ANSWER KEY
ECONOMICS 353 (SECTION 1) L. Tesfatsion/Spring 00
EXERCISE SET 8: 5 POINTS TOTAL DUE: Tuesday, April 18, 9:30 A.M.
*IMPORTANT REMINDER: LATE ASSIGNMENTS CANNOT BE ACCEPTED -- NO EXCEPTIONS*
*NOTE:* Please FILL IN YOUR NAME, BIRTH DATE, AND ID (SOC SEC) No. on Side 1
of the accompanying answer sheet and write "353 SECTION 1-EXERCISE SET 8" in
the top margin of Side 1. Use a #2 pencil to MARK YOUR ANSWERS on Side 1
of the answer sheet to the following five multiple choice questions:
1-1 Because of adverse selection problems in financial markets,
A. lenders have an incentive to monitor the behavior of their borrowers
after loan contracts are signed with them
B. lenders may prefer to lend only to those who "do not need the money."
C. lenders typically require collateral before making a loan.
D. all of the above
E E. only B and C above
2-1 Corporate debt claims are generally better able than equity claims to
reduce moral hazard problems because
A. debt claims have priority over equity claims in case of bankruptcy
B. corporate managers are legally required to keep debt claim owners
informed about their day-to-day activities
C. debt claims have pre-set payment obligations that are not conditioned
on corporate profit performance
D. all of the above
E E. only A and C above
3-1 The "economic development" of a country refers to improvements in
__________ that permit higher standards of living for its people.
A. its balance of payments
B B. the infrastructure, organization, and governance of its economy
C. its unemployment rate
D. the size of its GDP
E. none of the above
4-1 The economic growth and development of a country are impeded when the
flow of funds from savers to lenders is disrupted, which can result from
A. inadequate government regulation.
B. a weak legal system.
C. absence of standard accounting practices.
D D. all of the above.
E. only A and B above.
5-1 According to Mishkin, key factors that can trigger or worsen financial
crises include
A. sudden increases in lender uncertainty.
B. sharp declines in corporate real net worth.
C. sudden exchange rate depreciations or devaluations.
D. bank panics.
E E. all of the above.
