Question 1

Which of the following would be most likely to use a financial market?

Accepted Answer

A) A household with a small amount of funds to lend 
B) A household wishing to borrow a small amount 
C) A small business wishing to borrow to expand its operations 
D) A state government wishing to borrow to finance a highway project 
A) A household with a small amount of funds to lend 
B) A household wishing to borrow a small amount 
C) A small business wishing to borrow to expand its operations 
D) A state government wishing to borrow to finance a highway project

Question 2

An automobile loan is likely to be a(an)

Accepted Answer

A) short-term debt instrument. 
B) intermediate-term debt instrument. 
C) long-term debt instrument. 
D) equity. 
A) short-term debt instrument. 
B) intermediate-term debt instrument. 
C) long-term debt instrument. 
D) equity.

Question 3

All of the following are forms of savings EXCEPT

Accepted Answer

A) purchase of a new car. 
B) purchase of shares of Google. 
C) buying shares in a mutual fund. 
D) opening up a savings account. 
A) purchase of a new car. 
B) purchase of shares of Google. 
C) buying shares in a mutual fund. 
D) opening up a savings account.

Question 4

Fluctuations in the market price of a corporate bond

Accepted Answer

A) are an example of the risk of owning a financial asset. 
B) happen only very rarely. 
C) indicate that the firm issuing the bond will soon declare bankruptcy. 
D) are generally offset by the yield on the bond being very stable. 
A) are an example of the risk of owning a financial asset. 
B) happen only very rarely. 
C) indicate that the firm issuing the bond will soon declare bankruptcy. 
D) are generally offset by the yield on the bond being very stable.

Question 5

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

Accepted Answer

A) Bank deposits 
B) Mutual fund shares 
C) Life insurance reserves 
D) Pension fund reserves 
A) Bank deposits 
B) Mutual fund shares 
C) Life insurance reserves 
D) Pension fund reserves

Question 6

Promises given by borrowers to lenders are

Accepted Answer

A) recognized as legally enforceable only in some states. 
B) not subject to federal taxation. 
C) assets to the lenders. 
D) liabilities to the lenders. 
A) recognized as legally enforceable only in some states. 
B) not subject to federal taxation. 
C) assets to the lenders. 
D) liabilities to the lenders.

Question 7

The decline in the dominance of U.S. financial markets has been the result of

Accepted Answer

A) the rapid post-war growth of Japan and Europe. 
B) the unwillingness of U.S. financial markets to allow trading in options and futures contracts. 
C) the difficulties experienced by the U.S. commercial banking system during the 1980s. 
D) unfair trading practices on the part of Japan and Europe. 
A) the rapid post-war growth of Japan and Europe. 
B) the unwillingness of U.S. financial markets to allow trading in options and futures contracts. 
C) the difficulties experienced by the U.S. commercial banking system during the 1980s. 
D) unfair trading practices on the part of Japan and Europe.

Question 8

When borrowers possess information about their opportunities or activities that they don't disclose to lenders or creditors, a problem of

Accepted Answer

A) asymmetric information arises. 
B) illiquidity arises. 
C) communication arises. 
D) undiversified risk arises. 
A) asymmetric information arises. 
B) illiquidity arises. 
C) communication arises. 
D) undiversified risk arises.

Question 9

Trading in capital markets involves

Accepted Answer

A) debt instruments with maturities of more than one year. 
B) equities. 
C) debt instruments with maturities of less than one year. 
D) debt instruments with maturities of more than one year and equities. 
A) debt instruments with maturities of more than one year. 
B) equities. 
C) debt instruments with maturities of less than one year. 
D) debt instruments with maturities of more than one year and equities.

Question 10

Financial innovation

Accepted Answer

A) may reduce the cost of risk sharing to lenders. 
B) is discouraged by the government because of its adverse impact on tax revenues. 
C) will generally reduce the liquidity of financial assets. 
D) has occurred frequently in financial markets, but rarely in financial intermediaries. 
A) may reduce the cost of risk sharing to lenders. 
B) is discouraged by the government because of its adverse impact on tax revenues. 
C) will generally reduce the liquidity of financial assets. 
D) has occurred frequently in financial markets, but rarely in financial intermediaries.

Question 11

When a bank makes a car loan, the loan

Accepted Answer

A) is an asset to the bank. 
B) is a liability to the bank. 
C) is an asset to the person taking it out. 
D) is a money market instrument. 
A) is an asset to the bank. 
B) is a liability to the bank. 
C) is an asset to the person taking it out. 
D) is a money market instrument.

Question 12

U.S. Treasury bills

Accepted Answer

A) have the largest trading volume of any money market asset. 
B) have a default risk slightly greater than that of corporate bonds. 
C) have a maturity of at least two years. 
D) may only be purchased directly from the federal government. 
A) have the largest trading volume of any money market asset. 
B) have a default risk slightly greater than that of corporate bonds. 
C) have a maturity of at least two years. 
D) may only be purchased directly from the federal government.

