Function of Financial Markets

8.2 Transaction Costs

2) The reduction in transactions costs per dollar of investment as the size of transactions increases is

A) discounting.
B) economies of scale.
C) economies of trade.
D) diversification.

3) By bundling share purchases of many investors together mutual funds can take advantage of economies of scale and thereby lower

A) adverse selection.
B) moral hazard.
C) transactions costs.
D) diversification.

5) Financial intermediaries develop ________ in things such as computer technology which allows them to lower transactions costs.

A) expertise
B) diversification
C) regulations
D) equity

6) Financial intermediaries' low transaction costs allow them to provide ________ services that make it easier for customers to conduct transactions.

A) liquidity
B) conduction
C) transcendental
D) equitable
8.3 Asymmetric Information: Adverse Selection and Moral Hazard

1) A borrower who takes out a loan usually has better information about the potential returns and risk of the investment projects he plans to undertake than does the lender. This inequality of information is called

A) moral hazard.
B) asymmetric information.
C) noncollateralized risk.
D) adverse selection.

2) The presence of ________ in financial markets leads to adverse selection and moral hazard problems that interfere with the efficient functioning of financial markets.

A) noncollateralized risk
B) free-riding
C) asymmetric information
D) costly state verification

3) The problem created by asymmetric information before the transaction occurs is called ________, while the problem created after the transaction occurs is called ________.

A) adverse selection; moral hazard
B) moral hazard; adverse selection
C) costly state verification; free-riding
D) free-riding; costly state verification

4) If bad credit risks are the ones who most actively seek loans then financial intermediaries face the problem of

A) moral hazard.
B) adverse selection.
C) free-riding.
D) costly state verification.

5) The problem faced by the lender that the borrower may take on additional risk after receiving the loan is called

A) adverse selection.
B) moral hazard.
C) transactions costs.
D) diversification.

7) The analysis of how asymmetric information problems affect economic behavior is called ________ theory.

A) uneven
B) parallel
C) principal
D) agency