Quiz 2, Chapter 8

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School

Western Michigan University *

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3200

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Economics

Date

Feb 20, 2024

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docx

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Uploaded by Tyang00213231

Question 1 (1 point) Saved A buyer of a used car faces the _ lemons. __ problem that most of her choices are @ 1) adverse selection '/ 2) bureaucratic behavior ) L/ 3) free rider ,'7\‘ -/ 4) moral hazard N '/ 5) diversification Question 2 (1 point) Saved Adverse selection is a problem associated with equity and debt contracts arising from (.) 1) the lender's relative lack of information about the borrower's potential B returns and risks of his investment activities. () 2) the lender's inability to legally require sufficient collateral to cover a 100% loss if the borrower defaults. - - 3) the borrower's lack of incentive to seek a loan for highly risky investments. \‘) 4) the lender's inability to restrict the borrower from changing his behavior once given a loan.

Question 3 (1 point) Saved With regard to external sources of financing for nonfinancial businesses in the United States, which of the following are accurate statements? (6) 1) Marketable securities account for a larger share of external business financing in the United States than in most other countries. O 2) Since 1970, most of the newly issued corporate bonds and commercial paper have been sold directly to American households. (/\ 3) Direct finance accounts for more than 50 percent of the external financing of American businesses. () 4) Smaller businesses almost always raise funds by issuing marketable securities. Question 4 (1 point) Saved Which of the following statements concerning external sources of financing for nonfinancial businesses in the United States are true? O 1) Issuing marketable securities is the primary way that they finance their activities. \:\ 2) Bonds are the least important source of external funds to finance their activities. P ~ (®)'3) Stocks are a relatively unimportant source of finance for their activities. e\ ) / 2) Selling bonds directly to the American household is a major source of funding for American businesses.

Question 5 (1 point) Saved True or False? For businesses in the United States, stocks are a relatively unimportant source of finance for their activities. @:‘ 1) True. O 2) False. Question 7 (1 point) Saved Which of the following is not one of the eight basic puzzles about financial structure? O 1) The financial system is among the most heavily regulated sectors of the economy. (5) 2) Issuing marketable securities is the primary way businesses finance their operations. '\/\ 3) 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. (;\ 2) Banks are the most important source of external funds to finance businesses.

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Question 6 (1 point) Saved A professional baseball player may be contractually restricted from skiing. The team owner includes this clause in the player's contract to protect against = ® 2) moral hazard. O . () 3) adverse selection. O . . -/ 4) risk sharing. \—) 5) regulatory circumvention. Question 7 (1 point) Saved Which of the following is not one of the eight basic puzzles about financial structure? //, 1) The financial system is among the most heavily regulated sectors of the economy. (.\ 2) Issuing marketable securities is the primary way businesses finance their operations. O 3) 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. ) 4) Banks are the most important source of external funds to finance businesses.

Question 8 (1 point) Saved True or False? For businesses in the United States, non-bank loans are the most important source of external funds to finance their activities. (.j 1) True. 0O - 2) False. Question 9 (1 point) Saved That most used cars are sold by intermediaries (i.e., used car dealers) provides evidence that these intermediaries () 1) have been afforded special government treatment, since used car dealers do not provide information that is valued by consumers of used cars. (.) 2) are able to prevent potential competitors from free-riding off the i information that they provide. () 3) have failed to solve adverse selection problems in this market because ) "lemons" continue to be traded. () 4) have solved the moral hazard problem by providing valuable information to their customers.

Question 10 (1 point) Saved The reduction in transactions costs per dollar of investment as the size of transactions increases is 1) discounting. £ Y '/ 3) economies of trade. e -/ 4) diversification. Question 11 (1 point) Saved True or False? For businesses in Japan, issuing marketable securities is the primary way that they finance their activities. N O 1) True. ® 2) False.

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Question 12 (1 point) Saved Which of the following is not one of the eight basic puzzles about financial structure? C N ) - ) The financial system is among the most heavily regulated sectors of the economy. O 2) Only large, well-established corporations have access to securities markets to finance their activities. (.) 3) Direct finance, in which businesses raise funds directly from lenders in financial markets, is many times more important than indirect finance, which involves the activities of financial intermediaries. \/\ 2) Debt contracts are typically extremely complicated legal documents that ) place substantial restrictions on the behavior of the borrower. Question 13 (1 point) Saved Which of the following is not one of the eight basic puzzles about financial structure? \;\ 1) Only large, well-established corporations have access to securities markets to finance their activities. C > 2) 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. ) Y 3) Collateral is a prevalent feature of debt contracts for households, but not business since they have many alternative sources for funds. ® 4) Banks are the most important source of external funds to finance businesses.

