports of financial analysts is already reflected in market prices. C) unexploited profit opportunities abound, thereby explaining why so many people get rich by trading securities. D) all of the above are true. E) only A and B of the above are true. Answer: E Topic: Chapter 6.1 The Efficient Market Hypothesis 82) Another way to state the efficient market condition is that in an efficient market, A) unexploited profit opportunities will be quickly eliminated. B) unexploited profit opportunities will never exist. C) arbitrageurs guarantee that unexploited profit opportunities never exist. D) both A and C of the above occur. Answer: A Topic: Chapter 6.1 The Efficient Market Hypothesis 83) Raj Rajaratnam, a successful investor in the 2000s who consistently beat the market, was able to outperform the market on a consistent basis, indicating that A) securities markets are not efficient. B) unexploited profit opportunities were abundant. C) investors can outperform the market with inside information. D) only B and C of the above. Answer: C Topic: Chapter 6.2 Evidence on the Efficient Market Hypothesis 84) The efficient market hypothesis applies to A) both the stock market and the foreign exchange market. B) the stock market but not the foreign exchange market. C) the foreign exchange market but not the stock market. D) neither the stock market nor the foreign exchange market. Answer: A Topic: Chapter 6.2 Evidence on the Efficient Market Hypothesis 85) Which of the following is not one of the eight basic facts about financial structure? A) The financial system is among the most heavily regulated sectors of the economy. B) Issuing marketable securities is the primary way businesses finance their operations. C) Indirect finance, which involves the activities of financial intermediaries, is many times more important than direct finance in which businesses raise funds directly from lenders in financial markets. D) Financial intermediaries is the most important source of external funds to finance businesses. Answer: B Topic: Chapter 7.1 Basic Facts About Financial Structure Throughout the World 86) Because information is scarce, A) equity contracts are used much more frequently to raise capital than are debt contracts. B) monitoring managers gives rise to costly state verification. C) government regulations, such as standard accounting principles, can help reduce moral hazard. D) all of the above are true. E) only B and C of the above are true. Answer: E Topic: Chapter 7.5 How Moral Hazard Affects the Choice Between Debt and Equity Contracts 87) Which of the following best explains the recent decline in the role of financial intermediaries? A) Private production and sale of information B) Government regulation to increase information C) Improvements in information technology D) None of the above can explain the recent decline Answer: C Topic: Chapter 7.2 Transaction Costs 88) (I) The total cost of carrying out a transaction in financial markets increases proportionally with the size of the transaction. (II) Financial intermediaries facilitate diversification when an investor has only a small sum to invest. A) (I) is true; (II) false. B) (I) is false; (II) true. C) Both (I) and (II) are true. D) Both (I) and (II) are false. Answer: B Topic: Chapter 7.2 Transaction Costs 89) If borrowers take on big risks after obtaining a loan, then lenders face the problem of A) free-riding. B) adverse selection. C) moral hazard. D) costly state verification. Answer: C Topic: Chapter 7.3 Asymmetric Information: Adverse Selection and Moral Hazard 90) Because of the lemons problem in the used car market, the average quality of the used cars offered for sale will be ________, which gives rise to the problem of ________. A) low; moral hazard B) low; adverse selection C) high; moral hazard D) high; adverse selection Answer: B Topic: Chapter 7.4 The Lemons Problem: How Adverse Selection Influences Financial Structure 91) In the used car market, asymmetric information leads to the lemons problem because the price that buyers are willing to pay will A) reflect the highest quality of used cars in the market. B) reflect the lowest quality of used cars in the market. C) reflect the average quality of used cars in the market. D) none of the above. Answer: C Topic: Chapter 7.4 The Lemons Problem: How Adverse Selection Influences Financial Structure 92) The problem created by asymmetric information before the transaction occurs is called ________, while the problem created after the transaction occurs is called ________. A) adverse selection; moral hazard B) moral hazard; adverse selection C) costly state verification; free-riding D) free-riding; costly state verification Answer: A Topic: Chapter 7.3 Asymmetric Information: Adverse Selection and Moral Hazard 93) A borrower who takes out a loan usually has better information about the potential returns and risks of the investment projects he plans to undertake than the lender does. This inequality of information is called A) moral hazard. B) asymmetric information. C) noncollateralized risk. D) adverse selection. Answer: B Topic: Chapter 7.4 The Lemons Problem: How Adverse Selection Influences Financial Structure 94) Adverse selection is a problem associated with equity and debt contracts arising from A) the lender's relative lack of information about the borrower's potential returns and risks of his investment activities. B) the lender's inability to legally require sufficient collateral to cover a 100 percent loss if the borrower defaults. C) the borrower's lack of incentive to seek a loan for highly risky investments. D) none of the above. Answer: A Topic: Chapter 7.4 The Lemons Problem: How Adverse Selection Influences Financial Structure 95) Moral hazard is a problem associated with debt and equity contracts arising from A) the borrower's incentive to undertake highly risky investments. B) the owners' inability to ensure that managers will