1) A sharp decline in the stock market means that the ________ of corporations has fallen making lenders ________ willing to lend.
A) net worth; less
B) net worth; more
C) liability; less
D) liability; more
2) A sharp stock market decline increases moral hazard incentives
A) since borrowing firms have less to lose if their investments fail.
B) because it is immoral to profit from someone”s loss.
C) since lenders are more willing to make loans.
D) reducing uncertainty in the economy and increasing market efficiency.
3) An unanticipated decline in the price level increases the burden of debt on borrowing firms but does not raise the real value of borrowing firms” assets. The result is
A) that net worth in real terms declines.
B) that adverse selection and moral hazard problems are reduced.
C) an increase in the real net worth of the borrowing firm.
D) an increase in lending.
4) If debt contracts are denominated in foreign currency, then an unanticipated decline in the value of the domestic currency results in
A) a decline in a firm”s net worth.
B) an increase in a firm”s net worth.
C) a decrease in adverse selection and moral hazard.
D) an increase in willingness to lend.