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. moral hazard, which arises before the transaction occurs, and adverse selection,
which occurs after the transaction.
C. adverse selection and moral hazard, both of which occur after the transaction.
D. adverse selection and moral hazard, both of which occur before the transaction.
Answer:
Which of the following statements is most correct?
A. Discount loans are initiated by the Federal Reserve.
B. Discount loans are made when banks need relatively small amounts of cash for the
long term.
C. Discount loans are made when banks need relatively large amounts of cash for the
long term.
D. Discount loans are made when banks need relatively small amounts of cash for the
short term.
Answer:
If we focus on the banking system and assume no change in the public’s currency
holdings, a loss of reserves by any one bank must:
A. equal the loss of reserves by the entire system.
B. be equal to the net loss of reserves for the banking system.
C. result in no change in reserves for the banking system.
D. result in a multiple loss to the banking system.
Answer:
Investing in financial instruments in today’s economy:
A. is an activity practiced only by the wealthy.
B. involves costly transactions.
C. requires a relatively large sum of money to invest (more than $100,000).
D. is made easier by the use of mutual funds.
Answer:
Comparing monetary and fiscal policy:
A. fiscal policy has an advantage because it is faster to implement than monetary
policy.
B. fiscal policy is easier to implement.
C. monetary policy is easier to implement.
D. history has shown fiscal policy to be more effective at stabilization.
Answer:
As technology allows information regarding the financial health of corporations to
become easier to obtain, we should expect:
A. the risk spread to decrease.
B. the role of bond rating agencies to become more important.
C. a decrease in the number of participants in the bond market.
D. the risk spread to increase.
Answer:
Which of the following would lead to an increase in bond supply?
A. A decrease in government spending relative to revenue.
B. An increase in corporate taxes.
C. A decrease in expected inflation.
D. An improvement in general business conditions.
Answer:
Bonds must have positive yields because:
A. the U.S. treasury guarantees all bonds to have a positive yield.
B. the banking technology does not exist to deal with negative yields.
C. people can always hold cash.
D. all of the answers given are correct.
Answer:
Requiring a large net worth on the part of an applicant is one way lenders treat the
problem of:
A. free-riders.
B. adverse selection.
C. moral hazard.
D. the Lemons market.
Answer:
An automobile is an asset, but it is not liquid because:
A. the transactions costs for turning it into money are high.
B. the owner may still be making payments on the loan.
C. the automobile may not be in good repair.
D. the automobile cannot be sold without a loss in value.
Answer:
Harry gets $1000 in currency from his grandfather when he graduates from college. He
deposits these funds into his checking account. Considering Harry’s personal balance
sheet, his assets:
A. increased by $1000 when he deposited the $1000 into his checking account.
B. Increased when he received the $1000 in currency from his grandfather.
C. And liabilities increased by $1000 when he deposited the funds into his checking
account.
D. Increased by $1000 and his liabilities decreased by $1000 when he deposited the
funds into his checking account.
Answer:
If bank with $100 million in assets and $10 million in equity increases its assets by
adding $1 to capital for every $1 added to assets:
A. the debt-to-equity ratio will increase.
B. the debt-to-equity ratio will remain constant.
C. the debt-to-equity ratio will decrease.
D. the answer cannot be determined from the information in the question.
Answer:
If financial intermediaries did not have the ability to pool the resources of small savers:
A. borrowers needing large amounts of money would find it more costly to obtain the
funds.
B. the economy would grow faster.
C. people would likely save more.
D. the risk associated with lending would decrease.
Answer: