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Homework answers / question archive / 1)Suppose prices in Europe decrease
1)Suppose prices in Europe decrease. If dollar prices are constant and with no change in the
nominal exchange rate, the euro has undergone a
A) Real appreciation
B) Real depreciation
C) Nominal appreciation
D) Nominal depreciation
2.The presence of information and transactions cost result in all of the following EXCEPT:
A) reduced effificiency of fifinancial markets.
B) some funds not being lent at all
C) borrowers need to pay more for funds
D) higher returns for savers
3. Financial intermediaries reduce transactions costs by
A) charging fees to small savers.
B) charging fees to small investors.
C) taking advantage of economies of scale.
D) avoiding risky investments
4. If there were no adverse selection problems in the stock market,
A) some well-run fifirms would pay more to raise funds.
B) some poorly-run fifirms would pay less to raise funds.
C) the willingness of savers to invest in the market would be increased.
D) the volume of new stock issues would be lower.
5.All of the following are consequences of adverse selection on good fifirms EXCEPT
A) the cost of external fifinancing increases.
B) fifirms need to rely more on internal funds.
C) fifirms need to rely more on accumulated profifits.
D) fifirms will only be able to attain fifinancing from the government.
1) Correct Option is (B) Real depreciation
Because - When prices decrease in a country and if dollar prices are constant and with no change in the nominal exchange rate, the euro has undergone a real depreciation. Means Euro value has decreased.
2) Correct Option is (D) higher returns for savers
Because - Transactions costs are related to direct financial transactions. Information costs those costs in which savers lose money to find out whether credit should be given to borrowers or not, that piece of information is information cost. Both transactions costs and information costs reduces the expected return to lenders. So saver cannot have high returns due to it.
3) Correct Option is (C) taking advantage of economies of scale.
Because - Economies of scale are the reduction in costs per unit which gets accompanied as we increase the volume. Financial intermediaries reduce transactions costs because the components needed for one transaction the same can be applied to other transactions as well.
4) Correct Option is (C) the willingness of savers to invest in the market would be increased.
Because - adverse selection problems arises because borrowers typically know more than lenders in a assymteric model. Lender finds it difficult to differentiate between good-risk applicants and the bad-risk applicants. So this leads to increase in knowledge cost which affects savers investment. So if it is not present then willingness of savers to invest in the market would be increased.
5) Correct Option is (D) firms will only be able to attain financing from the government
Because - Adverse selection is when there is unequal information between lenders and borrowers. And this leads to market failure and government is an insufficient option to deal with the problem of adverse selection.