act in the owners' interest. C) the difficulty lenders have in sorting out good credit risks from bad credit risks. D) all of the above. E) only A and B of the above. Answer: E Topic: Chapter 7.5 How Moral Hazard Affects the Choice Between Debt and Equity Contracts 96) Because of the adverse selection problem, A) good credit risks are more likely to seek loans, causing lenders to make a disproportionate amount of loans to good credit risks. B) lenders may refuse loans to individuals with high net worth, because of their greater proclivity to "skip town." C) lenders are reluctant to make loans that are not secured by collateral. D) all of the above. Answer: C Topic: Chapter 7.4 The Lemons Problem: How Adverse Selection Influences Financial Structure 97) The problem of adverse selection helps to explain A) why banks prefer to make loans secured by collateral. B) why banks have a comparative advantage in raising funds for American businesses. C) why borrowers are willing to offer collateral to secure their promises to repay loans. D) all of the above. E) only A and B of the above. Answer: D Topic: Chapter 7.4 The Lemons Problem: How Adverse Selection Influences Financial Structure 98) The problem of adverse selection helps to explain A) which firms are more likely to obtain funds from banks and other financial intermediaries, rather than from securities markets. B) why collateral is an important feature of consumer, but not business, debt contracts. C) why direct finance is more important than indirect finance as a source of business finance. D) only A and B of the above. Answer: A Topic: Chapter 7.4 The Lemons Problem: How Adverse Selection Influences Financial Structure 99) When an accounting firm conducts on independent audit, the accounting firms certify that A) the firm is adhering to standard accounting principles and disclosing accurate information about sales, assets, and earnings. B) the firm is adhering to federal regulations with regard to product safety, hiring practices, and environmental regulations. C) the firm's management is qualified to conduct the firm's business in the best interest of share holders. D) All of the above are correct answers. Answer: A Topic: Chapter 7.4 The Lemons Problem: How Adverse Selection Influences Financial Structure 100) The concept of adverse selection helps to explain A) why collateral is not a common feature of many debt contracts. B) why large, well-established corporations find it so difficult to borrow funds in securities markets. C) why financial markets are among the most heavily regulated sectors of the economy. D) all of the above. Answer: C Topic: Chapter 7.4 The Lemons Problem: How Adverse Selection Influences Financial Structure 101) One financial intermediary in our financial structure that helps to reduce the moral hazard arising from the principal-agent problem is the A) venture capital firm. B) money market mutual fund. C) pawn broker. D) savings and loan association. Answer: A Topic: Chapter 7.5 How Moral Hazard Affects the Choice Between Debt and Equity Contracts 102) A venture capital firm protects its equity investment from moral hazard through which of the following means? A) It places people on the board of directors to better monitor the borrowing firm's activities. B) It writes contracts that prohibit the sale of an equity investment to anyone but the venture capital firm. C) It prohibits the borrowing firm from replacing its management. D) It does both A and B of the above. E) It does both A and C of the above. Answer: D Topic: Chapter 7.5 How Moral Hazard Affects the Choice Between Debt and Equity Contracts 103) Debt contracts A) are agreements by the borrowers to pay the lenders fixed dollar amounts at periodic intervals. B) have an advantage over equity contracts in that they have a lower cost of state verification. C) are used much more frequently to raise capital than equity contracts. D) all of the above. E) only A and B of the above. Answer: D Topic: Chapter 7.5 How Moral Hazard Affects the Choice Between Debt and Equity Contracts 104) Equity contracts account for a small fraction of external funds raised by American businesses because A) costly state verification makes the equity contract less desirable than the debt contract. B) there is greater scope for moral hazard problems under equity contracts, as compared to debt contracts. C) equity contracts do not permit borrowing firms to raise additional funds by issuing debt. D) all of the above. E) both A and B of the above. Answer: E Topic: Chapter 7.5 How Moral Hazard Affects the Choice Between Debt and Equity Contracts 105) Economies of scale A) in the financial markets does not explain why financial intermediaries developed and have become such an important part of our financial structure. B) can be used to an advantage by reducing transaction cost. C) both A and B of the above. D) neither A nor B of the above. Answer: B Topic: Chapter 7.2 Transaction Costs 106) Liquidity services are services that A) make it easier for customers to conduct transactions. B) conducts transactions for the customer. C) increase transaction costs. D) all of the above. Answer: A Topic: Chapter 7.2 Transaction Costs 107) Adverse selection A) is a problem created by asymmetrical information after the transaction. B) can be solved by eliminating asymmetrical information. C) occurs when people who do not pay for information take advantage of the information other people have to pay for. D) all of the above. Answer: B Topic: Chapter 7.3 Asymmetric Information: Adverse Selection and Moral Hazard 107) A bank A) has the ability to profit from the information it produces. B) avoids the free-rider problem by primarily making private loans rather than by purchasing securities that are traded in the open market. C) becomes an expert in determining good firms from bad firms. D) all of the above. Answer: D Topic: Chapter 7.4 The Lemons Problem: How Adverse