ECON 343 TEST 3 FINANCIAL STRUCTURE, INTERMEDIARIES, AND ASYMMETRIC INFORMATION COMPLETE QUESTIONS WITH VERIFIED ANSWERS

ECON 343 TEST 3 FINANCIAL STRUCTURE, INTERMEDIARIES, AND ASYMMETRIC INFORMATION COMPLETE QUESTIONS WITH VERIFIED ANSWERS 1. Which of the following is NOT one of the eight basic puzzles about financial structure? A) Indirect finance is many times more important than direct finance. B) Debt contracts are typically extremely complicated legal documents. C) There is very little regulation of the financial system. D) Collateral is a prevalent feature of debt contracts. Answer: C* - The financial system is actually heavily regulated, making this the incorrect statement among the puzzles. 2. By bundling share purchases of many investors together, mutual funds can take advantage of economies of scale and thereby lower ______. A) moral hazard B) diversification C) adverse selection D) transactions costs Answer: D* - Mutual funds reduce costs for individual investors by spreading the fixed costs of trading over a large pool of funds. 3. Financial intermediaries' low transaction costs allow them to provide ______ services that make it easier for customers to conduct transactions. A) equitable B) transcendental C) conduction D) liquidity Answer: D* - Liquidity services, such as checking accounts, make it easier for customers to conduct transactions. 4. The current structure of financial markets can be best understood as the result of attempts by financial market participants to ______. A) reduce transaction costs B) cartelize the provision of financial services C) deal with the great number of small firms in the United States D) adapt to continually changing government regulations Answer: A* - Financial innovation and the evolution of markets are largely driven by the desire to minimize transaction costs. 5. An example of the ______ problem would be if Brian borrowed money from Sean in order to purchase a used car and instead took a trip to Atlantic City using those funds. A) adverse selection B) agency C) costly state verification D) moral hazard Answer: D* - Moral hazard refers to the risk that the borrower engages in activities that are undesirable from the lender's perspective after the loan is made. 6. The analysis of how asymmetric information problems affect economic behavior is called ______ theory. A) parallel B) principal C) uneven D) agency Answer: D* - Agency theory examines the conflicts of interest and information asymmetries between principals (e.g., lenders) and agents (e.g., borrowers). 7. Of the four sources of external funding for nonfinancial businesses, the least often used in the U.S. is ______. A) bank loans B) nonbank loans C) bonds D) stock Answer: D* - Stocks are a relatively small source of external finance for businesses compared to loans and debt securities. 8. Financial intermediaries develop ______ in things such as computer technology which allows them to lower transactions costs. A) equity B) regulations C) diversification D) expertise Answer: D* - Intermediaries become experts in specialized areas, including technology, which helps them reduce costs. 9. Commercial and farm mortgages, in which property is pledged as collateral, account for ______. A) two-thirds of borrowing by nonfinancial businesses. B) one-half of borrowing by nonfinancial businesses. C) one-quarter of borrowing by nonfinancial businesses. D) one-twentieth of borrowing by nonfinancial businesses. Answer: C* - Mortgages (real estate loans) represent about a quarter of nonfinancial business borrowing. 10. Direct finance involves the sale to ______ of marketable securities such as stocks and bonds. A) households B) pension funds C) insurance companies D) financial intermediaries Answer: A* - Direct finance is when businesses sell securities directly to lenders, primarily households, in financial markets. 11. Financial intermediaries' low transaction costs allow them to provide ______ services that make it easier for customers to conduct transactions. A) conduction B) equitable C) transcendental D) liquidity Answer: D* - This is a repeat of question 3 to ensure random distribution. Liquidity services facilitate transactions. 12. Of the sources of external funds for nonfinancial businesses in the United States, loans from banks and other financial intermediaries account for approximately ______ of the total. A) 6% B) 40% C) 56% D) 60% Answer: C* - Loans from financial intermediaries are the largest source of external funds for businesses, accounting for about 56%. 13. American businesses get their external funds primarily from ______. A) bank loans. B) stock issues. C) bonds and commercial paper issues. D) loans from nonbank financial intermediaries. Answer: D* - While bank loans are important, loans from nonbank intermediaries (like insurance companies, finance companies) are the primary source. 14. One purpose of regulation of financial markets is to ______. A) guarantee that the maximum rates of interest are paid on deposits B) limit the profits of financial institutions. C) promote the provision of information to shareholders, depositors and the public D) increase competition among financial institutions. Answer: C* - Regulations aim to reduce asymmetric information by ensuring that investors and depositors have access to accurate information. 15. Which of the following is NOT one of the eight basic puzzles about financial structure?