Question

1) A borrower who takes out a loan usually has better information about the potential returns and risk of the investment projects he plans to undertake than does the lender. This inequality of information is called

A) moral hazard.

B) asymmetric information. C) noncollateralized risk. D) adverse selection.

2) If bad credit risks are the ones who most actively seek loans then financial intermediaries face the problem of

A) moral hazard.

B) adverse selection.

C) free-riding.

D) costly state verification.

3) The concept of adverse selection helps to explain all of the following EXCEPT

A) why firms are more likely to obtain funds from banks and other financial intermediaries, rather than from the securities markets.

B) why indirect finance is more important than direct finance as a source of business finance.

C) why direct finance is more important than indirect finance as a source of business finance.

D) why the financial system is so heavily regulated.

ECON 350 Assignment 3, Spring, 2020 cont’d P a g e | 2

4) Adverse selection is a problem associated with equity and debt contracts arising from

A) the lender's relative lack of information about the borrower's potential returns and risks of his investment activities.

B) the lender's inability to legally require sufficient collateral to cover a 100% loss if the borrower defaults.

C) the borrower's lack of incentive to seek a loan for highly risky investments.

D) the lender's inability to restrict the borrower from changing his behavior once given a loan.

5) The amount of checkable deposits that banks are required by regulation to hold are the

A) excess reserves.

B) required reserves.

C) vault cash.

D) total reserves.

6) When $1 million is deposited at a bank, the required reserve ratio is 20 percent, and the bank chooses not to hold any excess reserves but makes loans instead, then, in the bank's final balance sheet

A) the assets at the bank increase by $800,000.

B) the liabilities of the bank increase by $1,000,000. C) the liabilities of the bank increase by $800,000. D) reserves increase by $160,000.

7) With a 20% reserve requirement ratio, a $100 deposit into New Bank means that the maximum amount New Bank could lend is

A) $80.

B) $100.

C) $10. D) $110.

8) A serious consequence of a financial crisis is A) a contraction in economic activity.

B) an increase in asset prices.

C) financial engineering.

D) financial globalization.

1) A borrower who takes out a loan usually has better information about the potential returns and risk of the investment projects he plans to undertake than does the lender This inequality of information is called A) moral hazard B) asymmetric information C) noncollateralized risk D) adverse selection 2) If bad credit risks are the ones who most actively seek loans then financial intermediaries face the problem of A) moral hazard B) adverse selection, C) free-riding. D) costly state verification. 3) The concept of adverse selection helps to explain all of the following EXCEPT A) why firms are more likely to obtain funds from banks and other financial intermediaries, rather than from the securities markets B) why indirect finance is more important than direct finance as a source of business finance. C) why direct finance is more important than indirect finance as a source of business finance D) why the financial system is so heavily regulated. ECON 350 Assignment 3. Spring 2020 cont'd Page 12 4) Adverse selection is a problem associated with equity and debt contracts arising from A) the lender's relative lack of information about the borrower's potential returns and risks of his investment activities. B) the lender's inability to legally require sufficient collateral to cover a 100% loss if the borrower defaults C) the borrower's lack of incentive to seek a loan for highly risky investments D) the lender's inability to restrict the borrower from changing his behavior once given 5) The amount of checkable deposits that banks are required by regulation to hold are A) excess reserves B) required reserves. C) vault cash D) total reserves. 6) When $1 million is deposited at a bank, the required reserve ratio is 20 percent, and the bank chooses not to hold any excess reserves but makes loans instead, then, in the bank's final balance sheet A) the assets at the bank increase by $800.000 B) the liabilities of the bank increase by $1,000,000 C) the liabilities of the bank increase by $800,000 D) reserves increase by $160.000 7) With a 20% reserve requirement ratio, a $100 deposit into New Bank means that the maximum amount New Bank could lend is A) $80 B) $100 C) $10. D) $110 8) A serious consequence of a financial crisis is A) a contraction in economic activity B) an increase in asset prices c) financial engineering D) financial globalization

Answer 1

A borrower who takes out a loan usually has better information about the potential returns and risk of the investment projects he plans to undertake than does the lender. This inequality of information is called:-

B) Assymetric information

Assymetric information also called information failure, happens when one party to a transaction has greater material knowledge than the other party. Typically the more knowledgeable party is the seller.

2) If bad credit risks are the ones who most actively seek loans then financial intermediaries face the problem of

Adverse selection

Which means, when sellers have information than buyers don't have or vice versa, about some aspect of product quality.

3) The concept of adverse selection helps to explain all of the following EXCEPT

Ans) why direct finance is more than indirect finance as of a source of business finance.

4) Adverse selection is a problem associated with equity and debt contracts arising from

A) the lender's relative lack of information about the borrower's potential returns and risks of his investment activities, is the correct answer.

5) The amount of checkable deposits that banks are required by regulation to hold are the

Required reserve

Required reserve is a central bank regulation employed by most, but not all of the world's central banks, that sets the minimum amount of reserve that must be held by commercial banks.

6) When $1 million is deposited at a bank, the required reserve ratio is 20 percent, and the bank chooses not to hold any excess reserves but makes loans instead, then, in the bank's final balance sheet

The liabilities of bank increases by $1,000,000.

7) With a 20% reserve requirement ratio, a $100 deposit into New Bank means that the maximum amount New Bank could lend is

$80.

First, the required reserve ratio is the proportion of the deposits which the banks should keepwith themselves, this ratio is set by central bank. We can calculate reserve ratio as :- Reserve maintained with central bank divided by bank deposits multiplied by 100.

8) A serious consequence of a financial crisis is

A) a contraction in economic activity

Because banks pay high intrest rates to attract foreign capital, which leads banks.