Lesson 4.4.2

4.4.2 Market failure in the financial sector Quiz: Pearson Edexcel Economics, Unit 4

20 questions

Written by Revision Ninja · Last reviewed 11 October 2026

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Lesson 4.4.2, Market failure in the financial sector: 20 multiple choice questions for the Pearson Edexcel Economics (9EC0), Unit 4: Theme 4: A global perspective, written with Revision Ninja.

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The 20 questions

  1. What term describes a transaction where one party has more knowledge than the other?

    • Asymmetric information
    • Market rigging
    • External cost
    • Moral hazard

  2. Which market failure occurs before a transaction when risky borrowers actively seek loans?

    • Free rider problem
    • Moral hazard
    • Adverse selection
    • Market rigging

  3. What term describes taking excessive risks because another party bears the financial consequences?

    • Speculation
    • Adverse selection
    • Moral hazard
    • Market rigging

  4. What impact do guaranteed state bailouts typically have on commercial bank behaviour?

    • Increases risk taking
    • Eliminates adverse selection
    • Decreases risk taking
    • Prevents market bubbles

  5. What is a cost imposed on third parties outside of a financial transaction called?

    • Negative externality
    • Market rigging
    • Moral hazard
    • Adverse selection

  6. What term describes the spread of financial distress from one failing bank to another?

    • Moral hazard
    • Market rigging
    • Adverse selection
    • Systemic contagion

  7. What is buying assets purely to profit from anticipated future price increases called?

    • Speculation
    • Market rigging
    • Moral hazard
    • Hedging

  8. What forms when speculative buying drives asset prices far above their fundamental value?

    • Moral hazard
    • Negative externality
    • Market bubble
    • Market rigging

  9. What term describes collusive behaviour to artificially manipulate financial market prices or benchmark rates?

    • Speculation
    • Moral hazard
    • Adverse selection
    • Market rigging

  10. Which regulatory policy directly reduces moral hazard by forcing bank owners to absorb losses?

    • Higher capital requirements
    • Government bailouts
    • Interest rate cuts
    • Deposit guarantees

  11. Which market failure occurs when information asymmetry leads to high-risk individuals dominating the market?

    • Moral hazard
    • Systemic risk
    • Adverse selection
    • Market rigging

  12. What regulatory policy helps prevent property market bubbles by restricting excessive mortgage borrowing?

    • Quantitative easing
    • Capital adequacy ratios
    • Interest rate rises
    • Loan-to-income limits

  13. What type of risk threatens the collapse of an entire financial system or market?

    • Moral hazard
    • Systemic risk
    • Adverse selection
    • Microeconomic risk

  14. What regulatory tool tests whether commercial banks hold enough capital to withstand economic crises?

    • Market rigging checks
    • Stress testing
    • Monetary policy reviews
    • Liquidity coverage ratios

  15. Why can self-regulation in the financial sector lead to market failure?

    • Eliminates moral hazard
    • Ignores external costs
    • Guarantees liquidity
    • Prevents speculation

  16. What occurs when asset trading based on expected price rises drives values far above fundamental worth?

    • A market bubble
    • Market rigging
    • Asymmetric information
    • Moral hazard

  17. Which market failure occurs when a bank takes excessive risks because it is protected against potential losses?

    • Market rigging
    • Negative externalities
    • Moral hazard
    • Asymmetric information

  18. Which market failure justifies central bank regulation because bank collapses impose systemic costs on society?

    • Adverse selection
    • Market rigging
    • Negative externalities
    • Moral hazard

  19. What term describes how easily an asset can be converted into cash without significant loss of value?

    • Solvency
    • Liquidity
    • Capitalisation
    • Profitability

  20. A bank holds £100 million in equity and £1,000 million in total assets. What is its equity ratio?

    • 100 per cent
    • 1 per cent
    • 90 per cent
    • 10 per cent

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