1) The name economists give the process by which stockholders gather information by frequent monitoring of the firm's activities is

A) Costly state verification.

B) Free-riding.

C) Costly avoidance.

D) Debt intermediation.

2) One financial intermediary in our financial structure that helps to reduce the moral hazard arising from the principal-agent problem is the

A) Savings and loan association.

B) Money market mutual fund.

C) Pawn broker

D) Venture capital firm.

3) Although debt contracts require less monitoring than equity contracts, debt contracts are still subject to ________ since borrowers have an incentive to take on more risk than the lender would like.

A) Agency theory

B) Moral hazard

C) Diversification

D) The "lemons" problem

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) State verifies the debt contract.

C) Makes the debt contract incentive compatible.

D) Removes all of the risk in the debt contract.

5) 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.