Objective type questions on investment

1. When interest rates are high, lenders may not want to make loans because of:

a.      adverse selection.

b.      the principal-agent problem.

c.       costly state verification.

d.      moral hazard.

2. A venture capital firm:

a.      has no say in the management of the new firm.

b.      pools resources to help entrepreneurs start new firms.

c.       allows equity shares of the new firm to be sold in the marketplace.

d.      increases the size of the moral hazard problem.

3. An incentive compatible debt contract:

a.      aligns the incentives of the borrower with those of the lender.

b.      provide incentives for lenders to pick a certain industry.

c.       provide incentives for the borrower to make interest payments.

d.      increases the size of the moral hazard problem.

4. Which of the following describes the "lemons problem?"

a.      Buyers have more information than sellers and more transactions occur.

b.      Sellers have more information than buyers and few transactions occur.

c.       Sellers have more information than buyers and more transactions occur.

d.      Buyers have more information than sellers and few transactions occur.

5. By taking advantage of economies of scale and developing expertise, financial intermediaries overcome the problem of:

a.      free-riding.

b.      adverse selection.

c.       high transaction costs.

d.      moral hazard.

6. Which of the following causes a financial crisis to move into the debt deflation phase?

a.      Increase in interest rates

b.      Stock market decline

c.       Increase in uncertainty

d.      Unanticipated decline in the price level

7. Conflicts of interest arise when

a.      Financial institutions provide multiple services with competing interests

b.      Financial institutions provide information to both buyers and sellers of financial products

c.       Financial institutions use their expertise to become more efficient.

d.      Financial institutions use their expertise to realize economies of scale

8. How can the collapse of major corporations such as Enron and MCI WorldCom contribute to financial crises?

a.      The collapse of these companies could wipe out investor wealth and increase loan defaults and market uncertainty.

b.      The collapse of these companies could encourage other firms to declare bankruptcy.

c.       The crash of their stocks' prices could reduce the value of the shares held by banks.

d.      The collapse of their stocks' prices could deter banks from underwriting future corporation stock issues and reduce financial activity.