Question

1.A well-functioning financial system: a. creates unpredictable market disruptions. b. solves asymmetric information problems. c. acts as a barrier to efficient allocation of capital d. causes financial frictions to increase in an economy.

2. Which of the following is true of securitization? (Circle All) a. It is a process that converts high-risk financial instruments into default-free financial instruments. b. It is a process that converts a series of financial instruments into marketable securities. c. A process that drives the prices of financial instruments above their fundamental values.

3. Which of the following factors apart from securitization was responsible for the Great Recession of 2007-2009? a. An increase in funds lent to subprime borrowers. b. A sudden rise in equity prices. c. An increase in the federal funds rate.

Answer 1

1]

(b) is the correct option. A well functioning financial system enables free flow of information.

(a) is incorrect. Market disruptions are not the goal of a well functioning financial system

(c) is incorrect. A well functioning financial system enables efficient capital allocation

(d) is incorrect. A well functioning financial system reduces frictions in an economy

2]

(b) is the correct option. Securitization converts assets into marketable securities

(a) is incorrect. Securitization cannot convert high risk instruments into default free securities. In fact, no process can do that.

(c) is incorrect. This is not the goal of securitization

3]

(a) is the correct option. Funds lent to subprime borrowers was one of the major reasons for the recession

(b) is incorrect. This was not one of the reasons for the recession

(c) is incorrect. This was not one of the reasons for the recession