Financial intermediaries pool the resources of many small savers so that they can:

obtain the funds necessary to make loans to borrowers seeking large amounts.

charge fees to these small savers and earn substantial income.

lower their transaction costs of obtaining funds.

avoid paying any interest to obtain funds to lend.

If financial intermediaries did not have the ability to pool the resources of small savers:

borrowers needing large amounts of money would find it more costly to obtain the funds.

the risk associated with lending would decrease.

Financial intermediaries, through their ability to lower transaction costs:

increase the amount of trading that occurs in an economy.

allow for people to be more self-sufficient.

take people away from their comparative advantage.

reduce the number of financial transactions that occur.

Financial intermediaries, through their ability to lower transaction costs:

reduce the opportunity cost of specialization.

decrease the efficiency of an economy.

allow for people to be more self-sufficient.

make collecting and processing information unprofitable.

The fact that a financial intermediary can hire a lawyer to write one contract that works for many customers is an example of:

the law of diminishing marginal returns.

the law of increasing opportunity cost.

Economies of scale associated with financial intermediaries means:

the cost per transaction falls as a larger volume of similar transactions are handled.

the total cost of handling transactions falls as more transactions of different kinds are handled.

the cost per transaction increases as more transactions are handled.

the cost per transaction decreases regardless of the number of transactions.

Examples of economies of scale are:

the reduction in the cost per transaction that occurs as the number of transactions increase.

the additional fees financial intermediaries charge on small accounts.

the decrease in overall transaction costs that occur as volume increases.

the decrease in overall information costs that occurs as more transactions are handled.

The reduction in transaction costs provided by financial intermediaries benefit:

small borrowers and small savers.

large borrowers but not small savers.

society in the net, but small savers bear much of the cost.

small borrowers but not small savers.

Automated teller machines provided by financial intermediaries are an example of:

the ability of financial intermediaries to provide liquidity.

high transactions costs associated with financial intermediaries.

the ability of financial intermediaries to earn profits by raising transaction costs above the

The function of providing liquidity by financial intermediaries:

affects people who need to borrow and depositors who withdraw their funds.

includes depositors withdrawing funds but not borrowers.

only considers people who borrow on a short-term basis, but not depositors.

only affects customers with savings accounts.

Since one function of financial intermediaries is to provide liquidity:

they must know approximately how much liquidity their customers will need each day and have these funds available.

they must keep all of their funds in short-term securities.

they keep almost all of their funds in cash.

regulations require financial intermediaries to keep 50% of their assets in cash.

A bank can usually offer a saver a higher return for the same risk for all of the following reasons except:

savers do not have good enough information to know if the return is sufficient.

the bank can usually purchase assets at a lower cost than any one saver.

the bank can pool the resources of small savers and purchase higher valued assets.

economies of scale can also be applied by the bank in its purchase of assets.

Lines of credit provided by financial intermediaries:

are pre-approved loans that can increase liquidity and lowering transaction costs.

decrease liquidity for customers but increase income for the intermediary.

are costly for intermediaries to provide so are only available to large commercial customers.

require deposits in the intermediary that equal or exceed the amount of the line of credit.

When a bank takes savings from many small savers and lends it to many borrowers, the bank:

decreases the risk to savers through diversification.

increases the risk to borrowers through high transaction costs.

decreases the risk to savers through economies of scale.

decreases the return to savers and increases the cost to borrowers.

Mutual funds offer investors:

a way for individuals to eliminate the idiosyncratic risk associated with any single investment.

a greater return for greater risk than what an investor can earn on his own.

a lower return for more risk than what the investor could earn on his own.

a lower return for less risk than what the investor could earn on his own.

Mutual funds are attractive because:

they provide the investor with greater diversification at a lower cost than what most investors could obtain individually.

they provide high returns from purchasing the financial securities of a few select companies.

they have inside information that is not available to other investors.

they usually have inside information because they run most of the companies they invest in.

Most individuals save at banks rather than lend directly because:

banks can reduce the cost of information asymmetry.

the bank creates information asymmetry.

moral hazard exists only when individuals make loans directly to borrowers, it does not occur when banks issue loans.

information asymmetry is a problem for individuals but not for banks.

Financial intermediaries reduce the problems in lending associated with information asymmetries by all of the following except:

charging interest rates high enough to discourage undesirable borrowers.

collecting and processing standardized information.

screening applicants to be sure they are creditworthy.

monitoring loan recipients to be sure the funds are used properly.

Asymmetric information poses two important obstacles to the smooth flow of funds from savers to investors. They are:

adverse selection, which arises before the transaction occurs, and moral hazard, which occurs after the transaction.

moral hazard, which arises before the transaction occurs, and adverse selection, which occurs after the transaction.

adverse selection and moral hazard, both of which occur after the transaction.

adverse selection and moral hazard, both of which occur before the transaction.

Financial markets do not function as well as they could due to:

the cost of obtaining information which can be high.

the fact that banking is highly monopolized.

fluctuations in the inflation rate.

The usual situation in banking regarding asymmetric information is:

borrowers know more than lenders.

lenders know more than borrowers.

borrowers and lenders have the same information.

lenders and borrowers have perfect information.

Mom's Pizzeria goes out of business due to a dramatic decrease in sales from a local newspaper article highlighting the fact that Mom's Pizzeria has been purchasing expired meat from a distributor at cut rate prices for years. The decrease in business also results in Mom's defaulting on the loan they have with the bank. This is an example of:

asymmetric information in the financial markets.

symmetric information in the financial markets.

perfect information in the financial markets.

perfect information in the pizza market.

Which of the following is an example of asymmetric information in the financial markets?

asymmetric information in the financial markets.

perfect information in the financial markets.

perfect information in the pizza market.

