Question

Ch. 7 - The stock market

Question 3

0 / 1 point

If the Federal Reserve raises market interest rates, then:

(note: the "going forward" in the question below asks you to consider what happens to the discount rate (the ke) on stocks, not your return if you happen to hold stocks while the price goes up or down.)

Question options:

	Interest rates and prices on stocks will increase.
	Stock prices will fall, while the return to holding stocks going forward will increase.
	Stock prices and the return to holding stocks going forward will fall.

Question 4

0 / 1 point

Net worth can perform a similar role to

Question options:

	collateral.
	intermediation.
	economies of scale.

Question 5

0 / 1 point

If you default on your auto loan, your car will be repossessed because it has been pledged as ______ for the loan.

Question options:

	collateral
	dividend
	commodity

Question 8

0 / 1 point

If banking jobs attract the kind of people who like to make bets in the market with other people's money, we have a problem with _______. If people who work in banking are tempted to undertake risky investments because they want to make a lot of money for the bank, and they think the government will save the bank if it fails, then we have a problem of ______________.

Question options:

	adverse selection, moral hazard.
	moral hazard, adverse selection.
	adverse hazard, moral selection.

Question 9

0 / 1 point

Banks can reduce Asymmetric Information or the effects of Asymmetric Information through all the tools below, EXCEPT:

Question options:

	doing background checks on borrowers
	charge higher interest rate
	putting restrictive covenants in the contract, like an insurance requirement

Answer 1

1. Stock prices and the returns to holding stocks going forward will fall

Reason: As interest rates increase, cost of borrowing increases, thereby reducing demand for investment in stocks, bringing down stock prices

2. Collateral

Reason: It is the net worth of an individual which he can put for collateral against loans

3. Collateral

Reason: Since the loan is against the car

4. Adverse selection, Moral hazard

Reason: Moral hazard refers to increase in risky behavior of individual as risk of bearing it shifts to someone else

Adverse selection is picking the wrong ones out of a given options

5. Charge higher interest rates

Reason: This does not affect asymmetric information