1. How can economies of scale help explain the existence of financial intermediaries?

2. Describe two ways in which financial intermediaries help lower transaction costs in the economy.

3. Would moral hazard and adverse selection still arise in financial markets if information were not asymmetric? Explain.

4. Which firms are most likely to use bank financing rather than to issue bonds or stocks to

finance their activities? Why?

5. How can the existence of asymmetric information provide a rationale for government?

regulation of financial markets?

6. Would you be more willing to lend to a friend if she put all of her life savings into her

business than you would if she had not clone so? Why?

7. The more collateral there is backing a loan, the less the lender has to worry about adverse

selection. Is this statement true, false, or uncertain? Explain your answer.

8. How does the free-rider problem aggravate adverse selection and moral hazard problems in

financial markets.

9. Is a financial crisis more likely to occur when the economy is experiencing deflation or

inflation? Explain.

10. How can a stock market crash provoke a financial crisis?

11. How can a sharp rise in interest rates provoke a financialcrisis?