Financial institutions that accept deposits and make loans are called ________ institutions.

20) Because there is an imbalance of information in a lending situation, we must deal with the
problems of adverse selection and moral hazard. Define these terms and explain how financial
intermediaries can reduce these problems.
Answer: Adverse selection is the asymmetric information problem that exists before the
transaction occurs. For lenders, it is the difficulty in judging a good credit risk from a bad
credit risk. Moral hazard is the asymmetric information problem that exists after the
transaction occurs. For lenders, it is the difficulty in making sure the borrower uses the
funds appropriately. Financial intermediaries can reduce adverse selection through
intensive screening and can reduce moral hazard by monitoring the borrower.
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2.6 Types of Financial Intermediaries
1) Financial institutions that accept deposits and make loans are called ________ institutions.
A) investment
B) contractual savings
C) depository
D) underwriting
Answer: C
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2) Thrift institutions include
A) banks, mutual funds, and insurance companies.
B) savings and loan associations, mutual savings banks, and credit unions.
C) finance companies, mutual funds, and money market funds.
D) pension funds, mutual funds, and banks.
Answer: B
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3) Which of the following is a depository institution?
A) A life insurance company
B) A credit union
C) A pension fund
D) A mutual fund
Answer: B
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4) Which of the following is a depository institution?
A) A life insurance company
B) A mutual savings bank
C) A pension fund
D) A finance company
Answer: B
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5) Which of the following financial intermediaries is not a depository institution?
A) A savings and loan association
B) A commercial bank
C) A credit union
D) A finance company
Answer: D
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6) The primary assets of credit unions are
A) municipal bonds.
B) business loans.
C) consumer loans.
D) mortgages.
Answer: C
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7) The primary liabilities of a commercial bank are
A) bonds.
B) mortgages.
C) deposits.
D) commercial paper.
Answer: C
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8) The primary liabilities of depository institutions are
A) premiums from policies.
B) shares.
C) deposits.
D) bonds.
Answer: C
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9) ________ institutions are financial intermediaries that acquire funds at periodic intervals on a
contractual basis.
A) Investment
B) Contractual savings
C) Thrift
D) Depository
Answer: B
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10) Which of the following is a contractual savings institution?
A) A life insurance company
B) A credit union
C) A savings and loan association
D) A mutual fund
Answer: A
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