A bank a has the ability to profit from the

47) A bank
A) has the ability to profit from the information it produces.
B) avoids the free-rider problem by primarily making private loans rather than by purchasing
securities that are traded in the open market.
C) becomes an expert in determining good firms from bad firms.
D) all of the above.
Answer: D
49) Because information is scarce,
E
50) Moral hazard is a problem associated with debt and equity contracts arising from

B) the owners' inability to ensure that managers will act in the owners' interest.
C) the difficulty lenders have in sorting out good credit risks from bad credit risks.
D) all of the above.
E) only A and B of the above.
Answer: E
51) Because of the moral hazard problem,
E
52) Moral hazard in equity contracts is known as the ________ problem because the manager of
the firm has fewer incentives to maximize profits than the stockholders might ideally prefer.
A) principal-agent
B) adverse selection
C) free-rider
D) debt deflation
Answer: A
54) The principal-agent problem
B
55) Solutions to the moral hazard problem include
E
56) One financial intermediary in our financial structure that helps to reduce the moral hazard
arising from the principal-agent problem is the

C) pawn broker.
D) savings and loan association.
Answer: A