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Financial Intermediaries
Entities that facilitate transactions between savers and borrowers.
Investment Risk
Potential for loss in investment value.
Direct Finance
Lending directly to borrowers without intermediaries.
Indirect Finance
Using banks to lend money to borrowers.
Loan Size
Amount of money borrowed
Interest Rate
Percentage charged on borrowed money.
Pooling Savings
Combining funds from multiple savers for lending.
Liquidity
Ease of converting assets to cash.
Asymmetric Information
Unequal knowledge between parties in a transaction.
Moral Hazard
Risky behavior when costs are borne by others.
Adverse Selection
Risky individuals more likely to seek loans.
Principal-Agent Problem
Agent acts against principal's best interests.
Information Services
Banks provide data to reduce transaction risks.
Monitoring
Banks track borrower behavior to mitigate risks.
Collateral
Asset pledged to secure a loan.
Lemon's Problem
Difficulty in distinguishing good borrowers from bad.
Risk Diversification
Spreading risk among multiple savers and loans.
Contract Costs
Expenses associated with creating and managing loans.
Borrower Risk
Likelihood of borrower defaulting on a loan.
Savers' Money
Funds deposited by individuals for lending purposes.
Loan Arrangements
Agreements made between borrowers and lenders.
Banking Services
Functions provided by banks to facilitate finance.
Credit Access
Ability of firms to obtain loans from banks.
Risk Sharing
Distribution of risk among multiple savers.
Explicit Costs
Direct expenses incurred in financial transactions.
The assumption of asymmetric information means that
borrowers know more than lenders.
Generally, when there is asymmetric information
practical solutions are devised to allow lending to take place.
Which of the following is NOT true of adverse selection?
It describes a lender's problem in verifying borrowers are using their funds as intended.
Which of the following is NOT true of moral hazard?
It describes a lender's problem of distinguishing the good−risk applicants from the bad−risk applicants.
Which of the following is an example of adverse selection?
A man with a bad heart condition buys a large life insurance policy.
Which of the following is NOT an example of adverse selection?
A company uses the proceeds of a new stock sale to build an unnecessarily luxurious new headquarters.
The "lemons problem" in the used car market arises from
the difficulty buyers have in distinguishing good cars from lemons.
Why is adverse selection more likely in financial markets when interest rates rise?
The remaining borrowers are more likely to be risky.
When there's asymmetric information, who tends to have the better information?
borrower
Moral hazard problems arise when
borrowers have an incentive to act in ways that do not reflect the lender's interests.
Moral hazard problems arise when
borrowers have an incentive to conceal information.
Suppose some members of Enron's board of directors are aware of the company's true financial condition, information that is not available to most investors. This is an example of
asymmetric information.
Moral hazard is not eliminated in debt financing because
borrowers have an incentive to assume greater risk than is in the interest of the lender.
Adverse selection
occurs when bad risks are more likely to seek/accept a financial contract than are good risks.
Moral Hazard
occurs in financial markets when borrowers use borrowed funds differently than they would have used their own funds.
The McFadden Act of 1927
prohibited national banks from operating branches outside their home states.
During a banking panic, a lender of last resort will
make loans to solvent but temporality illiquid banks.
In the current U.S. economy, who plays the role of lender of last resort?
The Federal Reserve System
Currently, the FDIC insures deposits up to a limit of
$250,000.
If you have $2 million in a CD at a commercial bank that is a member of the FDIC, how much of your funds are uninsured?
$1.75 million
The president of which Federal Reserve Bank is always a voting member of the Federal Open Market Committee?
New York
Who is considered to wield the most power in the Federal Reserve System?
the Fed chair
The regional Federal Reserve Banks are owned by
private banks which are part of the Federal Reserve System in each region.
How many Federal Reserve districts are there?
12
An increase in the demand for loanable funds will occur if there is
an increase in expected profits from firm investment projects.
Which of the following would you expect to increase the equilibrium interest rate?
an increase in the budget deficit
The demand for loanable funds is downward sloping because the ______ the interest rate, the __________ the number of profitable investment projects a firm can undertake, and the _________ the quantity demanded of loanable funds.
lower; greater; greater
Note 
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