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Unformatted text preview: the future 20) If bad credit risks are the ones who most actively seek loans then financial intermediaries face the problem of ________. A) free-riding B) adverse selection C) costly state verification D) moral hazard 21) The ________ problem helps to explain why the private production and sale of information cannot eliminate ________. A) free-rider; moralhazard B) free-rider; adverse selection C) principal-agent; adverse selection D) principal-agent; moral hazard 22) Because of the adverse selection problem, ________. A) lenders will write debt contracts that restrict certain activities of borrowers B) lenders are reluctant to make loans that are not secured by collateral C) good credit risks are more likely to seek loans causing lenders to make a disproportionate amount of loans to good credit risks D) lenders may refuse loans to individuals with high net worth, because of their greater proclivity to ʺskip townʺ 23) Factors that lead to worsening conditions in financial system include ________. A) unanticipated increases in the price level B) unanticipated declines in the value of the domestic currency C) increases in net worth D) unanticipated increases in the value of the domestic currency 24) The economy recovers quickly from most recessions, but the increase in adverse selection and moral hazard problems in the credit markets caused by ________ led to the severe economic contraction known as The Great Depression. A) debt deflation B) an improvement in banksʹ balance sheets C) illiquidity D) increases in bond prices 25) The mismanagement of financial liberalization in emerging market countries can be understood as a severe ________. A) free-rider problem B) asymmetric information problem C) principal/agent problem D) lemons problem 19) ______ 20) ______ 21) ______ 22) ______ 23) ______ 24) ______ 25) ______ 1) C 2) C 3) C 4) D 5) C 6) A 7) A 8) D 9) B 10) B 11) A 12) A 13) A 14) A 15) D 16) D 17) B 18) D 19) D 20) B 21) B 22) B 23) B 24) A 25) C...
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- Winter '14