Management of Banking operation
Home Work Chapter no.7
By Tareq Tamimi
Chapter 7: An Economic Analysis of Financial Structure > Multiple Choice 8
1. The largest source of external funds for U.S. firms is:
2. Asymmetric information occurs when:
1. one party in a transaction has more information than another.
2.each party has equal information.
3.one party in a transaction has more influence than another.
4.each party in a transaction gains from the transaction.
3. A bad credit risk seeks out loans more actively. This is a:
1.adverse selection problem.
3.moral hazard problem.
4. A borrower engages in activities that are undesirable from a lender's point of view.
This is the:
2.transaction costs problem.
3.moral hazard problem.
4.adverse selection problem.
5. The free-rider problem:
1.makes it easier for an investor to continue to buy securities at less than the true value.
2.will only occur if information costs are zero.
3.is that people who do not pay for information take advantage of information other
people have paid for.
4.will make more people willing to provide information services.
6. The principal-agent problem:
1.is not related to asymmetric information.
2.is a type of moral hazard.
3.occurs because owners have complete information about managers.
4.eliminates costly state verification.
7. A financial crisis is not characterized by:
1.a disruption in financial markets caused by declines in asset prices.
2.failure of financial and non-financial firms.
3.an inability of financial markets to channel funds efficiently.
4.strong increases in economic activity.
8. When interest rates are high, lenders may not want to make loans because of:
1.costly state verification.
4.the principal-agent problem.
9. A venture capital firm:
1.increases the size of the moral hazard problem.
2.allows equity shares of the new firm to be sold in the marketplace.
3.pools resources to help entrepreneurs start new firms.
4.has no say in the management of the new firm.
10. An incentive compatible debt contract:
1.provide incentives for lenders to pick a certain industry.
2.increases the size of the moral hazard problem.
3.aligns the incentives of the borrower with those of the lender.
4.provide incentives for the borrower to make interest payments.
11. Which of the following describes the "lemons problem?"
1.have more information than sellers and more transactions occur.
2.Sellers have more information than buyers and more transactions occur.
3.Buyers have more information than sellers and few transactions occur.
4.Sellers have more information than buyers and few transactions occur.
12. By taking advantage of economies of scale and developing expertise, financial
intermediaries overcome the problem of:
3.high transaction costs.
13. Which of the following causes a financial crisis to move into the debt deflation
1.Increase in uncertainty.
2.Unanticipated decline in the price level.
3.Stock market decline.
4.Increase in interest rates.
14. Conflicts of interest arise when
1.Financial institutions provide information to both buyers and sellers of financial
2.Financial institutions use their expertise to realize economies of scale
3.Financial institutions provide multiple services with competing interests
4.Financial institutions use their expertise to become more efficient.
15. How can the collapse of major corporations such as Enron and MCI WorldCom
contribute to financial crises?.
1.The crash of their stocks' prices could reduce the value of the shares held by banks.
2.The collapse of these companies could wipe out investor wealth and increase loan
defaults and market uncertainty.
3.The collapse of their stocks' prices could deter banks from underwriting future
corporation stock issues and reduce financial activity.
4.The collapse of these companies could encourage other firms to declare bankruptcy.
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