Economics of Money, Banking & Financial Markets, 4e (Bus. Schl. Ed.)
Chapter 2 An Overview of the Financial System
2.1 Function of Financial Markets
1) Every financial market has the following characteristic.
A) It determines the level of interest rates.
B) It allows common stock to be traded.
C) It allows loans to be made.
D) It channels funds from lenders-savers to borrowers-spenders.
Answer: D
AACSB: Reflective thinking
2) Financial markets have the basic function of
A) getting people with funds to lend together with people who want to borrow funds.
B) assuring that the swings in the business cycle are less pronounced.
C) assuring that governments need never resort to printing money.
D) providing a risk-free repository of spending power.
Answer: A
AACSB: Reflective thinking
3) Financial markets improve economic welfare because
A) they channel funds from investors to savers.
B) they allow consumers to time their purchase better.
C) they weed out inefficient firms.
D) they eliminate the need for indirect finance.
Answer: B
AACSB: Reflective thinking
4) Well-functioning financial markets
A) cause inflation.
B) eliminate the need for indirect finance.
C) cause financial crises.
D) allow the economy to operate more efficiently.
Answer: D
AACSB: Reflective thinking
5) A breakdown of financial markets can result in
A) financial stability.
B) rapid economic growth.
C) political instability.
D) stable prices.
Answer: C
AACSB: Reflective thinking
,6) The principal lender-savers are
A) governments.
B) businesses.
C) households.
D) foreigners.
Answer: C
AACSB: Application of knowledge
7) Which of the following can be described as direct finance?
A) You take out a mortgage from your local bank.
B) You borrow $2500 from a friend.
C) You buy shares of common stock in the secondary market.
D) You buy shares in a mutual fund.
Answer: B
AACSB: Analytical thinking
8) Assume that you borrow $2000 at 10% annual interest to finance a new business project. For
this loan to be profitable, the minimum amount this project must generate in annual earnings is
A) $400.
B) $201.
C) $200.
D) $199.
Answer: B
AACSB: Analytical thinking
9) You can borrow $5000 to finance a new business venture. This new venture will generate
annual earnings of $251. The maximum interest rate that you would pay on the borrowed funds
and still increase your income is
A) 25%.
B) 12.5%.
C) 10%.
D) 5%.
Answer: D
AACSB: Analytical thinking
10) Which of the following can be described as involving direct finance?
A) A corporation issues new shares of stock.
B) People buy shares in a mutual fund.
C) A pension fund manager buys a short-term corporate security in the secondary market.
D) An insurance company buys shares of common stock in the over-the-counter markets.
Answer: A
AACSB: Analytical thinking
, 11) Which of the following can be described as involving direct finance?
A) A corporation takes out loans from a bank.
B) People buy shares in a mutual fund.
C) A corporation buys a short-term corporate security in a secondary market.
D) People buy shares of common stock in the primary markets.
Answer: D
AACSB: Analytical thinking
12) Which of the following can be described as involving indirect finance?
A) You make a loan to your neighbor.
B) A corporation buys a share of common stock issued by another corporation in the primary
market.
C) You buy a U.S. Treasury bill from the U.S. Treasury at TreasuryDirect.gov.
D) You make a deposit at a bank.
Answer: D
AACSB: Analytical thinking
13) Which of the following can be described as involving indirect finance?
A) You make a loan to your neighbor.
B) You buy shares in a mutual fund.
C) You buy a U.S. Treasury bill from the U.S. Treasury at Treasury Direct.gov.
D) You purchase shares in an initial public offering by a corporation in the primary market.
Answer: B
AACSB: Analytical thinking
14) Securities are ________ for the person who buys them, but are ________ for the individual
or firm that issues them.
A) assets; liabilities
B) liabilities; assets
C) negotiable; nonnegotiable
D) nonnegotiable; negotiable
Answer: A
AACSB: Reflective thinking
15) With ________ finance, borrowers obtain funds from lenders by selling them securities in
the financial markets.
