Deck 2: Financial Systems, Monetary Units, and the Role of Money in the Economy

Question 1

The financial system may be thought of as the mechanism through which loanable funds reach borrowers.

Answer 1

True

Question 2

Transactions in the financial markets generally involve the exchange of money for financial claims.

Answer 2

True

Question 3

A financial asset is a claim against the income or wealth of a business firm, household or unit of government.

Answer 3

True

Question 4

Financial assets are sought after, according to the text, because they serve as a store of value and generally provide a continuing stream of services to their owners.

Question 5

Any asset held by a business firm, government or household that is also recorded as a liability or claim on some other economic unit's balance sheet is a financial asset.

Question 6

The net worth account of any economic unit (i.e., business firm, household or unit of government) represents its accumulated savings.

Question 7

One of the most important contributions of the global financial system to our daily lives is in permitting businesses, households and governments to adjust their financial position from that of net borrower (DBU) to net lender (SBU) and back again, smoothly and efficiently.

Question 8

For each sector of the economy the volume of financial assets held must be equal to the volume of financial liabilities incurred.

Question 9

Real assets are necessarily matched by an equal volume of financial claims held somewhere in the financial system.

Question 10

The amount of lending in a closed financial system must always equal the amount of borrowing in that system. In a closed economy the total value of all real assets must equal the amount of borrowing in that system.

Question 11

Society can increase its wealth only by saving.

Question 12

A deficit-budget unit is a net borrower of funds from the financial marketplace; that is DD < DFA.

Question 13

A surplus-budget unit is a net lender of funds to the financial marketplace; that is, DFA > DD.

Question 14

From day to day and week to week businesses, governments and households typically fluctuate from a deficit-budget position to a surplus-budget position and back again.

Question 15

Money's role as a standard of value means that it is usually the only financial asset which virtually every business, household and unit of government will accept in payment for goods and services.

Question 16

Fiat money consists of gold and silver coins whose precious metal content has been reduced, depreciating the value of the coin, by government order.

Question 17

Money's role as a medium of exchange frees buyers and sellers of goods and services from the need to have an exact coincidence of wants in terms of quality, quantity, time and location.

Question 18

The fact that money is the only "perfectly liquid asset" refers to the fact that it is the only asset that need not be converted into any other form before being spent.

Question 19

Indirect finance requires that ultimate lenders (surplus-budget units) and ultimate borrowers (deficit-budget units) have a coincidence of wants in terms of the amount, form and terms of loan.

Question 20

In semi-direct finance secondary securities are created.

Question 21

One of the most important contributions of security brokers and dealers is to facilitate the development and growth of secondary markets.

Question 22

The hedging principle refers to risk reduction by approximately matching the maturities of assets held with the maturities of liabilities taken on.

Question 23

During periods of disintermediation the total flow of credit through the financial system is reduced.

Question 24

Real estate investment trusts are among the largest financial intermediaries.

Question 25

The essential role of financial markets is to convert savings into investments.

Question 26

Society as a whole is better off by the mere creation of financial assets and liabilities.

Question 27

Every financial asset represents the lending or investing of money transferred from one economic unit to another.

Question 28

An example of a net lender is an economic unit which purchases U.S. Treasury Bills.

Question 29

A benefit of a financial system is the ability of economic units to adjust their financial positions smoothly and efficiently.

Question 30

It is not possible for an economic unit to be a lender and a borrower simultaneously.

Question 31

It is necessary for a monetary unit to have an intrinsic value as a commodity to be accepted as a medium of exchange.

Question 32

The financial asset which entitles its holder to a share of a business corporation's net earnings but carries no voting privileges is known as an indenture.

Question 33

Passbook savings accounts and U.S. Savings Bonds are examples of negotiable debt securities.

Question 34

A marketable corporate note would be a negotiable debt instrument.

Question 35

By definition financial assets provide a continuing stream of services to their owner.

Question 36

Financial assets are fungible, which means they can easily be transported from one location to another.

Question 37

A new form of disintermediation in recent years has involved some banks and savings and loans selling off their capital by purchasing large quantities of new loans in an attempt to bolster their revenues, according to the text.

Question 38

Due to recent deregulation, service innovations and lower average interest rates today's financial intermediaries face less uncertainty today than in the past regarding their funds sources and funds costs.

Question 39

A corporation that decides to turn down a loan from a bank and borrow instead in the open market has switched from semi-direct finance to direct finance, according to the textbook.

Question 40

Insurance companies and pension funds must adhere to the prudent man rule when making stock selections.

Question 41

Disintermediation occurs when a bank sells loans to raise funds.

Question 42

Corporations depend on banks and other financial institutions to meet their credit needs more today than they did in the past.

Question 43

When a corporation pools credit receivables and uses them as collateral for the sale of bonds it is engaged in semi-direct finance.

