ANSWER OUTLINE
ECONOMICS 353 (SECTION 1) L. Tesfatsion/Spring 99
EXERCISE SET 8: 5 POINTS TOTAL DUE: Thursday, April 22, 9:30 A.M.
*IMPORTANT REMINDER: LATE ASSIGNMENTS CANNOT BE ACCEPTED -- NO EXCEPTIONS*
Please FILL IN YOUR NAME on Side 1 of the accompanying General Purpose
NCS Answer Sheet and use a #2 pencil to MARK YOUR ANSWERS on Side 1 of this
Answer Sheet to the following five multiple choice questions.
NOTE: If you missed the answer sheet hand-out in class, you can obtain
an answer sheet from Sue Streeter (4-6600) in Heady Hall 382.
1-1 Which statement below is NOT one of the eight financial structure puzzles:
A. Issuing marketable debt and equity securities is not the primary way
businesses finance their operations.
B B. Bonds and commercial paper are the single most important source of
external finance for American businesses.
C. Indirect finance is many times more important than direct finance.
D. Banks are the most important source of external funds for businesses.
2-1 With regard to external financing for nonfinancial businesses in
the United States, which of the following are accurate statements:
A A. Smaller businesses that are not well-established almost never raise
funds by issuing marketable securities.
B. Because well-established corporations are dominant financial market
participants, their issues of marketable securities are the single most
important source of funds to finance businesses.
C. Direct financing accounts for more than fifty percent of the external
financing for American businesses.
D. Both A and B.
3-1 Adverse selection problems with equity and debt contracts arise from
A A. lenders' relative lack of information about borrowers' attributes
and the potential returns and risks of borrower investment activities.
B. lenders' inability to legally require sufficient collateral to cover
a 100% loss if borrowers default.
C. borrowers' lack of incentives to obtain loans for a high-risk investments.
D. none of the above.
4-1 Equity contracts account for a small fraction of external funds raised by
American businesses because
A. costly state verification makes the equity contract less desirable than
the debt contract
B. of the greater scope for moral hazard problems under equity contracts as
compared to debt contracts.
C. equity contracts do not permit borrowing firms to raise additional funds
by issuing debt.
D. all of the above.
E E. of both A and B of the above.
5-1 Many major financial crises in the United States have begun with
A. a sharp rise in interest rates.
B. a sharp stock market decline.
C. an increase in financial market uncertainty resulting from the failure
of either a major financial or nonfinancial firm.
D D. all of the above.
E. only A and B of the above.
