Deck 14: The Financial System and Economic Growth

Question 1

A financial market where economic agents meet in one central location is known as________.

A) an over the counter market.
B) an exchange.
C) a bond market.
D) a money market.

Answer 1

an exchange.

Question 2

Equities is to ________ as bond is to ________.

A) ownership; debt
B) fairness; constraint
C) stock; asset
D) banks; exchanges

Answer 2

ownership; debt

Question 3

Firms can acquire access to savings indirectly through________.

A) issuing securities.
B) borrowing from banks.
C) the payment of taxes to the federal government.
D) the depositing of funds in depository institutions.

Answer 3

borrowing from banks.

Question 4

Which of the following is not a depository institution?

A) a savings & loan association
B) a mutual savings bank
C) an investment bank
D) a credit union

Question 5

Economic agents can raise money capital by________.

A) issuing liabilities.
B) repaying a loan.
C) paying taxes.
D) providing a subsidy.

Question 6

Approximately 60 percent of the funds flowing to nonfinancial businesses come from________.

A) hedge funds.
B) financial intermediaries.
C) organized exchanges, like the New York Stock Exchange.
D) insurance companies.

Question 7

The purpose of a financial sector is________.

A) to minimize the payments firms make to state and local governments.
B) to maximize the payments firms make to state and local governments.
C) to channel funds away from households and firms with surplus funds.
D) to channel monies into socially acceptable causes.

Question 8

Finance companies________.

A) acquire access to funds by accepting deposits then using these monies to lend to households and firms.
B) raise funds by selling commercial paper then lend these funds to consumers.
C) acquire access to monies through the payment of premiums by employees
D) are a special type of mutual fund.

Question 9

Commercial banks are financial intermediaries, as are ________.

A) household savers.
B) state and local governments.
C) insurance companies.
D) organized exchanges.

Question 10

If the economy may be likened to a biological organism, then the financial system may be thought of as the ________,

A) brain
B) stomach
C) lungs
D) feet

Question 11

An asset is________.

A) equal in value to its corresponding liabilities and net worth.
B) a debt for the owner of the asset.
C) a net outflow from the revenues of a producing firm.
D) anything that can be owned and has value.

Question 12

Pension funds________.

A) acquire access to funds by accepting deposits then using these monies to lend to households and firms.
B) raise funds by selling commercial paper then lend these funds to consumers.
C) are a special type of mutual fund
D) acquire access to monies through the payment of premiums by employees

Question 13

Hedge funds________.

A) acquire access to funds by accepting deposits then using these monies to lend to households and firms.
B) raise funds by selling commercial paper then lend these funds to consumers.
C) acquire access to monies through the payment of premiums by employees
D) are a special type of mutual fund.

Question 14

Which of the following is not a financial intermediary?

A) an insurance company.
B) a pension fund.
C) a commercial bank.
D) an organized exchange, e.g. NYSE.

Question 15

The purpose of a financial sector is ________.

A) to enable consumers to make purchases before receiving income
B) to ensure that retirees have a source of income
C) to direct available funds to worthy opportunities
D) to create and to promote the trading of assets

Question 16

Nonfinancial businesses may acquire funds by borrowing from a commercial bank or by ________.

A) purchasing short-term assets
B) issuing securities
C) issuing insurance policies
D) trading on an exchange

Question 17

The most important source of funds for nonfinancial businesses is ________.

A) financial intermediaries.
B) insurance companies.
C) hedge funds.
D) state and local governments.

Question 18

Credit unions ________.

A) acquire access to funds by accepting deposits then use these monies in lending to hsoueholds and firms.
B) are a special type of mutual fund.
C) raise funds by selling commercial paper then lend these funds to consumers.
D) acquire access to monies through the payment of premiums by employees

Question 19

Firms can acquire access to savings directly________.

A) by issuing securities.
B) through the payment of taxes to the federal government.
C) by borrowing from banks.
D) through the depositing of funds in depository institutions.

