Question 1

In which of the following financial assets did U.S. households have the most invested in 2006?

Accepted Answer

A) U.S. government securities 
B) Corporate bonds 
C) Corporate equities 
D) State and local government securities 
A) U.S. government securities 
B) Corporate bonds 
C) Corporate equities 
D) State and local government securities

Question 2

Which of the following would NOT be an example of a financial market transaction?

Accepted Answer

A) You purchase a U.S. government bond. 
B) You purchase a bond issued by a large corporation. 
C) You deposit $100 in your bank checking account. 
D) You give your broker $2000 to purchase shares of stock in General Motors. 
A) You purchase a U.S. government bond. 
B) You purchase a bond issued by a large corporation. 
C) You deposit $100 in your bank checking account. 
D) You give your broker $2000 to purchase shares of stock in General Motors.

Question 3

The primary purpose of the financial system is to

Accepted Answer

A) make it possible for checks written on a bank in one part of the country to clear against an account in a bank in another part of the country. 
B) allow the government to raise enough money to cover its budget deficit. 
C) move funds from those who want to spend less than they have available to those with productive investment opportunities. 
D) facilitate the efficient exchange of goods and services. 
A) make it possible for checks written on a bank in one part of the country to clear against an account in a bank in another part of the country. 
B) allow the government to raise enough money to cover its budget deficit. 
C) move funds from those who want to spend less than they have available to those with productive investment opportunities. 
D) facilitate the efficient exchange of goods and services.

Question 4

The most commonly used claim in financial markets is

Accepted Answer

A) debt, which is a claim to share in the profits and assets of a firm. 
B) debt, which requires the borrower to repay the principal of the loan plus interest. 
C) equity, which is a claim to share in the profits and assets of a firm. 
D) equity, which requires the borrower to repay the principal of the loan plus interest. 
A) debt, which is a claim to share in the profits and assets of a firm. 
B) debt, which requires the borrower to repay the principal of the loan plus interest. 
C) equity, which is a claim to share in the profits and assets of a firm. 
D) equity, which requires the borrower to repay the principal of the loan plus interest.

Question 5

Which of the following statements is true?

Accepted Answer

A) While the financial system creates financial assets, it plays no role in increasing their liquidity. 
B) While financial assets are not created by the financial system, the financial system provides ways of increasing their liquidity. 
C) The financial system has little to do with either creating or increasing the liquidity of financial assets. 
D) The financial system both creates financial assets and provides ways of increasing their liquidity. 
A) While the financial system creates financial assets, it plays no role in increasing their liquidity. 
B) While financial assets are not created by the financial system, the financial system provides ways of increasing their liquidity. 
C) The financial system has little to do with either creating or increasing the liquidity of financial assets. 
D) The financial system both creates financial assets and provides ways of increasing their liquidity.

Question 6

Funds flow from lenders to borrowers

Accepted Answer

A) indirectly through financial markets. 
B) directly through financial intermediaries. 
C) indirectly through financial intermediaries. 
D) primarily through government agencies. 
A) indirectly through financial markets. 
B) directly through financial intermediaries. 
C) indirectly through financial intermediaries. 
D) primarily through government agencies.

Question 7

Information on financial assets is communicated

Accepted Answer

A) only to borrowers. 
B) only to savers. 
C) only to the appropriate agency of the federal government. 
D) both to borrowers and savers. 
A) only to borrowers. 
B) only to savers. 
C) only to the appropriate agency of the federal government. 
D) both to borrowers and savers.

Question 8

A financial portfolio

Accepted Answer

A) is a brokerage firm that deals only in common stock. 
B) measures the risk involved with holding a particular asset. 
C) is a collection of assets. 
D) will generally have less liquidity than a nonfinancial portfolio. 
A) is a brokerage firm that deals only in common stock. 
B) measures the risk involved with holding a particular asset. 
C) is a collection of assets. 
D) will generally have less liquidity than a nonfinancial portfolio.

Question 9

As a country develops, will businesses become or less likely to borrow in financial markets? Explain.

Accepted Answer

If firms in developing countries are abl

Question 10

Financial intermediaries pool the funds of

Accepted Answer

A) a few large savers and make loans to many borrowers. 
B) many small savers and make loans to a few large borrowers. 
C) many small savers and make loans to many borrowers. 
D) a few large savers and make loans to a few large borrowers. 
A) a few large savers and make loans to many borrowers. 
B) many small savers and make loans to a few large borrowers. 
C) many small savers and make loans to many borrowers. 
D) a few large savers and make loans to a few large borrowers.

Question 11

Which of the following is NOT a key service provided by the financial system?

Accepted Answer

A) Risk sharing 
B) Tax avoidance 
C) Liquidity 
D) Information 
A) Risk sharing 
B) Tax avoidance 
C) Liquidity 
D) Information

Question 12

Which of the following is an example of a debt instrument?

Accepted Answer

A) A checking account at a commercial bank 
B) A share of stock in General Motors 
C) A life insurance policy 
D) A bond issued by General Motors 
A) A checking account at a commercial bank 
B) A share of stock in General Motors 
C) A life insurance policy 
D) A bond issued by General Motors

Question 13

One value to investors of holding stock or bonds is that

Accepted Answer

A) they are exempt from both state and federal taxes. 
B) they are very low risk investments. 
C) they are more liquid than the physical assets of the companies issuing them. 
D) they are exempt from state taxes, although they are not exempt from federal taxes. 
A) they are exempt from both state and federal taxes. 
B) they are very low risk investments. 
C) they are more liquid than the physical assets of the companies issuing them. 
D) they are exempt from state taxes, although they are not exempt from federal taxes.

