Exam 2 Flashcards
That most used cars are sold by intermediaries (i.e., used car dealers) provides evidence that these intermediaries
are able to prevent potential competitors from free-riding off the information that they provide.
Which of the following are accurate statements concerning the role that restrictive covenants play in reducing moral hazard in financial markets?
- Covenants reduce moral hazard by restricting borrowers’ undesirable behavior.
- Covenants require that borrowers keep collateral in good condition.
- Covenants require periodic accounting statements and income reports.
Because of the adverse selection problem,
lenders are reluctant to make loans that are not secured by collateral.
Of the sources of external funds for nonfinancial businesses in the United States, bonds account for approximately ________ of the total.
30%
A clause in a mortgage loan contract requiring the borrower to purchase homeowner’s insurance is an example of
a restrictive covenant.
During the 2007-2009 financial crisis, housing prices began to fall and subprime mortgages began to default. Which of the following statements is true about the rating of subprime mortgage products?
Many AAA-rated subprime products had to be downgraded over and over again until they reached junk status.
Of the following sources of external finance for American nonfinancial businesses, the most important is
nonbank loans.
A venture capital firm protects its equity investment from moral hazard through which of the following means?
It places people on the board of directors to better monitor the borrowing firm’s activities.
Conflicts of interest in the Arthur Andersen accounting firm intensified when ________ became the firm’s largest source of profits and large clients pressured ________ office managers to give favorable audits.
consulting; regional
When an accounting firm conducts on independent audit , the accounting firms certify that
- the firm’s management is qualified to conduct the firm’s business in the best interest of share holders.
- the firm is adhering to standard accounting principles and disclosing accurate information about sales, assets, and earnings.
- the firm is adhering to federal regulations with regard to product safety, hiring practices, and environmental regulations.
Factors that lead to worsening conditions in financial markets include
- increases in interest rates.
- increasing uncertainty in financial markets.
- declining stock prices.
Most financial crises in the United States have begun with
- a steep stock market decline.
- an increase in uncertainty resulting from the failure of a major firm.
What is a credit boom?
Essentially a lending spree on the part of banks and other financial institutions
Stage Three of a financial crisis in an advanced economy features
debt deflation.
Factors that lead to worsening conditions in financial markets include
bank panics.
What is a collateralized debt obligation?
A tranche of an SPV that has been setup based on default risk
In addition to having a direct effect on increasing adverse selection problems, increases in interest rates also promote financial crises by ________ firms’ and households’ interest payments, thereby ________ their cash flow.
increasing; decreasing
Stage Two of a financial crisis in an advanced economy usually involves a ________ crisis.
banking
Financial crises
- invariably lead to debt deflation.
- cause failures of financial intermediaries and leave only securities markets to channel funds from savers to borrowers.
- are a recent phenomenon that occur only in developing countries.
Stock market declines preceded a full-blown financial crisis
in the United States in 1929.
The Board of Governors
effectively sets the discount rate.
- establishes, within limits, reserve requirements.
- sets margin requirements.
Critics of Fed independence argue
that it is undemocratic to have monetary policy controlled by an elite group responsible to no one.
The “________ book” is produced by the Federal Reserve banks and details evidence on the state of the economy in each of the Federal Reserve districts.
beige
Members of Congress are able to influence monetary policy, albeit indirectly, through their ability to
propose legislation that would force the Fed to submit budget requests to Congress, as must other government agencies.
The Federal Advisory Council has ________ member(s) from each district.
one
Which of the following are true statements?
- The FOMC issues directives to the trading desk at the New York Fed.
- Designers of the Federal Reserve Act did not envision the use of open market operations as a monetary policy tool.
- The FOMC usually meets every six weeks to set monetary policy.
The theory of bureaucratic behavior suggests that the Federal Reserve will
try to gain regulatory power over more banks.
- try to avoid a conflict with the president and Congress over increases in interest rates.
- devise clever strategies in an effort to avoid blame for poor economic performance.
Americans’ fear of centralized power and their distrust of moneyed interests explain why the U.S. did not have a central bank until the
20th century.
