1. The "lemons problem" exists because ofA) transactions costs.B) economies of scale.C) rational expectations.D) asymmetric information.2. A lesson of the Enron collapse is that government regulationA) always fails.B) can reduce but not eliminate asymmetric information.C) increases the problem of asymmetric information.D) should be reduced.3. Solutions to the moral hazard problem includeA) low net worth.B) monitoring and enforcement of restrictive covenants.C) greater reliance on equity contracts and less on debt contracts.D) greater reliance on debt contracts than financial intermediaries.4. Because of the weak systems of property rights in many developing and transitioneconomies, the financial system is unable to use collateral effectively worsening the________ problem.A) adverse selectionB) moral hazardC) principal/agentD) diversification5. A debt contract is incentive compatibleA) if the borrower has the incentive to behave in the way that the lender expects and desires,since doing otherwise jeopardizes the borrower's net worth in the business.B) if the borrower's net worth is sufficiently low so that the lender's risk of moral hazard issignificantly reduced.C) if the debt contract is treated like an equity.D) if the lender has the incentive to behave in the way that the borrower expects and desires.6. Property that is pledged to the lender in the event that a borrower cannot make his or herdebt payment is calledA) collateral.B) points.C) interest.D) good faith money.7. Collateralized debt is also known asA) unsecured debt.B) secured debt.C) unrestricted debt.D) promissory debt.8. A clause in a mortgage loan contract requiring the borrower to purchase homeowner'sinsurance is an example of aA) proscriptive covenant.B) prescriptive covenant.C) restrictive covenant.D) constraint-imposed covenant.9. The current structure of financial markets can be best understood as the result of attemptsby financial market participants toA) adapt to continually changing government regulations.B) deal with the great number of small firms in the United States.C) reduce transaction costs.D) cartelize the provision of financial services.10. Financial intermediaries develop ________ in things such as computer technology whichallows them to lower transactions costs.A) expertiseB) diversificationC) regulationsD) equity

The "lemons problem" exists because of D) asymmetric information. The term "lemons problem" typically refers to issues that arise due to asymmetric information in transactions, where the seller has more information about the product than the buyer.

A lesson of the Enron collapse is that government regulation B) can reduce but not eliminate asymmetric information. The Enron scandal highlighted the limitations of government regulation in preventing corporate fraud, but it doesn't imply that regulation always fails or increases asymmetric information.

Solutions to the moral hazard problem include B) monitoring and enforcement of restrictive covenants and C) greater reliance on equity contracts and less on debt contracts. Both of these can help align the interests of the parties involved and reduce the risk of irresponsible behavior.

Because of the weak systems of property rights in many developing and transition economies, the financial system is unable to use collateral effectively worsening the B) moral hazard problem. Weak property rights can exacerbate moral hazard problems because they make it harder for lenders to seize collateral if borrowers default on their loans.

A debt contract is incentive compatible A) if the borrower has the incentive to behave in the way that the lender expects and desires, since doing otherwise jeopardizes the borrower's net worth in the business. This aligns the interests of the borrower and lender.

Property that is pledged to the lender in the event that a borrower cannot make his or her debt payment is called A) collateral. Collateral is an asset that a borrower offers as a way for a lender to secure the loan.

Collateralized debt is also known as B) secured debt. Secured debt is a debt in which the borrower pledges some assets as collateral for the loan.

A clause in a mortgage loan contract requiring the borrower to purchase homeowner's insurance is an example of a C) restrictive covenant. This is a clause in a loan agreement that restricts certain behaviors of the borrower.

The current structure of financial markets can be best understood as the result of attempts by financial market participants to C) reduce transaction costs. Financial markets are structured to facilitate the buying and selling of securities with the least amount of costs and complications.

Financial intermediaries develop A) expertise in things such as computer technology which allows them to lower transactions costs. By specializing in certain areas, financial intermediaries can reduce costs and improve efficiency.