Economics 2154A/B Ch10

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Economics 2154A/B
Desmond Mc Keon

Chapter 10 Economic Analysis of Financial Regulation101 Asymmetric Information and Financial Regulation1 When depositors lack of information about the quality of bank assets it can lead to A bank panicsB bank booms C sequencingD asset transformation2 Deposit insurance covers deposits up to 100000 but as part of a doctrine called toobigtofail the CDIC sometimes ends up covering all deposits to avoid disrupting the financial systemWhen the CDIC does this it uses the A payoff methodB purchase and assumption methodC inequity methodD Basel method3 The fact that banks operate on a sequential service constraint means that A all depositors share equally in the banks funds during a crisisB depositors arriving last are just as likely to receive their funds as those arriving firstC depositors arriving first have the best chance of withdrawing their fundsD banks randomly select the depositors who will receive all of their funds4 Depositors have a strong incentive to show up first to withdraw their funds during a bankcrisis because banks operate on a A lastin firstout constraintB sequential service constraintC doublecoincidence of wants constraint D everyonesharesequally constraint5 Because of asymmetric information the failure of one bank can lead to runs on other banksThis is the A toobigtofail effectB moral hazard problemC adverse selection problem D contagion effect6 The contagion effect refers to the fact that A deposit insurance has eliminated the problem of bank failuresB bank runs involve only sound banksC bank runs involve only insolvent banksD the failure of one bank can hasten the failure of other banks7 To prevent bank runs and the consequent bank failures the Canada established the to provide deposit insuranceA CDICB OSCC Bank of CanadaD ATM8 Deposit insurance is a guarantee by the CDIC to pay deposits off in full on the first they have deposited in the bankA 60000 B 200000 C 100000 D 1500009 The primary difference between the payoff and the purchase and assumption methods ofhandling failed banks is A that the CDIC guarantees all deposits when it uses the payoff methodB that the CDIC guarantees all deposits when it uses the purchase and assumption methodC that the CDIC is more likely to use the payoff method when the bank is large and it fearsthat depositor losses may spur business bankruptcies and other bank failuresD that the CDIC is more likely to use the purchase and assumption method for small institutionsbecause it will be easier to find a purchaser for them compared to large institutions10 Deposit insurance has not worked well in countries with A a weak institutional environmentB strong supervision and regulationC a tradition of the rule of lawD few opportunities for corruption11 When one party to a transaction has incentives to engage in activities detrimental to the otherparty there exists a problem of A moral hazardB split incentivesC ex ante shirking D precontractual opportunism12 Moral hazard is an important concern of insurance arrangements because the existence ofinsurance A provides increased incentives for risk taking B is a hindrance to efficient risk takingC causes the private cost of the insured activity to increaseD creates an adverse selection problem13 When bad drivers line up to purchase collision insurance automobile insurers are subject tothe A moral hazard problem B adverse selection problemC assigned risk problem D ill queue problem14 Deposit insurance is only one type of government safety net All of the following are types ofgovernment support for troubled financial institutions except A forgiving tax debtB lending from the central bankC lending directly from the governments treasury departmentD nationalizing and guaranteeing that all creditors will be repaid their loans in full15 Although the CDIC was created to prevent bank failures its existence encourages banks to A take too much riskB hold too much capitalC open too many branches D buy too much stock16 A system of deposit insurance A attracts risktaking entrepreneurs into the banking industryB encourages bank managers to decrease riskC increases the incentives of depositors to monitor the riskiness of their banks asset portfolioD increases the likelihood of bank runs17 The government safety net createsproblem because riskloving entrepreneursmight find banking an attractive industryA an adverse selectionB a moral hazardC a lemons D a revenue18 Since depositors like any lender only receive fixed payments while the bank keeps anysurplus profits they face theproblem that banks may take on tooriskA adverse selection littleB adverse selection muchC moral hazard little D moral hazard much
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