1) Government-backed deposit insurance increases the ________. A) Willamette torsion effect. B) adverse selection problem. C) moral hazard problem. D) the prudential contagion problem. 2) Government-backed deposit insurance ________. A) protects “good” banks from the misdeeds of “bad” banks B) is intended to encourage banks to pursue high-risk activities C) is an example of prudential regulation D) is an example of government-directed credit 3) An example of a government-based approach to improve the quality of information in financial markets is ________. A) financial news networks B) mandatory disclosures C) government-directed credit D) government safety nets 4) Information asymmetries may make it difficult for important sectors of the economy to receive the funding they need to keep the economy growing. In many economies, this problem is addressed with ________. A) prudential regulation B) government-directed credit C) government-backed deposit insurance D) adverse selection 5) An inherent weakness of ________ is the absence of the profit incentive. A) government-directed credit B) government-backed deposit insurance C) private loans D) prudential supervision 6) A key objective of a government safety net for the banking system is to ensure ________. A) that the poor have access to bank services B) an efficient allocation of credit C) bank profitability D) that depositors always believe that their money is safe in the bank 7) The collapse of one bank might lead easily to the failure of several others, because ________. A) depositors cannot trust each other to keep their money in the bank B) deposit insurance renders all banks equally fragile C) no bank can survive when its competitors cease to operate D) government regulators will step in to punish any bank suspected of poor management 8) Prudential regulation ________. A) requires that banks maintain the confidentiality of loan applications B) is administered by a specific insurance company C) is necessitated by the government’s safety net for the banking system D) is an effective substitute for prudential supervision 9) The U.S. Securities and Exchange Commission ________. A) oversees lending policies at commercial banks B) directs credit to underserved segments of the financial sector C) promotes transparency in direct finance transactions D) advises households and businesses on the best companies in which to invest 10) The collapse of Enron Corporation is a reminder of the importance of ________. A) moral hazard B) government-directed credit C) energy trading D) transparency