Financial Structure Quiz

The current structure of financial markets can be best understood as the result of attempts by financial market participants to

• adapt to continually changing government regulations.

• deal with the great number of small firms in the United States.

• reduce transaction costs.

• cartelize the provision of financial services.

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

• discounting.

• economies of scale.

• economies of trade.

• diversification.

Which of the following is not a benefit to an individual purchasing a mutual fund?

• reduced risk

• lower transactions costs

• free-riding

• diversification

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

• expertise

• diversification

• regulations

• equity

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

• liquidity

• conduction

• transcendental

• equitable

How does a mutual fund lower transactions costs through economies of scale?

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

• moral hazard.

• asymmetric information.

• noncollateralized risk.

• adverse selection.

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

ncial markets leads to adverse selection and moral hazard problems that interfere with the efficient functioning of financial markets.

• noncollateralized risk

• free-riding

• asymmetric information

• costly state verification

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

• adverse selection; moral hazard

• moral hazard; adverse selection

• costly state verification; free-riding

• free-riding; costly state verification