Question 13

Trading by managers who own large amounts of a firm's stock or trading by others who have privileged information is known as

Accepted Answer

A) insider trading. 
B) asymmetric trading. 
C) arbitrage. 
D) reverse repurchase trading. 
A) insider trading. 
B) asymmetric trading. 
C) arbitrage. 
D) reverse repurchase trading.

Question 14

In comparing money market instruments to capital market instruments, we can say that

Accepted Answer

A) money market instruments tend to be less risky and less liquid than capital market instruments. 
B) money market instruments tend to be more risky, but less liquid than capital market instruments. 
C) money market instruments tend to be more risky and more liquid than capital market instruments. 
D) money market instruments tend to be less risky, but more liquid than capital market instruments. 
A) money market instruments tend to be less risky and less liquid than capital market instruments. 
B) money market instruments tend to be more risky, but less liquid than capital market instruments. 
C) money market instruments tend to be more risky and more liquid than capital market instruments. 
D) money market instruments tend to be less risky, but more liquid than capital market instruments.

Question 15

The process of matching borrowers and lenders performed by the financial system

Accepted Answer

A) greatly reduces the chances of inflation. 
B) is plagued by the double coincidence of wants problem. 
C) increases the economy's ability to produce goods and services. 
D) occurs only through financial intermediaries. 
A) greatly reduces the chances of inflation. 
B) is plagued by the double coincidence of wants problem. 
C) increases the economy's ability to produce goods and services. 
D) occurs only through financial intermediaries.

Question 16

The most common auction markets are

Accepted Answer

A) exchanges. 
B) over-the-counter markets. 
C) located in banks or other financial intermediaries. 
D) engaged in indirect finance. 
A) exchanges. 
B) over-the-counter markets. 
C) located in banks or other financial intermediaries. 
D) engaged in indirect finance.

Question 17

Risk sharing

Accepted Answer

A) generally reduces the tax liability of savers. 
B) increases borrowers' ability to raise funds in the financial system. 
C) comes at the cost of lower liquidity. 
D) is sometimes offset by the effects of diversification. 
A) generally reduces the tax liability of savers. 
B) increases borrowers' ability to raise funds in the financial system. 
C) comes at the cost of lower liquidity. 
D) is sometimes offset by the effects of diversification.

Question 18

Which of the following assets has become significantly more liquid during the past two decades?

Accepted Answer

A) U.S. currency 
B) U.S. government bonds 
C) Mortgage loans 
D) Bonds issued by large corporations 
A) U.S. currency 
B) U.S. government bonds 
C) Mortgage loans 
D) Bonds issued by large corporations

Question 19

The risk involved in owning a financial asset is best thought of as

Accepted Answer

A) equal to the interest received from ownership of the asset. 
B) the chance that the value of the asset will rise or fall relative to what you expect. 
C) equal in most instances to the liquidity of the asset. 
D) the difference between the return on the asset after taxes and the return on a similar tax-free asset. 
A) equal to the interest received from ownership of the asset. 
B) the chance that the value of the asset will rise or fall relative to what you expect. 
C) equal in most instances to the liquidity of the asset. 
D) the difference between the return on the asset after taxes and the return on a similar tax-free asset.

Question 20

Interest is best thought of as

Accepted Answer

A) a rental fee on the principal of a debt. 
B) compensation for taxes incurred on an investment. 
C) an example of the exploitation of borrowers by lenders. 
D) in most cases, equal to the maturity of the debt. 
A) a rental fee on the principal of a debt. 
B) compensation for taxes incurred on an investment. 
C) an example of the exploitation of borrowers by lenders. 
D) in most cases, equal to the maturity of the debt.

Exam 3: Overview of the Financial System

Which of the following would be most likely to use a financial market?

An automobile loan is likely to be a(an)

All of the following are forms of savings EXCEPT

Fluctuations in the market price of a corporate bond

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

Promises given by borrowers to lenders are

The decline in the dominance of U.S. financial markets has been the result of

When borrowers possess information about their opportunities or activities that they don't disclose to lenders or creditors, a problem of

Trading in capital markets involves

Financial innovation

When a bank makes a car loan, the loan

U.S. Treasury bills

Trading by managers who own large amounts of a firm's stock or trading by others who have privileged information is known as

In comparing money market instruments to capital market instruments, we can say that

The process of matching borrowers and lenders performed by the financial system

The most common auction markets are

Risk sharing

Which of the following assets has become significantly more liquid during the past two decades?

The risk involved in owning a financial asset is best thought of as

Interest is best thought of as

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