assets and use the proceeds to purchase riskier assets is known as A) risk sharing. B) risk aversion. C) risk neutrality. D) risk selling.
Answer: A Ques Status: Revised
6)Reducing risk through the purchase of assets whose returns do not always move together is A) diversification. B) intermediation. C) intervention. D) discounting.
Answer: A Ques Status: Revised
7) The concept of diversification is captured by the statement A) don?t look a gift horse in the mouth. B) don?t put all your eggs in one basket. C) it never rains, but it pours. D) make hay while the sun shines. Answer: B Ques Status: Revised
8) The process of asset transformation refers to the conversion of A) safer assets into risky assets. B) safer assets into safer liabilities. C) risky assets into safer assets. D) risky assets into risky liabilities. Answer: C Ques Status: Revised
9) Risk sharing is profitable for financial institutions due to A) low transactions costs. B) asymmetric information. C) adverse selection. D) moral hazard.
Answer: A Ques Status: Revised
10)Typically, borrowers have superior information relative to lenders about the potential returns
and risks associated with an investment project. The difference in information is called ________, and it creates the ________ problem. A) adverse selection; moral hazard B) asymmetric information; risk sharing C) asymmetric information; adverse selection D) adverse selection; risk sharing Answer: C Ques Status: Revised
11)If bad credit risks are the ones who most actively seek loans and, therefore, receive them from
financial intermediaries, then financial intermediaries face the problem of
A) moral hazard.
B) adverse selection. C) free-riding. D) costly state verification.
Answer: B Ques Status: Previous Edition
12)The problem created by asymmetric information before the transa
ction 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 Ques Status: Previous Edition
13)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% loss if the borrower defaults. C) the borrower?
s lack of incentive to seek a loan for highly risky investments. D) the borrower?s lack of good options for obtaining funds. Answer: A Ques Status: Revised
14)A professional baseball player may be contractually restricted from skiing. The team owner includes this clause in the player?s contract to protect against A) risk sharing. B) moral hazard. C) adverse selection. D) regulatory circumvention. Answer: B Ques Status: Revised
15)An example of the problem of ________ is when a corporation uses the funds raised from
selling bonds to fund corporate expansion to pay for Caribbean cruises for all of its employees and their families. A) adverse selection B) moral hazard C) risk sharing D) credit risk
Answer: B Ques Status: Revised
16)In the early 1980s, a particular bank in Oklahoma developed a reputation of readily providing
loans to borrowers for the purpose of exploring for oil deposits. Many of these loans were
never repaid, because this bank failed to address the A) adverse selection problem. B) regulatory avoidance problem. C) free-rider problem. D) risk-sharing problem. Answer: A Ques Status: Revised
17)The countries that have made the least use of securities markets are ________ and ________; in
these two countries finance from financial intermediaries has been al
most ten times greater than that from securities markets. A) Germany; Japan B) Germany; Great Britain C) Great Britain; Canada D) Canada; Japan
Answer: A Ques Status: Previous Edition
18)Although the dominance of ________ over ________ is clear in all countries, the relative
importance of bond versus stock markets differs widely. A) financial intermediaries; securities markets B) financial intermediaries; government agencies C) government agencies; financial intermediaries D) government agencies; securities markets Answer: A Ques Status: Previous Edition
19)Studies of the major developed countries show that when businesses go looking for funds to
finance their activities they usually obtain these funds from A) government agencies. B) equities markets. C) financial intermediaries. D) bond markets.
Answer: C Ques Status: Previous Edition
20)Because there is an imbalance of information in a lending situation, we must deal with the
problems of adverse selection and moral hazard. Define these terms and explain how financial intermediaries can reduce these problems. Answer:Adverse selection is the asymmetric information problem that exists before the
transaction occurs. For lenders, it is the difficulty in judging a good credit risk from a
bad credit risk. Moral hazard is the asymmetric information problem that exists after
the transaction occurs. For lenders, it is the difficulty in making sure the borrower uses
the funds appropriately. Financial intermediaries can reduce adverse selection through
intensive screening and can reduce moral hazard by monitoring the borrower. Ques Status: New
2.6 Types of Financial Intermediaries
1)Which of the following financial intermediaries is not a depository institution?
A) A savings and loan association B) A commercial bank C) A credit union D) A finance company
Answer: D Ques Status: Revised
2) Which of the following is a contractual savings institution? A) A life insurance company B) A credit union
C) A savings and loan association D) A mutual fund
Answer: A Ques Status: Previous Edition 3) Contractual savings institutions include A) mutual savings banks. B) money market mutual funds. C) commercial banks. D) life insurance companies. Answer: D Ques Status: Revised
4) Which of the following are not contractual savings institutions? A) Life insurance companies B) Credit unions C) Pension funds
D) State and local government retirement funds Answer: B Ques Status: Previous Edition
5)Financial institutions that accept deposits and make loans are called ________ institutions. A) investment B) contractual savings C) depository D) underwriting
Answer: C Ques Status: New
6) Which of the following are investment intermediaries? A) Life insurance companies B) Mutual funds C) Pension funds
D) State and local government retirement funds Answer: B Ques Status: Previous Edition
7) Which of the following is a depository institution? A) A life insurance company B) A credit union C) A pension fund D) A mutual fund
Answer: B Ques Status: Previous Edition
8) Which of the following is a depository institution? A) A life insurance company B) A mutual savings bank C) A pension fund D) A finance company
Answer: B Ques Status: Revised
9) Which of the following is not a contractual savings institution? A) A life insurance company B) A pension fund
C) A savings and loan association D) A fire and casualty insurance company Answer: C Ques Status: Previous Edition
10) The primary assets of a mutual savings bank are A) bonds. B) mortgages.
