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© 2014 Pearson Canada Inc.#
The problem of adverse selection helps to explain ____.
A) why banks prefer to make loans unsecured
B) why banks do not have advantage in raising funds for businesses
C) why borrowers are willing to offer collateral to secure their promises to repay loans
D) why the financial system is so heavily regulated
Answer: C
Diff: 2 Type: MC Page Ref: 170
Skill: Recall
Objective List: 8.1 Depict how asymmetric information results in adverse selection and moral
hazard
As information technology improves, the lending role of financial institutions such as banks
should ____.
A) increase somewhat
B) decrease
C) stay the same
D) increase significantly
Answer: B
Diff: 1 Type: MC Page Ref: 169
Skill: Recall
Objective List: 8.1 Depict how asymmetric information results in adverse selection and moral
hazard
That only large, well-established corporations have access to securities markets ____.
A) explains why indirect finance is such an important source of external funds for businesses
B) can be explained by the problem of moral hazard
C) can be explained by government regulations that prohibit small firms from acquiring funds in
securities markets
D) explains why newer and smaller corporations rely so heavily on the new issues market for
funds
Answer: A
Diff: 2 Type: MC Page Ref: 170
Skill: Recall
Objective List: 8.1 Depict how asymmetric information results in adverse selection and moral
hazard