Question 14

The main reason for trade in financial assets is

Accepted Answer

A) the desire of holders of bonds to be able to exchange them for shares of common stock. 
B) the mismatch of income and spending for many individuals and businesses. 
C) a shortage of money in an economy, making trade in other financial assets necessary. 
D) the refusal of most modern governments to trade currency for gold or silver. 
A) the desire of holders of bonds to be able to exchange them for shares of common stock. 
B) the mismatch of income and spending for many individuals and businesses. 
C) a shortage of money in an economy, making trade in other financial assets necessary. 
D) the refusal of most modern governments to trade currency for gold or silver.

Question 15

A "primary market" is a market

Accepted Answer

A) for government securities. 
B) in which newly issued claims are sold to buyers by borrowers. 
C) in which newly issued claims are sold by savers to borrowers. 
D) for debt by large or "primary" corporations. 
A) for government securities. 
B) in which newly issued claims are sold to buyers by borrowers. 
C) in which newly issued claims are sold by savers to borrowers. 
D) for debt by large or "primary" corporations.

Question 16

Long-term debt instruments have a maturity of at least

Accepted Answer

A) 30 days. 
B) 1 year. 
C) 10 years. 
D) 30 years. 
A) 30 days. 
B) 1 year. 
C) 10 years. 
D) 30 years.

Question 17

Diversification refers to the

Accepted Answer

A) splitting of wealth into many assets. 
B) difference between the liquidity of an asset and its risk. 
C) difficulty of converting investments in common stocks into investments in bonds. 
D) difficulty of selling common stocks in a weak market. 
A) splitting of wealth into many assets. 
B) difference between the liquidity of an asset and its risk. 
C) difficulty of converting investments in common stocks into investments in bonds. 
D) difficulty of selling common stocks in a weak market.

Question 18

Financial markets enable individuals to transfer risk by

Accepted Answer

A) effectively prohibiting investments in common stock by unsophisticated investors. 
B) leading conservative investors to put their money in government bonds. 
C) ensuring that increased risk is offset by increased liquidity. 
D) creating instruments that transfer risk from those less willing to bear risk to those more willing to bear risk. 
A) effectively prohibiting investments in common stock by unsophisticated investors. 
B) leading conservative investors to put their money in government bonds. 
C) ensuring that increased risk is offset by increased liquidity. 
D) creating instruments that transfer risk from those less willing to bear risk to those more willing to bear risk.

Question 19

If you have a checking account at a bank, the checking account is

Accepted Answer

A) an asset to you as well as an asset to the bank. 
B) an asset to you, but a liability to the bank. 
C) a liability to you, but an asset to the bank. 
D) a liability to you as well as a liability to the bank. 
A) an asset to you as well as an asset to the bank. 
B) an asset to you, but a liability to the bank. 
C) a liability to you, but an asset to the bank. 
D) a liability to you as well as a liability to the bank.

Question 20

Which of the following assets is the most liquid?

Accepted Answer

A) Money market mutual fund 
B) Stock 
C) Treasury bond 
D) House 
A) Money market mutual fund 
B) Stock 
C) Treasury bond 
D) House

Exam 3: Overview of the Financial System

In which of the following financial assets did U.S. households have the most invested in 2006?

Which of the following would NOT be an example of a financial market transaction?

The primary purpose of the financial system is to

The most commonly used claim in financial markets is

Which of the following statements is true?

Funds flow from lenders to borrowers

Information on financial assets is communicated

A financial portfolio

As a country develops, will businesses become or less likely to borrow in financial markets? Explain.

Financial intermediaries pool the funds of

Which of the following is NOT a key service provided by the financial system?

Which of the following is an example of a debt instrument?

One value to investors of holding stock or bonds is that

The main reason for trade in financial assets is

A "primary market" is a market

Long-term debt instruments have a maturity of at least

Diversification refers to the

Financial markets enable individuals to transfer risk by

If you have a checking account at a bank, the checking account is

Which of the following assets is the most liquid?

Introducing Money and the Financial System

Money and the Payments System

Interest Rates and Rates of Return

The Theory of Portfolio Allocation

Determining Market Interest Rates

Risk Structure and Term Structure of Interest Rates

The Foreign-Exchange Market and Exchange Rates

Derivative Securities and Derivative Markets

Information and Financial Market Efficiency

Reducing Transactions Costs and Information Costs

What Financial Institutions Do

The Business of Banking

The Banking Industry

Banking Regulation: Crisis and Response

Banking in the International Economy

The Money Supply Process

Changes in the Monetary Base

Organization of Central Banks

Monetary Policy Tools

The Conduct of Monetary Policy

The International Financial System and Monetary Policy

The Demand for Money

Linking the Financial System and the Economy: the Is-Lm-Fe Model

Aggregate Demand and Aggregate Supply

Money and Output in the Short Run

Information Problems and Channels for Monetary Policy

Inflation: Causes and Consequences

Filters