Question 20

Which of the following statements is correct?

A) assets plus liabilities equal net worth.
B) assets plus net worth equal liabilities.
C) assets equal liabilities plus net worth.
D) liabilities minus net worth equal assets.

Question 21

Which of the following is an example of the free-rider problem?

A) Warren Buffett
B) a stow-away
C) banks that will not lend to anyone they haven't known for years
D) No one takes out the trash, because everyone expects that someone else will.

Question 22

If one economic agent possesses more information that their fellow transactor________.

A) economic transactions cannot occur.
B) the moral hazard problem has been eliminated.
C) the adverse section problem has been eliminated.
D) asymmetric information exists.

Question 23

Which of the following statement is untrue?

A) assets equal liabilities plus net worth.
B) households and firms are lenders and borrowers in the flow of funds.
C) government regulation is the major cause of asymmetric information problems.
D) pension funds and insurance companies are financial intermediaries

Question 24

Suppose you have money to lend, but will do so only if you are compensated for the risk of default. If you set a high interest rate on your loan, a likely consequence is that ________.

A) safe borrowers will look elsewhere, and only risky borrowers will find your terms attractive
B) risky borrowers will look elsewhere, so your money is more likely to go to a safe borrower
C) competition from other lenders will force you to lower your interest rate
D) you will be prosecuted for predatory lending

Question 25

Which of the following is an example of adverse selection?

A) The foulest-tasting medicine is often the most effective.
B) Having secured a loan, a business manager is more likely to have a lavish office party than to buy new equipment.
C) The clientele at a low-price restaurant are unlikely to leave generous tips.
D) The shiniest packaging often contains disappointment.

Question 26

Suppose that a provider of health insurance is concerned that a policy holder will eat unhealthy foods during the lifetime of their insurance contract. The insurer faces the problem of ________.

A) Antediluvian intransigence.
B) opportunity costs.
C) moral hazard.
D) adverse selection.

Question 27

The principal buyers in financial markets are ________.

A) financial intermediaries
B) nonfinancial businesses
C) commercial banks
D) individual savers

Question 28

The incentive to collect information is undermined by the ________.

A) opportunity cost of collecting information.
B) asymmetric character of information flows.
C) free rider problem.
D) Willamette effect.

Question 29

Of all financial intermediaries which holds the most assets?

A) pension funds.
B) commercial banks.
C) insurance companies.
D) hedge funds.

Question 30

Adverse selection exists because________.

A) moral hazard exists.
B) asymmetric information exists.
C) of government regulation.
D) financial innovation continually occurs.

Question 31

Providers of health care insurance require applicants to provide information on their medical history. The purpose may be to minimize which of the following problems?

A) moral hazard.
B) adverse selection.
C) government taxes.
D) opportunity cost.

Question 32

Mutual funds ________.

A) accept deposits and issue loans
B) sell shares and buy financial instruments
C) are a special type of commercial bank.
D) issue policies and receive premiums

Question 33

Suppose you hear of a great deal on a used car and wonder, "Why is the price so low?" This might be an instance of ________.

A) tyranny of collateral
B) adverse selection
C) the free rider problem
D) moral hazard

Question 34

The primary source of funds for finance companies is ________.

A) commercial paper.
B) deposits.
C) securities.
D) the central bank.

Question 35

Financial firms whose loans are often $100 or less operate in ________.

A) the microcredit market.
B) the hedge fund industry.
C) the macrofinance market.
D) the credit union sector

Question 36

The primary source of funds for commercial banks is ________.

A) securities.
B) Federal Reserve Banks.
C) loans.
D) deposits.

Question 37

Assume that the riskiest individuals in a given population are the ones most likely to apply for health insurance. In this situation a provider of health insurance faces the problem of ________.

A) moral hazard
B) opportunity costs
C) tertiary impedence
D) adverse selection

Question 38

Of all financial intermediaries, which of the following holds the most assets?

A) hedge funds.
B) the federal government.
C) commercial banks.
D) corporations.

