Chapter 8 - Chapter 8 Exercise: .Key terms 1. bank panic 2....

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Chapter 8 Exercise: .Key terms 1. bank panic 2. free-rider problem 3. net worth 4. adverse selection 5. collateral 6. principal-agent problem 7. moral hazard 8. debt defilation . Multiple Choiceh 1. American businesses get their external funds primarily from a. bank loans. b. bonds and commercial paper issues. c. stock issues. d. other loans. 2. Collateral is a. a prevalent feature of debt contracts for households. b. a prevalent feature of debt contracts for business. c. property that is pledged to the lender if a borrower cannot make his or her debt payments. d. all of the above. e. only (a) and (c) of the above. 3. Which of the following is not one of the eight basic puzzles about financial structure? a. The financial system is among the most heavily regulated sectors of the economy. b.Issuing marketable securities is the primary way businesses finance their operations. c. Indirect finance, which involves the activities of financial intermediaries, is many times more important than direct finance, in which businesses raise funds directly from lenders in financial markets. d. Banks are the most important source of external funds to finance businesses. 4. Financial intermediaries provide their customers with a. reduced transactions costs. b. increased diversification and reduced risk. c. greater liquidity. d. all of the above. e. only (b) and (c) of the above. 5. Mutual funds lower transactions costs and provide individual investors the benefit of a. reduced risk. b. diversification. c. economies of scale. d. all of the above. e. both (a) and (c) of the above. 6. The problem created by asymmetric information before the transaction occurs is called _____, while the problem created after the transaction occurs is called _____.
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a. adverse selection; moral hazard b. moral hazard; adverse selection c. costly state verification; free-riding d. free-riding; costly state verification 7. The “lemons problem” is a term used to describe the a. moral hazard problem. b. adverse selection problem. c. free-rider problem. d. principal-agent problem. e. both (a) and (b) of the above. 8. Adverse selection is a problem associated with equity and debt contracts arising from a. the lender’s relative lack of information about the borrower’s potential returns and risks of his investment activities. b. the lender’s inability to legally require sufficient collateral to cover a 100% loss if the borrower defaults. c. the borrower’s lack of incentive to seek a loan for highly risky investments. d. none of the above. 9. Because of the moral hazard problem, a. lenders may demand positions on the board of directors of the firms that they provide with financing. b. lenders will choose to write complicated contracts, prohibiting the borrowers
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Chapter 8 - Chapter 8 Exercise: .Key terms 1. bank panic 2....

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