Question 1

How are financial intermediaries able to reduce transactions costs?

Accepted Answer

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Question 2

How do car dealers help reduce adverse selection?

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Question 3

Since crowdfunding sites do not themselves invest in business start ups that raise funds on their sites,they don't reduce

Accepted Answer

Crowdfunding sites primarily serve as platforms to connect entrepreneurs with a large number of potential investors. They do not directly invest in the startups themselves, nor do they take an active role in management. Therefore, they do not inherently reduce the principal-agent problem, which arises from the potential conflict of interest between the managers of a company (agents) and its shareholders (principals). The principal-agent problem involves issues like agents pursuing their own interests over those of the principals, and since crowdfunding platforms do not involve themselves in the management or decision-making processes of the businesses they help fund, they do not mitigate this issue.

Question 4

What are the various ways that financial intermediaries can take advantage of economies of scale?

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Question 5

How does adverse selection affect the economic efficiency of the used car market?

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Question 6

How is the lemons problem in the used car market an example of asymmetric information?

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Question 7

Many economists and policymakers have raised concerns about crowdfunding due to the existence of

Accepted Answer

Information costs facing small investors are a significant concern in the context of crowdfunding, as these investors may not have access to the same level of information or expertise as larger investors or institutional investors. This can make it difficult for small investors to make informed investment decisions and lead to potential losses.

Question 8

What are the information costs faced by savers?

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Question 9

Compared to CDs and money market funds,crowdfunding

Accepted Answer

Crowdfunding provides opportunities for higher returns, but it also comes with higher risk and the possibility of significant losses. CDs and money market funds are considered safer investments but have lower expected returns.

Question 10

The existence of adverse selection results in

Accepted Answer

Adverse selection occurs when one party to a transaction has more information than the other party, leading to a situation where the party with less information is at a disadvantage. This can result in reduced market efficiency, as the party with less information may be less likely to participate in the transaction, or may only participate if they are offered a higher price.

Question 11

Crowdfunding can best be described as

Accepted Answer

Crowdfunding involves raising small amounts of money from a large number of people, usually via internet platforms. It is a way for entrepreneurs to gather capital without the need for traditional funding sources such as angel investors or venture capitalists.

Question 12

Banks require collateral for loans in order to

Accepted Answer

Banks require collateral for loans in order to ensure that borrowers have significant amounts of their own funds invested in their businesses. This reduces the risk of default and provides the bank with some security in the event that the borrower cannot repay the loan.

Question 13

How does adverse selection affect the willingness of corporations to issue stock?

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Question 14

In regard to crowdfunding,investors with incomes or net worth of greater than $100,000 can invest up to ________ per year in equity in startups through online crowdfunding sites.

Accepted Answer

Investors with incomes or net worth greater than $100,000 can invest up to 10% of their income or net worth per year in equity in startups through online crowdfunding sites, subject to a maximum of $107,000 per year.

Question 15

In regard to crowdfunding,investors with incomes or net worth of less than $100,000 can buy up to ________ in equity in startups through online crowdfunding sites.

Accepted Answer

Investors with incomes or net worth of less than $100,000 can invest the greater of $2,000 or 5% of the lesser of their annual income or net worth through crowdfunding platforms, according to regulations set by the SEC.

Question 16

A part of the Jumpstart Our Business Startups (JOBS)Act is

Accepted Answer

The JOBS Act removed some of the restrictions on using crowdfunding to allow small investors to buy equity in start-ups, making it easier for start-ups to raise capital. Option A is not mentioned in the context of JOBS Act. Option B is partially correct, but it is not entirely true that differences were removed; instead, it increased the number of investors who can qualify as accredited investors. Option C is not true; the SEC still regulates funding of start-ups but with some exemptions provided by the JOBS Act.

Question 17

The problem of moral hazard

Accepted Answer

Moral hazard refers to the risk that an individual may take more risk or act in a reckless manner because the potential cost of failure is borne by another party. In the case of buying a firm's bonds, the investor is a lender who receives a fixed income and has a contractual right to be repaid. Hence, the firm has less incentive to take excessive risk as they have a legal obligation to repay the debt. On the other hand, buying a firm's stock implies ownership and a share in the company's profits and losses. The firm may have an incentive to take on excessive risk to increase profits, which could potentially harm the stockholders. Therefore, the moral hazard problem is considerably more serious when an investor buys a firm's stock than when they buy a firm's bonds.

Question 18

Financial intermediaries are able to act as delegated monitors for individual savers because

Accepted Answer

Financial intermediaries have the ability to act as delegated monitors for individual savers because other investors cannot benefit or gain a free ride from their monitoring efforts. Financial intermediaries use their expertise and resources to monitor borrowers to reduce the risk of default and ensure that the borrowers are using the funds for their intended purposes. By acting as delegated monitors, financial intermediaries create value for individual savers by reducing the information asymmetry and risk associated with lending money.

Question 19

All of the following are benefits of securitization EXCEPT

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Question 20

The use of collateral

Accepted Answer

Collateral serves as a security for the lender, reducing the risk associated with the loan. It makes it more costly for borrowers to default on their loans, thereby mitigating the problem of asymmetric information where borrowers have more information about their ability to repay than lenders do.

Quiz 9: Transactions Costs, asymmetric Information, and the Structure of the Financial System