Question 14 (1 point) Saved The presence of in financial markets leads to adverse selection and moral hazard problems that interfere with the efficient functioning of financial markets. M\ 1) free-riding ® " . ®)'2) asymmetric information O . N -/ 3) noncollateralized risk L 4) costly state verification Question 15 (1 point) Saved Which of the following is not one of the eight basic puzzles about financial structure? \’/\ 1) Debt contracts are typically extremely complicated legal documents that place substantial restrictions on the behavior of the borrower. ) 2) Indirect finance, which involves the activities of financial intermediaries, is O O many times more important than direct finance, in which businesses raise funds directly from lenders in financial markets. ’\ 3) Collateral is a prevalent feature of debt contracts for both households and business. (e 4) New security issues are the most important source of external funds to finance businesses.

Question 16 (1 point) Saved A clause in a mortgage loan contract requiring the borrower to purchase homeowner's insurance is an example of a ~ O 1) proscriptive covenant. U2 prescriptive covenant. /6\\ 1®)3) restrictive covenant. ) L/ 4) constraint-imposed covenant. Question 17 (1 point) Saved Because of the adverse selection problem, O 1) good credit risks are more likely to seek loans causing lenders to make a disproportionate amount of loans to good credit risks. O 2) lenders may refuse loans to individuals with high net worth, because of their greater proclivity to "skip town." (@) (®)3) |enders are reluctant to make loans that are not secured by collateral. O . N . . P '/ 4) lenders will write debt contracts that restrict certain activities of borrowers.

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Question 18 (1 point) Saved Which of the following is not a benefit to an individual purchasing a mutual fund? o Y 1) reduced risk - ) . -/ 2) |ower transactions costs S @/ 3) free-riding @) . e L. . 4) diversification Question 19 (1 point) Saved If you default on your auto loan, your car will be repossessed because it has been pledged as for the loan. P (1) interest (@) (®)'2) collateral © 3) gividend O . U4 commodity

Question 20 (1 point) Saved The problem created by asymmetric information before the transaction occurs is called , while the problem created after the transaction occurs is called S ° . 1®/1) adverse selection; moral hazard ) 2) . - moral hazard; adverse selection ) L/ 3) costly state verification; free-riding U4 free-riding; costly state verification Question 21 (1 point) Saved Which of the following is not one of the eight basic puzzles about financial structure? o) (®)'1) stocks are the most important source of finance for American businesses. () 2) Issuing marketable securities is not the primary way businesses finance their operations. (\ 3) Indirect finance, which involves the activities of financial intermediaries, is J many times more important than direct finance, in which businesses raise funds directly from lenders in financial markets. ’\’\ 4) Banks are the most important source of external funds to finance businesses.

Question 22 (1 point) Saved An example of the problemof ________ is when a corporation that uses the funds raised from selling new shares of stock to pay for Caribbean cruises for all of its employees and their families. ~ - 1) adverse selection N O 2) credit risk (@) (®)'3) moral hazard ) L) 4) risk sharing Os) prudential supervision Question 23 (1 point) Saved 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 ~ /1) moral hazard. (®)2) adverse selection. ) 3) free-riding. M ) L 4) costly state verification.

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Question 24 (1 point) Saved True or False? 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. @ 1) True. '\> 2) False. Question 25 (1 point) Saved The free-rider problem occurs because O 1) people who pay for information use it freely. . ® 2) people who do not pay for information use it. M\ L) 3) information can never be sold at any price. ~ " 4) itis never profitable to produce information.

Question 26 (1 point) Saved Which of the following statements concerning external sources of financing for nonfinancial businesses in the United States are true? I/ LJ1) stocks are a far more important source of finance than are bonds. (.) 2) Stocks and bonds, combined, supply less than one-half of the external ) funds. (\"/\ 3) Financial intermediaries such as banks are the least important source of external funds for businesses. \‘) 2) Since 1970, more than half of the new issues of stock have been sold to American households.

Question 27 (1 point) Saved The _______ problem helps to explain why the private production and sale of information cannot eliminate S °) . 5 \®)1) free-rider; adverse selection O 2) free-rider; moral hazard O 3) principal-agent; adverse selection ) 4) principal-agent; moral hazard Question 28 (1 point) Saved 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 - 1) costly state verification. ) ) 2) moral hazard. P \—) 3) free-riding. ®© ®)'4) adverse selection.

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Question 13 Which of the following is not one of the eight basic puzzles about financial structure’ 1) Only large, well-established corporations have access to securities markets to finance their activities. 2) 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. 3) Collateral is a prevalent feature of debt contracts for households, but not business since they have many alternative sources for funds. ®’ 4) Banks are the most important source of external funds to finance businesses. 3) Question 7 (1 point) Saved Which of the following is not one of the eight basic puzzles about financial structure? () 1) Only large, well-established corporations have access to securities markets to finance their activities. .() 2) 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. @. 3) Collateral is a prevalent feature of debt contracts for households, but not i business since they have many alternative sources for funds. ) 4) Banks are the most important source of external funds to finance businesses.

Quiz 2, Chapter 8

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