the economics of money, banking, and financial markets

239 #

© 2014 Pearson Canada Inc.#

4. 
   

   One way of describing the solution that high net worth provides to the moral hazard problem
   is to say that it ____.
   A) collateralizes the debt contract
   B) makes the debt contract incentive compatible
   C) state verifies the debt contract
   D) removes all of the risk in the debt contract
   Answer: B
   Diff: 1 Type: MC Page Ref: 174
   Skill: Recall
   Objective List: 8.1 Depict how asymmetric information results in adverse selection and moral
   hazard

   
   


5. 
   

   Which of the following is NOT one of the four types of restrictive covenants?
   A) Convenants to discourage undesirable behaviour
   B) Convenants to encourage desirable behaviour
   C) Covenants to keep collateral valuable
   D) Covenants for incentive compatibility
   Answer: D
   Diff: 1 Type: MC Page Ref: 174 - 175
   Skill: Recall
   Objective List: 8.1 Depict how asymmetric information results in adverse selection and moral
   hazard

   
   


6. 
   

   A clause in a debt contract requiring that the borrower purchase insurance against loss of the
   asset financed with the loan is called a ____.
   A) collateral-insurance clause
   B) prescription covenant
   C) restrictive covenant
   D) proscription covenant
   Answer: C
   Diff: 1 Type: MC Page Ref: 174
   Skill: Recall
   Objective List: 8.1 Depict how asymmetric information results in adverse selection and moral
   hazard

   
   


7. 
   

   Professional athletes often have contract clauses prohibiting risky activities such as skiing and
   motorcycle riding. These clauses are ____.
   A) limited-liability clauses
   B) risk insurance
   C) restrictive covenants
   D) illegal
   Answer: C
   Diff: 1 Type: MC Page Ref: 174 - 175
   Skill: Applied
   Objective List: 8.1 Depict how asymmetric information results in adverse selection and moral
   hazard