Selection Influences Financial Structure Question Status: Previous Edition 108) An advantage of providing multiple financial services within one financial institution is that it A) lowers information costs. B) develops broader long-term relationships with customers. C) both A and B of the above. D) none of the above. Answer: C Topic: Chapter 7.7 Conflicts of Interest 109) A conflict of interest occurs when A) a financial firm sells a service to its customers for a price that exceeds the cost of producing the service. B) lenders prefer higher interest rates and borrowers prefer lower interest rates. C) riskier borrowers are the ones who are more likely to apply for loans. D) people expected to provide reliable information to the public have incentives not to do so. Answer: D Topic: Chapter 7.7 Conflicts of Interest 110) A conflict of interest between providing impartial research about companies issuing securities and selling those same securities arises in A) investment banking. B) commercial banking. C) accounting firms. D) mutual funds. Answer: A Topic: Chapter 7.7 Conflicts of Interest 111) Financial crises A) are major disruptions in financial markets that are characterized by sharp declines in asset prices and the failures of many financial and nonfinancial firms. B) occur when adverse selection and moral hazard problems in financial markets become more significant. C) frequently lead to sharp contractions in economic activity. D) are all of the above. E) are only A and B of the above. Answer: D Topic: Chapter 8.1 What Is a Financial Crisis? 112) Financial crises A) cause failures of financial intermediaries and leave only securities markets to channel funds from savers to borrowers. B) are a recent phenomenon that occur only in developing countries. C) invariably lead to debt deflation. D) all of the above. E) none of the above. Answer: E Topic: Chapter 8.1 What Is a Financial Crisis? 113) In an advanced economy, a financial crisis can begin in several ways, including A) mismanagement of financial liberalization or innovation. B) asset pricing booms and busts. C) an increase in uncertainty caused by failure of financial institutions. D) all of the above. Answer: D Topic: Chapter 8.2 Dynamics of Financial Crises in Advanced Economies 114) What is a credit boom? A) An explosion in a credit cycle, which can increase or decrease lending in the short-run B) Essentially a lending spree on the part of banks and other financial institutions C) When credit card receivables rise due to low initial interest rates D) The signal of the end of a credit spree, with credit contracting rapidly Answer: B Topic: Chapter 8.2 Dynamics of Financial Crises in Advanced Economies 115) The process of deleveraging refers to A) cutbacks in lending by financial institutions. B) a reduction in debt owed by banks. C) both A and B. D) none of the above. Answer: A Topic: Chapter 8.2 Dynamics of Financial Crises in Advanced Economies 116) Factors that lead to worsening conditions in financial markets include A) declining interest rates. B) anticipated increases in the price level. C) bank panics. D) only A and C of the above. E) only B and C of the above. Answer: C Topic: Chapter 8.2 Dynamics of Financial Crises in Advanced Economie 118) In addition to having a direct effect on increasing adverse selection problems, increases in interest rates also promote financial crises by ________ firms' and households' interest payments, thereby ________ their cash flow. A) increasing; increasing B) increasing; decreasing C) decreasing; increasing D) decreasing; decreasing Answer: B Topic: Chapter 8.2 Dynamics of Financial Crises in Advanced Economies 119) Which of the following factors led up to the Greece debt crisis in 2009-2010? A) Speculative attacks on the euro and a rise in actual and expected inflation B) A decline in tax revenues resulting from a contraction in economic activity C) A double-digit budget deficit D) All of the above E) only B and C of the above Answer: E Topic: Chapter 8.2 Dynamics of Financial Crises in Advanced Economies 120) Which of the following led to the U.S. financial crisis of 2007-2009? A) Financial innovation in mortgage markets B) Agency problems in mortgage markets C) An increase in moral hazard at credit rating agencies D) All of the above E) only A and B of the above Answer: E Topic: Chapter 8.2 Dynamics of Financial Crises in Advanced Economies 121) The impact of the 2007-2009 financial crisis was widespread, including A) the first major bank failure in the UK in over 100 years. B) the failure of Bear Stearns, the fifth-largest U.S. investment bank. C) the bailout of Fannie Mae and Freddie Mac by the U.S. Treasury. D) all of the above. E) only B and C of the above. Answer: D Topic: Chapter 8.2 Dynamics of Financial Crises in Advanced Economies 122) A financial crisis occurs when information flows in financial markets experience a particularly large disruption. Answer: TRUE Topic: Chapter 8.1 What Is a Financial Crisis? 123) Factors that can lead to worsening conditions in financial markets include increasing interest rates and asset price booms. Answer: TRUE Topic: Chapter 8.2 Dynamics of Financial Crises in Advanced Economies Question Status: New Question 124) Explain the relationship between agency theory and a financial crisis. Topic: Chapter 8.1 What Is a Financial Crisis? 125) Describe the sequence of events in a financial crisis in an advanced economy and explain why they can cause economic activity to decline. Topic: Chapter 8.2 Dynamics of Financial Crises in Advanced Economies 126) What is the problem with government safety nets, such as deposit insurance, during the formative stages of a financial crisis? Topic: Chapter 8.2 Dynamics of Financial Crises in Advanced Economies 127) Discuss why some view the Fed as a culprit in the U.S. housing bubble during the 2000s. Topic: Chapter 8.2 Dynamics of Financial Crises in Advanced Economies [Show Less]