Question 39

Direct finance involves________.

A) borrowing monies from commercial banks.
B) issuing securities in financial markets.
C) borrowing from the Federal Reserve System.
D) issuing insurance policies

Question 40

Asymmetric information discourages the movement of funds from savers to borrowers, because ________.

A) big risks have high payoffs
B) the safe choice is always preferable to the risky choice
C) taking risks is inefficient
D) the loss arising from a failed project must be borne by the borrower, rather than the lender

Question 41

If you invest in an "emerging market fund," your money is probably going to a commercial bank, rather than directly to nonfinancial businesses. Why? Why is that probably a good thing?

Question 42

Deposit insurance can lead to ________.

A) an increase in adverse selection.
B) a decrease in bank costs.
C) a decrease in bank lending rates.
D) an increase in risks banks take on.

Question 43

How might asymmetric information cause a well-managed bank to be abandoned by its depositors?

Question 44

From the perspective of households and businesses deciding where to deposit their money, the key advantage of the private loans issued by commercial banks is ________.

A) transparency
B) marketability
C) incentive for the bank to collect information
D) relatively high interest rates

Question 45

Commercial banks limit the adverse selection problem through ________.

A) monitoring.
B) restrictive covenants.
C) screening.
D) moral hazard.

Question 46

In economies with effective accounting standards and low-cost, reliable information, ________.

A) banks become less dominant among intermediaries
B) the tyranny of collateral is particularly intense
C) funds are available only for activities involving little or no risk
D) restrictive covenants are difficult to enforce

Question 47

How do commercial banks solve asymmetric information problems?

Question 48

The tyranny of collateral ________.

A) suggests that government tax rates are too high in the United States.
B) gives rise to the twin problems of moral hazard and adverse selection.
C) implies that when a poor person has a good idea they find it difficult to acquire financing.
D) attributes moral hazard to excessive government regulation

Question 49

Screening and monitoring are costly activities. Why is it a bad idea to impose these costs on borrowers?

Question 50

Government-backed deposit insurance increases the ________.

A) Willamette torsion effect.
B) adverse selection problem.
C) moral hazard problem.
D) the prudential contagion problem.

Question 51

Moral hazard and adverse selection are the result of ________.

A) prudential supervision.
B) any and all government policy.
C) excessive price fluctuations.
D) asymmetries of information.

Question 52

Restrictive covenants place constraints on the behavior of ________.

A) borrowers.
B) lenders.
C) the central bank.
D) the executive branch of the federal government.

Question 53

Which of the following is used by lenders to reduce the problems that arise from asymmetries of information?

A) patent contracts.
B) collateral.
C) decreased interest rates.
D) restrictive contents.

Question 54

A loan contract that requires the borrower to keep a certain percentage of its assets in cash is an example of ________.

A) screening.
B) monitoring.
C) a restrictive covenant.
D) a patent contract.

Question 55

When property rights are well defined and inexpensive to enforce, ________.

A) collateral is an efficient solution to asymmetric information problems
B) little or no collateral is needed to secure a loan
C) banks become less dominant among intermediaries
D) poor borrowers are at no disadvantage relative to wealthy borrowers

Question 56

In the United States, commercial banks supply about ________% of total credit to nonfinancial businesses.

A) 20
B) 75
C) 50
D) 90

Question 57

Banks are most dominant in the financial markets of ________.

A) Canada and Germany.
B) Germany and Japan.
C) Japan and the United States.
D) the United States and Canada.

Question 58

Do you think that information technologies will someday eliminate asymmetric information problems?

Question 59

In 2009, U.S. banks held ________.

A) $16.3 million in assets.
B) $16.3 million in liabilities.
C) $16.3 billion in assets.
D) $16.3 trillion in assets.

Question 60

Government-backed deposit insurance ________.

A) protects "good" banks from the misdeeds of "bad" banks
B) is intended to encourage banks to pursue high-risk activities
C) is an example of prudential regulation
D) is an example of government-directed credit

Question 61

An inherent weakness of ________ is the absence of the profit incentive.