C) commercial loans. D) deposits.
Answer: B Ques Status: Revised
11) The primary liabilities of a credit union are A) bonds. B) mortgages. C) deposits. D) commercial loans.
Answer: C Ques Status: Revised
12) The primary assets of a pension fund are A) money market instruments. B) corporate bonds and stock. C) consumer and business loans. D) mortgages.
Answer: B Ques Status: Previous Edition
13) The primary assets of a savings and loan association are A) money market instruments. B) corporate bonds and stock. C) consumer and business loans. D) mortgages.
Answer: D Ques Status: Previous Edition 14) The primary assets of credit unions are A) municipal bonds. B) business loans. C) consumer loans. D) mortgages.
Answer: C Ques Status: Previous Edition 15) The primary assets of a finance company are A) municipal bonds.
B) corporate stocks and bonds. C) consumer and business loans. D) mortgages.
Answer: C Ques Status: Previous Edition
16) The primary liabilities of a commercial bank are A) bonds. B) mortgages. C) deposits. D) commercial paper.
Answer: C Ques Status: Previous Edition
17) The primary liabilities of depository institutions are A) premiums from policies. B) shares. C) deposits. D) bonds.
Answer: C Ques Status: Revised
18) The primary assets of money market mutual funds are A) stocks. B) bonds.
C) money market instruments.
D) deposits.
Answer: C Ques Status: Revised
19) Money market mutual fund shares function like A) checking accounts that pay interest. B) bonds. C) stocks. D) currency.
Answer: A Ques Status: Revised
20) An important feature of money market mutual fund shares is A) deposit insurance.
B) the ability to write checks against shareholdings. C) the ability to borrow against shareholdings. D) claims on shares of corporate stock. Answer: B Ques Status: Revised 21) Thrift institutions include
A) banks, mutual funds, and insurance companies.
B)savings and loan associations, mutual savings banks, and credit unions.
C) finance companies, mutual funds, and money market funds. D) pension funds, mutual funds, and banks. Answer: B Ques Status: Revised
22)________ institutions are financial intermediaries that acquire funds at periodic intervals on a contractual basis. A) Investment B) Contractual savings C) Thrift D) Depository
Answer: B Ques Status: New 2.7 Regulation of the Financial System
1) Which of the following is not a goal of financial regulation? A) Ensuring the soundness of the financial system B) Reducing moral hazard C) Reducing adverse selection
D) Ensuring that investors never suffer losses Answer: D Ques Status: Previous Edition
2) Savings and loan associations are regulated by the A) Federal Reserve System.
B) Securities and Exchange Commission. C) Office of the Comptroller of the Currency. D) Office of Thrift Supervision. Answer: D Ques Status: Revised
3) Which of the following do not provide charters? A) The Office of the Comptroller of the Currency B) The Federal Reserve System
C) The National Credit Union Administration D) State banking and insurance commissions Answer: B Ques Status: Previous Edition
4)The agency that was created to protect depositors after the banking failures of 1930-1933 is the
A) Federal Reserve System.
B) Federal Deposit Insurance Corporation. C) Treasury Department.
D) Office of the Comptroller of the Currency. Answer: B Ques Status: Revised
5)An important restriction on bank activities that was repealed in 1999 was
A) the prohibition of the payment of interest on checking deposits. B) restrictions on credit terms.
C) minimum down payments on loans to purchase securities. D) separation of commercial banking from the securities industries. Answer: D Ques Status: Revised
6)A goal of the Securities and Exchange Commission is to reduce problems arising from A) competition. B) banking panics. C) risk.
D) asymmetric information. Answer: D Ques Status: Revised
7)Asymmetric information is a universal problem. This would suggest that financial regulations
A) in industrial countries are an unqualified failure. B) differ significantly around the world. C) in industrialized nations are similar. D) are unnecessary.
Answer: C Ques Status: Revised
8)The purpose of the disclosure requirements of the Securities and Exchange Commission is to
A) increase the information available to investors. B) prevent bank panics. C) improve monetary control.
D) protect investors against financial losses. Answer: A Ques Status: Revised
9) The primary purpose of deposit insurance is to A) improve the flow of information to investors. B) prevent banking panics.
