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Money, Banking and Regulations

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Lenders must be concerned that borrowers may do risky unauthorized things with the funds they are lent. This is the problem of
A) moral hazard
B) asymmetric information
C) nondivisibility
D) adverse selection

Economies of scale in information production are enjoyed by
A) small borrowers
B) small lenders
C) large borrowers
D) large lenders

Savings-and-loans were particularly vulnerable to ________ by _______ savers.
A) intermediation, small
B) intermediation, large
C) disintermediation, small
D) disintermediation, large

Repealing Regulation Q still left savings-and-loans with a problem: most of their _______ were still at _____ interest rates.
A) assets, low
B) assets, high
C) deposits, low
D) deposits, high

In the 1980s banks lost many of their ________ borrowers as these former borrowers were able to sell their commercial paper to _____________.
A) small, savings-and-loans
B) small, money market mutual funds
C) large, savings-and-loans
D) large, money market mutual funds

The advent of money market mutual funds is _________ the trend of "institutionalization," in which a _________ percentage of financial assets are directly owned by individuals.
A) part of, growing
B) part of, shrinking
C) counter to, growing
D) counter to, shrinking

A bank that mismatches its asset and liability maturities is
A) trying to reduce credit risk
B) willingly accepting greater credit risk
C) engaging in interest-rate speculation
D) trying to protect itself against interest rate movements

If a bank has a lot of long-term loans it will probably want to reduce interest rate risk by encouraging ______-term deposits, especially if interest rates are expected to ______ in the future.
A) long, rise
B) long, fall
C) short, rise
D) short, fall

In the 1980s banks responded to the loss of loans to the commercial paper market by increasing loans to all the following except
A) less creditworthy businesses
B) commercial real estate loans
C) loans to less-developed countries
D) large corporations

Since 1970 there has been a clear increase in the proportion of the banking industry assets made up of
A) mortgage loans
B) state and local government securities
C) cash
D) business loans

As a source of bank funds, _________ have fallen by nearly two-thirds in relative importance since 1970.
A) time deposits
B) transactions deposits
C) savings deposits
D) equity

Since 1970 there has been a huge increase in the relative importance of _________ as a source of bank funds.
A) negotiable CDs
B) time deposits
C) foreign deposits
D) transactions deposits

With overnight repos, _________ earn interest while sacrificing virtually no liquidity.
A) corporations
B) banks
C) governments
D) consumers

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ANSWERS

Lenders must be concerned that borrowers may do risky unauthorized things with the funds they are lent. This is the problem of
A) moral hazard
Moral hazard is the consequence of asymmetric information after the transaction occurs. The lender runs the risk that the borrower will engage in activities that are undesirable from the lender's point of view because they make it less likely that the loan will be paid back.
Economies of scale in information production are enjoyed by
D) large lenders
Economies of scale arise when the cost per unit falls as output increases. A large asset size provides a lender with scale economies.
Savings-and-loans were particularly vulnerable to ________ by _______ savers.
C) disintermediation, small
Disintermediation is the withdrawal of funds from intermediary financial institutions, such as banks and savings and loan associations, in order to invest in instruments yielding a higher return. Main clients of S&L are small savers

Repealing ...

Solution Summary

This solution answers various questions regarding money, banking and regulations.

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Assignment Overview

In the individual assignment due this week, students explore the reasons behind regulating banks and how that regulation relates to the formation of the Federal Reserve System. Students demonstrate an understanding of the effects Federal Reserve policies have on interest rates, financial markets, and financial institutions. Students are given the opportunity to participate in additional activities that further explore the risks faced by financial institutions and how those risks are measured.

In the Learning Team assignment due this week, students deepen their understanding of the services provided, main source of funding, interactions with financial markets, and how Federal Reserve policies affect financial institutions.

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