Mom's Bakery goes out of business due to decreasing sales resulting from the dramatic increase in people on low carbohydrate diets. The decrease in business also results in Mom's defaulting on the loan they have with the bank. This is an example of:

lack of perfect information in financial markets.

asymmetric information in financial markets.

moral hazard in financial markets.

symmetric information in financial markets.

Often times we see companies offering money back guarantees to customers if they are not satisfied. These guarantees are a way to treat the problem of:

the seller having more information about the product than the buyer.

buyers having more information about the product than the seller.

Which of the following is not true of adverse selection?

It exists because information is perfect.

It describes the problem a lender faces in identifying loan applicants as good or bad risk borrowers.

It arises because borrowers have more information than lenders regarding their creditworthiness.

It arises if lenders try to charge an average price to all applicants.

In a financial market where information is symmetric:

there would be no adverse selection.

one party to a transaction knows information the other party does not.

the ability to obtain information is available to only one party.

Two problems that arise from asymmetric information are:

moral hazard and adverse selection.

adverse selection and diseconomies of scale.

moral hazard and the free-rider problem.

the free-rider problem and adverse selection.

Which of the following is a problem of adverse selection?

The lender has a problem of distinguishing good risk from bad risk borrowers.

The lender has a problem determining that the proceeds from a loan are being used as the borrower stated.

A person takes up the hobby of bungee jumping after purchasing health insurance.

Individuals use more medical services as a result of their purchase of a health insurance plan.

Which of the following is a problem of moral hazard?

An individual who purchases auto insurance begins to leave his or her keys in the car while running into a store.

A lender cannot distinguish good risk from bad risk borrowers.

Life insurance companies offer an average premium to smokers and non-smokers so they do not have to have two different premiums.

An auto insurance company charges higher premiums to younger drivers than what they charge to older drivers.

One of the conclusions from Akerlof's paper titled “The Market for Lemons” was:

lacking the ability to distinguish high from low quality, low quality may drive high quality out of the market.

high quality goods will drive low quality goods out of the market.

lacking the ability to distinguish high from low quality, the quality the market will end up offering will be the average quality.

high quality is always demanded by consumers over low quality.

Mary Jones is the president of a local bank. She knows that half of the loan applicants in town she would classify as high risk and the other half as low risk. She observes that the other banks in town charge two different interest rates, a lower rate for low risk borrowers and the higher rate for high risk borrowers. She decides that to have an advantage over the other banks she will offer an average rate to everyone. The likely result will be:

Mary's bank will experience adverse selection and have a disproportionate number of high risk borrowers.

Mary's bank will be highly successful as this will provide the bank with a large competitive advantage.

Mary's bank is likely to see a dramatic increase in both types of borrowers.

Mary's bank will experience adverse selection and have a disproportionate number of low risk borrowers.

One lesson that Akerlof's Lemons model provides is:

that for high quality providers to survive they must provide a way that customers can distinguish high quality from low quality.

low quality will not survive in a market.

people always prefer high quality to low quality goods.

A firm that has a well-earned reputation for providing high quality:

has found a way to address the problem of adverse selection.

has found a way to address the free-rider problem.

has found a way to address the moral hazard problem.

will not survive in a market if low quality is provided at a lower price.

The interest rates charged on most credit cards is:

high due to the problem of adverse selection.

high because Visa and MasterCard have a virtual monopoly on this business.

high due to diseconomies of scale that exist in this market.

lower than they should be given the problem of adverse selection.

Assume there are two companies. Both issue stock, but one is high quality and the other low quality. If potential investors cannot distinguish the quality of the company:

the shares of the high quality firm will disappear from the market.

the shares of the low quality firm will disappear from the market.

the shares of both companies will trade on the market.

this is an example of moral hazard and the shares of both companies will cease to trade.

Financial Intermediation Quiz

Authored by 11 Anh Phạm Hà Quyên

Specialty

12th Grade

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48 questions

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MULTIPLE CHOICE QUESTION

30 sec • 1 pt

Financial intermediation is:

far less important than direct finance through stock and bond markets.

only a little more important than direct finance in the United States.

much more important than direct finance through stock and bond markets.

the same thing as finance through stock and bond markets.

MULTIPLE CHOICE QUESTION

30 sec • 1 pt

Financial intermediation exists, in part, because:

financial markets work so well.

direct finance through stocks and bonds is the dominant form of financing.

transaction costs of financial intermediation is always higher than direct finance.

the transaction costs associated with direct finance can at times be prohibitive.

MULTIPLE CHOICE QUESTION

30 sec • 1 pt

When the amount of direct and indirect financing are summed, the result is usually:

greater than 100% of GDP.

equal to GDP.

less than GDP.

approximately 50% of GDP.

MULTIPLE CHOICE QUESTION

30 sec • 1 pt

Emerging market economies, compared to industrialized economies, have financial markets that:

differ in composition and size.

differ in composition but not in size.

are the same in composition but differ in size.

are similar in composition and size.

MULTIPLE CHOICE QUESTION

30 sec • 1 pt

The reason financial intermediaries play such an important role in economies has to do with all of the following except:

information costs.

transaction costs.

complexity of a lot of financial transactions.

the composition of GDP.

MULTIPLE CHOICE QUESTION

30 sec • 1 pt

Which of the following is not a role of a financial institution acting as a financial intermediary?

Pooling the resources of small savers

Formulating oversight regulations

Providing ways to diversify risk

Supplying liquidity

MULTIPLE CHOICE QUESTION

30 sec • 1 pt

Financial institutions, acting as financial intermediaries, perform all of the following, except:

provide ways to diversify risk.

pooling resources of small savers.

increase transactions costs.

provide safekeeping and accounting services.

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