ECONOMICS 353 (SECTION 2) L. Tesfatsion/Spring 01
EXERCISE SET 8: 5 POINTS TOTAL DUE: Tuesday, April 10, 2:10 P.M.
*IMPORTANT REMINDER: LATE ASSIGNMENTS CANNOT BE ACCEPTED -- NO EXCEPTIONS*
1-2. According to Mishkin, which of the following are true statements about
U.S business external financing in the 1970-1985 period:
A. Stock issue constituted only a small percentage of this external
financing, less than 5 percent.
B. Bank loans were the single most important source of external funds
C. Indirect finance was much more important than direct finance as
a source of external finance.
D. Foreign saving (loans from foreigners) accounted for a large portion of
this external financing, over 25 percent.
E E. All but D above.
2-2 "Principle-agent problems" are said to occur in financial markets when
A. people who do not pay for information take advantage of the information
that other people have paid for by observing their behavior.
B. high-risk borrowers are successfully able to pass themselves off
as low-risk borrowers when applying for loans.
C. the cost per dollar loaned declines as the size of the loan increases.
D D. ownership of assets is separated from the control of these assets.
3-2 Standard accounting principles make profit verification easier and
hence reduce ________ for ____________
A. Adverse selection problems; Corporate shareholders
B. Adverse selection problems; Corporate managers
C C. Principle-agent problems; Corporate shareholders
D. Moral hazard problems; Corporate managers
4-2 Because of moral hazard 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 prefer to lend to borrowers with a high net worth.
C. lenders often require collateral before making a loan.
D D. all of the above
E. only A and C above
5-2 Securities dealers face more information problems than bankers because
A. bank loans are traded on an open market, which gives bankers a
greater incentive to engage in information gathering.
B. bankers can include collateral requirements in loan contracts, which
can act as a signal regarding the type of borrower (high or low risk)
C. dealers have a harder time eliminating free-rider problems.
D. all of the above.
E E. only B and C above.
