Chapter Questions
If 1 can buy a car today for $\$ 5,000$ and it is worth $\$ 10,000$ in extra income next year to me because it enables me to get a job as a traveling salesman, should I take out a loan from Larry the Loan Shark at a $90 \%$ interest rate if no one else will give me a loan? Will I be better or worse off as a result of taking out this loan? Can you make a case for legalizing loan sharking?
Some economists suspect that one of the reasons that economies in developing countries grow so slowly is that they do not have well-developed financial markets. Does this argument make sense?
Why is a share of Microsoft common stock an asset for its owner and a liability for Microsoft?
If you suspect that a company will go bankrupt next year, which would you rather hold, bonds issued by the company or equities issued by the company? Why?
"Because corporations do not actually raise any funds in secondary markets, they are less important to the economy than primary markets are." Is this statement true, false, or uncertain?
For each of the following money market instruments, describe who issues the debt:a. Treasury billsb. Certificates of depositc. Commercial paperd. Repurchase agreemente. Fed funds
What is the difference between a mortgage and a mortgage-backed security?
The U.S. economy borrowed heavily from the British in the nineteenth century to build a railroad system. Why did this make both countries better off?
A significant number of European banks held large amounts of assets as mortgage-backed securities derived from the U.S. housing market, which crashed after 2006 How does this demonstrate both a benefit and a cost to the internationalization of financial markets?
How does risk sharing benefit both financial intermediaries and private investors?
How can the adverse selection problem explain why you are more likely to make a loan to a family member than to a stranger?
One of the factors contributing to the financial crisis of $2007-2009$ was the widespread issuance of subprime mortgages. How does this demonstrate adverse selection?
Why do loan sharks worry less about moral hazard in connection with their borrowers than some other lenders do?
If you are an employer, what kinds of moral hazard problems might you worry about with your employees?
If there were no asymmetry in the information that a borrower and a lender had, could a moral hazard problem still exist?
"In a world without information costs and transaction costs, financial intermediaries would not exist." Is this statement true, false, or uncertain? Explain your answer.
Why might you be willing to make a loan to your neighbor by putting funds in a savings account earning a $5 \%$ interest rate at the bank and having the bank lend her the funds at a $10 \%$ interest rate rather than lendher the funds yourself?
How do conflicts of interest make the asymmetric information problem worse?
How can the provision of several types of financial services by one firm be both beneficial and problematic?
If you were going to get a loan to purchase a new car. which financial intermediary would you use: a credit union, a pension fund, or an investment bank?
Why would a life insurance company be concerned about the financial stability of major corporations or the health of the housing market?
In $2008,$ as a financial crisis began to unfold in the United States, the FDIC raised the limit on insured losses to bank depositors from $\$ 100,000$ per account to $\$ 250,000$ per account. How would this help stabilize the financial system?
Suppose you have just inherited $\$ 10,000$ and are considering the following options for investing the money to maximize your return:Option1: Put the money in an interest-bearing checking account, which earns $2 \%$. The FDIC insures the account against bank failure.