ANSWER KEY
ECONOMICS 353 (SECTION 2) L. Tesfatsion/Spring 00
EXERCISE SET 8: 5 POINTS TOTAL DUE: Tuesday, April 18, 2:10 P.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 2-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:
1-2 Because of moral hazard problems in financial markets,
A. lenders often include loan contract provisions that restrict the
behavior of borrowers
B. the interest rates set by lenders to cover expected default losses
can result in lower quality loan applicants
C. lenders more readily lend to borrowers with high net worth.
D. all of the above.
E E. only A and C above
2-2 Financial intermediaries (FIs) are generally better able than corporate
securities dealers to reduce adverse selection problems because
A. FIs can make private non-traded loans, which means that information
collected on borrowers is not as subject to free-rider problems.
B. FIs can include collateral requirements in loan contracts, which
act as a signal regarding a borrower's default risk
C. FIs can better monitor the behavior of their borrowers after loan
contracts are signed with them
D. all of the above.
E E. only A and B above.
3-2 The "economic growth" of a country refers to __________.
A. changes in its balance of payments
B. changes in the infrastructure, organization, and governance of its economy
C. changes in its unemployment rate
D D. changes in the size of its economy, often measured by changes in GDP
E. none of the above
4-2 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. lack of enforcement of contracts
B. inadequate information disclosure requirements
C. nationalization of financial institutions
D D. all of the above
E. only A and B above
5-2 According to Mishkin, key factors that can trigger or worsen financial
crises include
A. increases in interest rates
B. sudden declines in stock market prices
C negative exchange rate shocks
D. negative inflation rate shocks
E E. all of the above.
