ECONOMICS 353 (SECTION 1) L. Tesfatsion/Spring 02
EXERCISE 9: 6 POINTS TOTAL DUE: Tuesday, April 16, 9:30 A.M.
ANSWER OUTLINE
*IMPORTANT REMINDER: LATE ASSIGNMENTS CANNOT BE ACCEPTED -- NO EXCEPTIONS*
Q1. According to Mishkin (Chapter 8), currently in the United States
_______ are a MORE important source of EXTERNAL funds for corporations than
_________.
A. loans from government agencies; loans from financial intermediaries
B. funds from security issues; loans from financial intermediaries
C C. loans from financial intermediaries; funds from security issues
D. loans from foreign investors; funds from security issues
Q2. FREE RIDING is said to occur in financial markets when
A. high-risk borrowers are successfully able to pass themselves off
as low-risk borrowers when applying for loans.
B. ownership of assets is separated from the control of these assets.
C. the cost per dollar loaned declines as the size of the loan increases.
D D. people who do not pay for information take advantage of the information
that other people have paid for by observing their behavior.
Q3. In economics, INFORMATION COSTS refer to the __________ whereas
TRANSACTION COSTS refer to the ___________.
A. costs of keeping information private that has been gathered at
great expense; costs of goods and services secured in trades
B. costs paid for information purchased from information agencies; costs
charged by dealers to secure matches between buyers and sellers.
C C. costs incurred in trying to reduce moral hazard and adverse selection
problems; costs associated with the organization of productive activities
D. costs incurred in trying to prevent free riding problems; costs of
goods and services secured in trades
Q4. DIRECT finance through securities markets tends to involve more adverse
selection and moral hazard problems for lenders than INDIRECT finance through
banks because
A. bank loans are private agreements between banks and borrowers, which
reduces free-riding problems and encourages banks to invest in the
gathering of detailed information about loan applicants.
B. banks can include special contract provisions in loans (e.g., substantial
collateral requirements which only low risk borrowers would be willing
to agree to) that force a potential borrower to reveal more about his
true type (high or low risk).
C. banks can include special contract provisions in loans (e.g., substantial
collateral requirements) that reduce the incentive of a borrower to
engage in risky behavior after a loan contract has been signed.
D D. all of the above.
Q5. _______________ in corporations can result in principal-agent problems
for ______________ .
A A. The separation of ownership and control; Corporate stockholders
B. Low dividend payouts; Corporate stockholders
C. High transactions costs; Corporate managers
D. Free riding problems; Corporate employees
Q6. Participants in securities markets in the United States are required to
adhere to standard accounting principles and to disclose information about
their sales, assets, and earnings. The government agency that enforces these
regulations is called the
A. Andersen Accounting Agency
B. Office of the Comptroller
C C. Securities and Exchange Commission
D. Accounting Standards Review Commission
