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Question
One way the venture capital firm avoids the free-rider problem is by
A) prohibiting the sale of equity in the firm to anyone except the venture capital firm.
B) prohibiting members from serving on the board of directors.
C) prohibiting the borrowing firm from replacing management.
D) requiring collateral equal to the value of the borrowed funds.
Answer
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Related questions
Q:
What is a stock? How do stocks affect the economy?
Q:
When I purchase a corporate ________, I am lending the corporation funds for a specific time. When I purchase a corporation's ________, I become an owner in the corporation.
A) bond; stock
B) stock; bond
C) stock; debt security
D) bond; debt security
Q:
Fear of a major recession causes stock prices to fall, everything else held constant, which in turn causes consumer spending to
A) increase.
B) remain unchanged.
C) decrease.
D) cannot be determined.
Q:
An increase in stock prices ________ the size of people's wealth and may ________ their willingness to spend, everything else held constant.
A) increases; increase
B) increases; decrease
C) decreases; increase
D) decreases; decrease
Q:
Everything else held constant, an increase in interest rates on student loans
A) increases the cost of a college education.
B) reduces the cost of a college education.
C) has no effect on educational costs.
D) increases costs for students with no loans.
Q:
High interest rates might ________ purchasing a house or car but at the same time high interest rates might ________ saving.
A) discourage; encourage
B) discourage; discourage
C) encourage; encourage
D) encourage; discourage
Q:
The price paid for the rental of borrowed funds (usually expressed as a percentage of the rental of $100 per year) is commonly referred to as the
A) inflation rate.
B) exchange rate.
C) interest rate.
D) aggregate price level.
Q:
The bond markets are important because they are
A) easily the most widely followed financial markets in the United States.
B) the markets where foreign exchange rates are determined.
C) the markets where interest rates are determined.
D) the markets where all borrowers get their funds.
Q:
________ markets transfer funds from people who have an excess of available funds to people who have a shortage.
A) Commodity
B) Fund-available
C) Financial
D) Derivative exchange
Q:
Financial markets promote greater economic efficiency by channeling funds from ________ to ________.
A) investors; savers
B) borrowers; savers
C) savers; borrowers
D) savers; lenders
Q:
________ are the only depository institutions that are tax-exempt.
A) Commercial banks
B) Savings and loans
C) Mutual savings banks
D) Credit unions
Q:
Like the dual banking system for commercial banks, thrifts can have either ________ or ________ charters.
A) state; federal
B) state; local
C) local; federal
D) municipal; federal
Q:
Under the Gramm-Leach-Bliley Act the oversight of the securities activities of bank holding companies belongs to
A) the SEC.
B) the Comptroller of the Currency.
C) the U.S. Treasury.
D) the Federal Reserve.
Q:
Under the Gramm-Leach-Bliley Act states retain regulatory authority over
A) bank holding companies.
B) securities activities.
C) insurance activities.
D) bank subsidiaries engaged in securities underwriting.
Q:
Which investment bank filed for bankruptcy on September 15, 2008 making it the largest bankruptcy filing in U.S. history?
A) Lehman Brothers
B) Merrill Lynch
C) Bear Stearns
D) Goldman Sachs
Q:
Mortgage brokers often did not make a strong effort to evaluate whether the borrower could pay off the loan. This created a
A) severe adverse selection problem.
B) decline in mortgage applications.
C) call to deregulate the industry.
D) decrease in the demand for houses.
Q:
When housing prices began to decline after their peak in 2006, many subprime borrowers found that their mortgages were "underwater." This meant that
A) the value of the house fell below the amount of the mortgage.
B) the basement flooded since they could not afford to fix the leaky plumbing.
C) the roof leaked during a rainstorm.
D) the amount that they owed on their mortgage was less than the value of their house.
Q:
Debt deflation occurs when
A) an economic downturn causes the price level to fall and a deterioration in firms' net worth because of the increased burden of indebtedness.
B) rising interest rates worsen adverse selection and moral hazard problems.
C) lenders reduce their lending due to declining stock prices (equity deflation) that lowers the value of collateral.
D) corporations pay back their loans before the scheduled maturity date.
Q:
When financial intermediaries deleverage, firms cannot fund investment opportunities resulting in
A) a contraction of economic activity.
B) an economic boom.
C) an increased opportunity for growth.
D) a call for government regulation.
Q:
In a bank panic, the source of contagion is the
A) free-rider problem.
B) too-big-to-fail problem.
C) transactions cost problem.
D) asymmetric information problem.
Q:
When the value of loans begins to drop, the net worth of financial institutions falls causing them to cut back on lending in a process called
A) deleveraging.
B) releveraging.
C) capitulation.
D) deflation.
Q:
A key finding of the economic analysis of financial structure is that
A) the existence of the free-rider problem for traded securities helps to explain why banks play a predominant role in financing the activities of businesses.
B) while free-rider problems limit the extent to which securities markets finance some business activities, nevertheless the majority of funds going to businesses are channeled through securities markets.
C) given the great extent to which securities markets are regulated, free-rider problems are not of significant economic consequence in these markets.
D) economists do not have a very good explanation for why securities markets are so heavily regulated.
Q:
For restrictive covenants to help reduce the moral hazard problem they must be ________ by the lender.
A) monitored and enforced
B) written in all capitals
C) easily changed
D) impossible to remove
Q:
Government regulations designed to reduce the moral hazard problem include
A) laws that force firms to adhere to standard accounting principles.
B) light sentences for those who commit the fraud of hiding and stealing profits.
C) state verification subsidies.
D) state licensing restrictions.
Q:
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
Q:
Equity contracts
A) are claims to a share in the profits and assets of a business.
B) have the advantage over debt contracts of a lower costly state verification.
C) are used much more frequently to raise capital than are debt contracts.
D) are not subject to the moral hazard problem.
Q:
As the banking system in the United States evolves, it is expected that
A) the number and importance of small banks will increase.
B) the number and importance of large banks will decrease.
C) small banks will grow at the expense of large banks.
D) the number and importance of large banks will increase.
Q:
Although it has a population about half that of the United States, Japan has
A) many more banks.
B) about 25 percent of the number of banks.
C) more than 5000 commercial banks.
D) fewer than 100 commercial banks.
Q:
What financial innovations helped banks to get around the bank branching restrictions of the McFadden Act?
Q:
One factor contributing to the decline in cost advantages that banks once had is the
A) decline in the importance of checkable deposits from over 60 percent of banks' liabilities to 2 percent today.
B) decline in the importance of savings deposits from over 60 percent of banks' liabilities to under 15 percent today.
C) decline in the importance of checkable deposits from over 40 percent of banks' liabilities to 15 percent today.
D) decline in the importance of savings deposits from over 40 percent of banks' liabilities to under 20 percent today.