Question

liabilities and buying 1) In general, banks make profits by selling A) long-term; shorter-term B) short-term; longer-term C) illiquid; liquid D) risky; risk-free assets 2) The presence of problems that interfere with the efficient functioning of financial markets A) noncollateralized risk B) free-riding C) asymmetric information D) costly state verification in financial markets leads to adverse selection and moral hazard 3) Adverse selection is a problem associated with equity and debt contracts arising from A) the lender's relative lack of information about the borrower's potential returns and risks of his investment activities B) the lender's inability to legally require sufficient collateral to cover a 100% loss if the borrower defaults C) the borrower's lack of incentive to seek a loan for highly risky investments D) the lender's inability to restrict the borrower from changing his behavior once given a loan 4) Financial innovations occur because of financial institutions search for A) profits B) fame C) stability D) recognition 5) The driving force behind the securitization of mortgages and automobile 1loans has been A) the rising regulatory constraints on substitute financial instruments. B) the desire of mortgage and auto lenders to exit this field of lending. C) the improvement in computer technology. D) the relaxation of regulatory restrictions on credit card operations

Answer 1

1. The correct answer is 'Option B'.

Banks make profits by selling short-term liabilities and buying longer term assets. Short-term liabilities are the obligations which have to be paid within a year and long-term assets are those assets which are not converted into cash easily and include the long-term investments, property and plant which will help the banks to earn profits for many years.