Question 44

Brokers take a position in the securities they trade while dealers do not.

Question 45

The M2 measure of the U.S. money supply includes currency and coin held by the public.

Question 46

The M1 definition of the U.S. money supply views money primarily as a medium of exchange.

Question 47

The M2 and M3 definitions of the U.S. money supply reflect mainly money's role as a store of value.

Question 48

Short-term borrowings in the money market are included in the M1 definition of the U.S. money supply.

Question 49

A derivative is so called because its value is derived from an underlying asset.

Question 50

Swaps, futures and options all represent a class of financial assets called derivatives.

Question 51

In a security-dominated financial system, adequate collateral is required by most banks when issuing loans.

Question 52

In describing the entire financial system, the total of all financial liabilities outstanding should equal the sum of all financial assets held.

Question 53

Countries with more fully developed financial systems usually grow faster and have a higher standard of living.

Question 54

Compared to other nations and regions of the world the United States is considered a relatively safe haven for money.

Question 55

Today, relative to check writing volume, electronic payments are declining.

Question 56

The monetary unit, which is used for the in country currency, in China is the yuan.

Question 57

The monetary unit, which is used for the in country currency, in China is the yen.

Question 58

The euro is used as the home country monetary unit in Japan.

Question 59

Both Canada and the United States use a monetary unit, which is used for the home country currency is called the dollar.

Question 60

M2Z is a money measure close to the transactions demand for money.

Question 61

Money serves as a "store of value" which is a reserve for future purchasing power.

Question 62

Direct finance is the technique when borrower and lender meet each other and exchange funds for financial assets without the help of a third-party.

Question 63

Disintermediation may reverse itself, with funds flowing back into the perceived safer instruments of financial intermediaries, a process called re-intermediation.

Question 64

Disintermediation may reverse itself, with funds flowing back into the perceived safer instruments of financial intermediaries, a process called re-intermediation.

Question 65

Today, relative to check writing volume, electronic payments are increasing.

Question 66

The M2 measure of the U.S. money supply includes currency and coin held by the corporations.

Question 67

Purchasing stocks and bonds through a broker is an example of direct finance.

Question 68

Long-term borrowings in the money market are included in the M1 definition of the U.S. money supply.

Question 69

Which one of the following is not a financial asset?

A) Bank loan
B) Common stock
C) Corporate Bond
D) Insurance policy
E) Checking account
F) All of the above are examples of financial assets

Question 70

There is a term missing from the identity shown below: Expenditures out of Current Income-Current Income Receipts = Change in Holdings of Debt and Equity during the Current Period- ____. Which of the terms shown below correctly completes the identity above?

A) Change in holdings of real and financial assets during the current period
B) Change in holdings of real assets during the current period
C) Change in holdings of financial assets during the current period
D) Change in net worth during the current period
E) None of the above

Question 71

The inequality statement E>R and DD >DFA, according to your text, describes a:

A) Deficit-budget unit
B) Surplus-budget unit
C) Net lender of funds
D) Balanced-budget unit
E) None of the above

Question 72

The inequality statement R >E and DFA > DD, according to your text, describes a:

A) Deficit-budget unit
B) Net borrower of funds
C) Surplus-budget unit
D) Balanced-budget unit
E) None of the above

Question 73

The government sector in the economy usually is a:

A) Balanced-budget sector
B) Surplus-budget sector
C) Deficit-budget sector
D) Financially neutral sector
E) None of the above

Question 74

The household sector in the economy usually is a:

A) Balanced-budget sector
B) Surplus-budget sector
C) Deficit-budget sector
D) Financially neutral sector
E) None of the above

Question 75

The business sector in the economy usually is a:

A) Balanced-budget sector
B) Surplus-budget sector
C) Deficit-budget sector
D) Financially neutral sector
E) None of the above

Question 76

According to the text, the secondary securities issued by financial intermediaries include all of the following items except one. Which is not normally a secondary security?

A) Checking accounts
B) Insurance policies
C) Retirement plans
D) Savings deposits
E) Corporate bonds

Question 77

According to the text, the most important financial asset in the economy is:

A) Money
B) Common stock
C) Mortgages
D) Savings deposits in banks and credit unions
E) Government bonds

Question 78

The fact that money is an asset which virtually every business, household, unit of government will accept in payment for goods and services describes money's role as a:

A) Perfectly liquid asset
B) Standard of value
C) Store of value
D) Medium of exchange
E) None of the above

Question 79

The fact that money always has a constant price in terms of itself (i.e., a dollar always exchanges for a dollar) refers to money's role as a:

A) Medium of exchange
B) Standard of value
C) Store of value
D) Perfectly liquid asset
E) None of the above

Question 80

Which of the following items is an example of fiat money?

A) A twenty-dollar bill
B) Wampum
C) Gold coins minted by the government
D) Silver dollars
E) Credit card