Order An Economic Analysis of Financial Structure

Order An Economic Analysis of Financial Structure
1. How can economies of scale help explain the existence
of financial intermediaries?
*2. Describe two ways in which financial intermediaries
help lower transaction costs in the economy.
3. Would moral hazard and adverse selection still arise in
financial markets if information were not asymmetric?
Explain.
*4. How do standard accounting principles required by
the government help financial markets work more efficiently?
5. 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.
*6. Which firms are most likely to use bank financing
rather than to issue bonds or stocks to finance their
activities? Why?
7. How can the existence of asymmetric information provide a rationale for government regulation of financial
markets?
*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?
Order An Economic Analysis of Financial Structure
9. Rich people often worry that others will seek to marry
them only for their money. Is this a problem of
adverse selection?
*10. 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.
11. How does the free-rider problem aggravate adverse
selection and moral hazard problems in financial
markets?
*12. Explain how the separation of ownership and control in
American corporations might lead to poor management.
13. Is a financial crisis more likely to occur when the
economy is experiencing deflation or inflation?
Explain.
*14. How can a stock market crash provoke a financial crisis?
15. How can a sharp rise in interest rates provoke a financial crisis?
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