ANSWER OUTLINE
ECONOMICS 353 (SECTION 2) L. Tesfatsion/Spring 99
EXERCISE SET 8: 5 POINTS TOTAL DUE: Thursday, April 22, 2:10 P.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 382 Heady Hall.
1-2 Of the following types of external finance for American nonfinancial
businesses, the MOST important is
A A. loans from financial intermediaries
B. stock issue
C. bond and commercial paper issue
D. loans from governments, foreigners, and other businesses
2-2 With regard to external financing for nonfinancial businesses
in the United States, which of the following are accurate statements:
A. Securities markets account for a larger share of external funds
in the United States than in most of its major trading partners.
B. Since 1970, less than 5 percent of newly issued corporate bonds
and commercial paper have been sold directly to American households.
C. The stock market accounted for a sizeable fraction of the financing
of American businesses in the 1970-1985 period.
D. All of the above.
E E. Only A and B of the above.
3-2 Because of the adverse selection problem,
A. lenders may make a disproportionate amount of loans to bad credit risks.
B. lenders may refuse loans to individuals with low net worth.
C. lenders are reluctant to make loans that are not secured by collateral.
D D. all of the above.
4-2 Which of the following are accurate statements concerning the role that
restrictive covenants can play in reducing moral hazard in financial markets:
A. Covenants can reduce moral hazard by restricting borrowers' undesirable
behavior.
B. Covenants can reduce moral hazard by requiring that borrowers keep
collateral in good condition.
C. Covenants can reduce moral hazard by requiring that borrowers maintain
high net worth.
D D. All of the above.
E. Only A and B of the above.
5-2 Adverse selection and moral hazard problems increased in magnitude during
the early years of the Great Depression as
A. stock prices declined to 10% of their level in 1929
B. banks failed.
C. the aggregate price level declined.
D D. a result of all of the above.
E. a result of A and B of the above.
