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The Economics of Money, Banking, and Financial Markets

Frederic S. Mishkin

Chapter 8

An Economic Analysis of Financial Structure - all with Video Answers

Educators

Chapter Questions

02:52

Problem 1

For each of the following countries, identify the single most important (largest) and least important (smallest) source of external funding: United States; Germany; Japan; Canada. Comment on the similarities and differences between the countries' funding sources.

Oluwadamilola Ameobi
Oluwadamilola Ameobi
Numerade Educator
04:16

Problem 2

How can economies of scale help explain the existence of financial intermediaries?

Pragya Ahuja
Pragya Ahuja
Numerade Educator
11:12

Problem 3

Describe two ways in which financial intermediaries help lower transaction costs in the economy.

Aryan Tiwari
Aryan Tiwari
Numerade Educator
06:11

Problem 4

Why are financial intermediaries willing to engage in information collection activities when investors in financial instruments may be unwilling to do so?

Pragya Ahuja
Pragya Ahuja
Numerade Educator
01:39

Problem 5

Suppose you go to a bank, intending to buy a certificate of deposit with your savings. Explain why you would not offer a loan to the next individual who applies for a car loan at your local bank at a higher interest rate than the bank pays on certificates of deposit (but lower than the rate the bank charges for car loans).

Oluwadamilola Ameobi
Oluwadamilola Ameobi
Numerade Educator
01:59

Problem 6

Wealthy people often worry that others will seek to marry them only for their money. Is this a problem of adverse selection?

Rashmi Sinha
Rashmi Sinha
Numerade Educator
03:12

Problem 7

Do you think the lemons problem would be more severe for stocks traded on the New York Stock
Exchange or those traded over-the-counter? Explain.

Pragya Ahuja
Pragya Ahuja
Numerade Educator
03:17

Problem 8

Would you be more willing to lend to a friend if she put all of her life savings into her business than you would if she had not done so? Why?

Pragya Ahuja
Pragya Ahuja
Numerade Educator
03:06

Problem 9

What specific procedures do financial intermediaries use to reduce asymmetric information problems in lending?

Pragya Ahuja
Pragya Ahuja
Numerade Educator
05:06

Problem 10

What steps can the government take to reduce asymmetric information problems and help the financial system function more smoothly and efficiently?

Pragya Ahuja
Pragya Ahuja
Numerade Educator
03:31

Problem 11

How can asymmetric information problems lead to a bank panic?

Shazia Naz
Shazia Naz
Numerade Educator
07:11

Problem 12

In December 2001 , Argentina announced it would not honor its sovereign (government-issued) debt. Many investors were left holding Argentinean bonds priced at a fraction of their previous value. A few years later Argentina announced it would pay back $25 \%$ of the face value of its debt. Comment on the effects of information asymmetries on government bond markets. Do you think investors are currently willing to buy bonds issued by the government of Argentina?

Pragya Ahuja
Pragya Ahuja
Numerade Educator
04:13

Problem 13

How does the free-rider problem aggravate adverse selection and moral hazard problems in financial markets?

Pragya Ahuja
Pragya Ahuja
Numerade Educator
00:24

Problem 14

Would moral hazard and adverse selection still arise in
financial markets if information were not asymmetric? Explain .

Lu He
Lu He
Numerade Educator
04:36

Problem 15

How do standardized accounting principles help financial markets work more efficiently?

Pragya Ahuja
Pragya Ahuja
Numerade Educator
04:04

Problem 16

Which firms are most likely to use bank financing rather than to issue bonds or stocks to finance their
activities? Why?

Pragya Ahuja
Pragya Ahuja
Numerade Educator
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Problem 17

How can the existence of asymmetric information provide a rationale for government regulation of financial markets?

Rashmi Sinha
Rashmi Sinha
Numerade Educator
01:31

Problem 18

"The more collateral there is backing a loan, the less the lender has to worry about adverse selection." Is this statement true, false, or uncertain? Explain your answer.

Oluwadamilola Ameobi
Oluwadamilola Ameobi
Numerade Educator
01:53

Problem 19

Explain how the separation of ownership and control in American corporations might lead to poor management.

Aditya Sood
Aditya Sood
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04:06

Problem 20

Many policymakers in developing countries have proposed implementing systems of deposit insurance like the one that exists in the United States. Explain why this might create more problems than solutions in the financial system of developing countries.

Md.Daniyal Arshad
Md.Daniyal Arshad
Numerade Educator
11:57

Problem 21

Gustavo is a young doctor who lives in a country with
a relatively inefficient legal and financial system. When Gustavo applied for a mortgage, he found that banks usually required collateral for up to $300 \%$ of the amount of the loan. Explain why banks might require that much collateral in such a financial system. Comment on the consequences of such a system for economic growth.

Pragya Ahuja
Pragya Ahuja
Numerade Educator
08:34

Problem 22

Use the fact that the expected value of an event is a probability weighted average, the sum of each possible outcome multiplied by the probability of the event occurring.
You are in the market for a used car. At a used car lot, you know that the blue book value for the cars you are looking at is between $\$ 20,000$ and $\$ 24,000$. If you believe the dealer knows as much about the car as you, how much are you willing to pay? Why? Assume that you care only about the expected value of the car you buy and that the car values are symmetrically distributed.

Md.Daniyal Arshad
Md.Daniyal Arshad
Numerade Educator
07:03

Problem 23

Use the fact that the expected value of an event is a probability weighted average, the sum of each possible outcome multiplied by the probability of the event occurring.
Refer to Problem $22 .$ Now you believe the dealer knows more about the cars than you. How much are you willing to pay? Why? How can this be resolved in a competitive market?

Md.Daniyal Arshad
Md.Daniyal Arshad
Numerade Educator
03:07

Problem 24

Use the fact that the expected value of an event is a probability weighted average, the sum of each possible outcome multiplied by the probability of the event occurring.
You wish to hire Ron to manage your Dallas operations. The profits from the operations depend partially on how hard Ron works, as follows.
If Ron is lazy, he will surf the Internet all day, and he views this as a zero cost opportunity. However, Ron would view working hard as a "personal cost" valued at $\$ 1,000 .$ What fixed percentage of the profits should you offer Ron? Assume Ron cares only about his expected payment less any "personal cost."

Pragya Ahuja
Pragya Ahuja
Numerade Educator
13:06

Problem 25

Use the fact that the expected value of an event is a probability weighted average, the sum of each possible outcome multiplied by the probability of the event occurring.
You own a house worth $\$ 400,000$ that is located on a river. If the river floods moderately, the house will be completely destroyed. This happens about once every 50 years. If you build a seawall, the river would have to flood heavily to destroy your house, which happens only about once every 200 years. What would be the annual premium for an insurance policy that offers full insurance? For a policy that pays only $75 \%$ of the home value, what are your expected costs with and without a seawall? Do the different policies provide an incentive to be safer (i.e., to build the seawall)?

Pragya Ahuja
Pragya Ahuja
Numerade Educator