A) government-directed credit
B) government-backed deposit insurance
C) private loans
D) prudential supervision

Question 62

Prudential regulation ________.

A) requires that banks maintain the confidentiality of loan applications
B) is administered by a specific insurance company
C) is necessitated by the government's safety net for the banking system
D) is an effective substitute for prudential supervision

Question 63

Per capita income in China is approximately ________% of the U.S. level.

A) 12
B) 80
C) 40
D) 5

Question 64

How might government-directed credit help poor entrepreneurs to escape the "tyranny of collateral"? What side-effects might undermine the effectiveness of such a program?

Question 65

Economic growth in China ________.

A) would have been impossible in the absence of its impressive record of financial development.
B) occurred despite limited domestic financial development.
C) can continue indefinitely without additional financial development.
D) has occurred despite a relatively low domestic saving rate.

Question 66

Overall, government intervention in the financial system ________.

A) is both essential and imperfect
B) prevents adequate market solutions to market problems
C) is continually improving and expanding
D) is incompatible with an efficient allocation of resources

Question 67

A key objective of a government safety net for the banking system is to ensure ________.

A) that the poor have access to bank services
B) an efficient allocation of credit
C) bank profitability
D) that depositors always believe that their money is safe in the bank

Question 68

Information asymmetries may make it difficult for important sectors of the economy to receive the funding they need to keep the economy growing. In many economies, this problem is addressed with ________.

A) prudential regulation
B) government-directed credit
C) government-backed deposit insurance
D) adverse selection

Question 69

Over the past two decades, the saving rate in China has been approximately ________%.

A) 12
B) 80
C) 40
D) 5

Question 70

The collapse of one bank might lead easily to the failure of several others, because ________.

A) depositors cannot trust each other to keep their money in the bank
B) deposit insurance renders all banks equally fragile
C) no bank can survive when its competitors cease to operate
D) government regulators will step in to punish any bank suspected of poor management

Question 71

Prudential supervision is, in essence, the monitoring of ________.

A) borrowers, to enforce restrictive covenants
B) intermediaries, to direct credit to preferred sectors of the economy
C) holders of an insurance policy, to discourage excessively risky behaviors
D) depositors, to discourage sudden withdrawal of funds

Question 72

An important consequence of financial deepening is ________.

A) an increase in the number of new firms
B) a sharp increase in levels of saving & investment
C) higher profit rates
D) an expansion of bank loans relative to other funding sources

Question 73

Prudential regulation ________.

A) is an example of government-directed credit
B) helps to encourage people to abandon banks that engage in excessively risky behaviors
C) provides banking services to economically-disadvantaged households and businesses
D) is more prominent for direct than for indirect finance

Question 74

Evidence suggests that financial deepening is of greatest benefit to ________.

A) industries that are highly dependent on external sources of funds
B) family-owned enterprises
C) established firms, rather than new firms
D) child workers

Question 75

The collapse of Enron Corporation is a reminder of the importance of ________.

A) moral hazard
B) government-directed credit
C) energy trading
D) transparency

Question 76

An example of a government-based approach to improve the quality of information in financial markets is ________.

A) financial news networks
B) mandatory disclosures
C) government-directed credit
D) government safety nets

Question 77

When is a firm more likely to engage in excessively risky behaviors, when business is well, or when it is facing financial distress?

Question 78

The U.S. Securities and Exchange Commission ________.

A) oversees lending policies at commercial banks
B) directs credit to underserved segments of the financial sector
C) promotes transparency in direct finance transactions
D) advises households and businesses on the best companies in which to invest

Question 79

Financial deepening is synonymous with ________.

A) issuing equities.
B) financial development.
C) borrowing additional funds from world capital markets.
D) holding a well diversified portfolio.

Question 80

What problem is addressed by a government safety net for the banking system? What problem is caused by the safety net?