C) protect bank shareholders against losses. D) protect bank employees from unemployment. Answer: B Ques Status: Revised
10)In order to reduce risk and increase the safety of financial institutions, commercial banks and
other depository institutions are prohibited from A) owning municipal bonds. B) making real estate loans. C) making personal loans. D) owning common stock. Answer: D Ques Status: Revised
11)How do regulators help to ensure the soundness of financial intermediaries?
Answer:Regulators restrict who can set up a financial intermediary, conduct regular
examinations, restrict assets, and provide insurance to help ensure the soundness of financial intermediaries. Ques Status: New Chapter 3 What Is Money? 3.1 Meaning of Money
1)Economists find no completely satisfactory way to measure money because
A) money supply statistics are a state secret.
B)the Federal Reserve does not employ or report different measures of the money supply.
C) the ?moneyness? or liquidity of an asset is a matter of degree. D)economists find disagreement interesting and refuse to agree for ideological reasons.
Answer: C Ques Status: Previous Edition
2)To an economist, ________ is anything that is generally accepted in payment for goods and services or in the repayment of debt. A) wealth B) income C) money D) credit
Answer: C Ques Status: New 3) Currency includes A) paper money and coins. B) paper money, coins, and checks. C) paper money and checks.
D) paper money, coins, checks, and savings deposits. Answer: A Ques Status: Previous Edition
4) The difference between money and income is that A) money is a flow and income is a stock. B) money is a stock and income is a flow. C) there is no differencemoney and income are both stocks. D) there is no differencemoney and income are both flows.
Answer: B Ques Status: Previous Edition
5) It is true that
A) income and wealth are both stocks. B) money and income are both stocks. C) income is a flow and wealth is a stock. D) money and wealth are both flows. Answer: C Ques Status: Revised 6) An individual?s annual salary is her A) money. B) income. C) wealth. D) liabilities.
Answer: B Ques Status: Revised 7) A person?s house is part of her A) money. B) income.
C) liabilities. D) wealth.
Answer: D Ques Status: Revised 8) Money is
A)anything that is generally accepted in payment for goods and services or in the repayment of debt. B) a flow of earnings per unit of time.
C) the total collection of pieces of property that are a store of value. D) always based on a precious metal like gold or silver. Answer: A Ques Status: Revised
9) Which of the following are true statements? A) Wealth is a stock variable. B) Money is a flow variable. C) Income is a stock variable. D) Wealth is a flow variable. Answer: A Ques Status: Revised
10)________ is used to make purchases while ________ is the total collection of pieces of property that serve to store value. A) Money; income B) Wealth; income C) Income; money D) Money; wealth
Answer: D Ques Status: New
11) ________ is a flow of earnings per unit of time. A) Income B) Money C) Wealth D) Currency
Answer: A Ques Status: New
12) Which of the following statements uses the economists? definition of money?
A) I plan to earn a lot of money over the summer. B) Betsy is rich
she has a lot of money.
C) I hope that I have enough money to buy my lunch today. D)The job with New Company gave me the opportunity to earn more money.
Answer: C Ques Status: New 3.2 Functions of Money 1) Of money?
s three functions, the one that distinguishes money from other assets is its function as a A) store of value. B) unit of account.
C) standard of deferred payment. D) medium of exchange.
Answer: D Ques Status: Previous Edition
2)If peanuts serve as a medium of exchange, a unit of account, and a store of value, then peanuts are A) bank deposits.
B) reserves. C) money. D) loanable funds.
Answer: C Ques Status: Revised
3) The conversion of a barter economy to one that uses money A)increases efficiency by reducing the need to exchange goods and services.
B) increases efficiency by reducing the need to specialize. C) increases efficiency by reducing transactions costs. D) does not increase economic efficiency. Answer: C Ques Status: Previous Edition
4)When compared to exchange systems that rely on money, disadvantages of the barter system include:
A) the requirement of a double coincidence of wants. B) lowering the cost of exchanging goods over time.
C) lowering the cost of exchange to those who would specialize. D) encouraging specialization and the division of labor. Answer: A Ques Status: Revised
5)When economists say that money promotes ________, they mean that money encourages specialization and the division of labor. A) bargaining B) contracting C) efficiency D) greed
Answer: C Ques Status: New
6)Which of the following statements best explains how the use of money in an economy increases economic efficiency?
A)Money increases economic efficiency because it is costless to produce.
B)Money increases economic efficiency because it discourages specialization.
C)Money increases economic efficiency because it decreases transactions costs.
D) Money cannot have an effect on economic efficiency. Answer: C Ques Status: Revised
7) For a commodity to function effectively as money it must be A) easily standardized, making it easy to ascertain its value. B) difficult to make change.
C) deteriorate quickly so that its supply does not become too large. D) hard to carry around. Answer: A Ques Status: Revised
8)All but the most primitive societies use money as a medium of exchange, implying that
A) the use of money is economically efficient. B) barter exchange is economically efficient. C) barter exchange cannot work outside the family. D) inflation is not a concern. Answer: A Ques Status: Revised
9)Whatever a society uses as money, the distinguishing characteristic