A) active
B) determined
C) indirect
D) direct
Answer: D
AACSB: Application of knowledge
Chapter 2 An Overview of the Financial System
2.1 Function of Financial Markets
1) Every financial market has the following characteristic.
A) It determines the level of interest rates.
B) It allows common stock to be traded.
C) It allows loans to be made.
D) It channels funds from lenders-savers to borrowers-spenders.
Answer: D
AACSB: Reflective thinking
2) Financial markets have the basic function of
A) getting people with funds to lend together with people who want to borrow funds.
B) assuring that the swings in the business cycle are less pronounced.
C) assuring that governments need never resort to printing money.
D) providing a risk-free repository of spending power.
Answer: A
AACSB: Reflective thinking
3) Financial markets improve economic welfare because
A) they channel funds from investors to savers.
B) they allow consumers to time their purchase better.
C) they weed out inefficient firms.
D) they eliminate the need for indirect finance.
Answer: B
AACSB: Reflective thinking
4) Well-functioning financial markets
A) cause inflation.
B) eliminate the need for indirect finance.
C) cause financial crises.
D) allow the economy to operate more efficiently.
Answer: D
AACSB: Reflective thinking
5) A breakdown of financial markets can result in
A) financial stability.
B) rapid economic growth.
C) political instability.
D) stable prices.
Answer: C
AACSB: Reflective thinking
,6) The principal lender-savers are
A) governments.
B) businesses.
C) households.
D) foreigners.
Answer: C
AACSB: Application of knowledge
7) Which of the following can be described as direct finance?
A) You take out a mortgage from your local bank.
B) You borrow $2500 from a friend.
C) You buy shares of common stock in the secondary market.
D) You buy shares in a mutual fund.
Answer: B
AACSB: Analytical thinking
8) Assume that you borrow $2000 at 10% annual interest to finance a new business project. For
this loan to be profitable, the minimum amount this project must generate in annual earnings is
A) $400.
B) $201.
C) $200.
D) $199.
Answer: B
AACSB: Analytical thinking
9) You can borrow $5000 to finance a new business venture. This new venture will generate
annual earnings of $251. The maximum interest rate that you would pay on the borrowed funds
and still increase your income is
A) 25%.
B) 12.5%.
C) 10%.
D) 5%.
Answer: D
AACSB: Analytical thinking
10) Which of the following can be described as involving direct finance?
A) A corporation issues new shares of stock.
B) People buy shares in a mutual fund.
C) A pension fund manager buys a short-term corporate security in the secondary market.
D) An insurance company buys shares of common stock in the over-the-counter markets.
Answer: A
AACSB: Analytical thinking
, 11) Which of the following can be described as involving direct finance?
A) A corporation takes out loans from a bank.
B) People buy shares in a mutual fund.
C) A corporation buys a short-term corporate security in a secondary market.
D) People buy shares of common stock in the primary markets.
Answer: D
AACSB: Analytical thinking
12) Which of the following can be described as involving indirect finance?
A) You make a loan to your neighbor.
B) A corporation buys a share of common stock issued by another corporation in the primary
market.
C) You buy a U.S. Treasury bill from the U.S. Treasury at TreasuryDirect.gov.
D) You make a deposit at a bank.
Answer: D
AACSB: Analytical thinking
13) Which of the following can be described as involving indirect finance?
A) You make a loan to your neighbor.
B) You buy shares in a mutual fund.
C) You buy a U.S. Treasury bill from the U.S. Treasury at Treasury Direct.gov.
D) You purchase shares in an initial public offering by a corporation in the primary market.
Answer: B
AACSB: Analytical thinking
14) Securities are ________ for the person who buys them, but are ________ for the individual
or firm that issues them.
A) assets; liabilities
B) liabilities; assets
C) negotiable; nonnegotiable
D) nonnegotiable; negotiable
Answer: A
AACSB: Reflective thinking
15) With ________ finance, borrowers obtain funds from lenders by selling them securities in
the financial markets.
A) active
B) determined
C) indirect
D) direct
Answer: D
AACSB: Application of knowledge
