Deck 1: Understanding the Financial System and Its Impact on the Economy and Markets

Question 1

The term "financial system" refers to the collection of markets, individuals and institutions, laws, regulations and techniques through which securities are traded and interest rates determined.

Answer 1

True

Question 2

When credit becomes more costly and less available, total spending for goods and services generally falls.

Answer 2

True

Question 3

The primary task of a financial system is to move scarce loanable funds from those who save to those who borrow to buy goods and services and to make investments in new equipment and facilities so that the global economy can grow and increase the standard of living enjoyed by its citizens.

Answer 3

True

Question 4

The money market is designed for the making of short-term loans. It is the institution through which individuals and institutions with temporary surpluses of funds meet the needs of borrowers who have temporary funds shortages (deficits).

Question 5

A market in which prices fully reflect the latest available information is an efficient market.

Question 6

A surplus of current revenues over current expenditures is a measure of current government saving.

Question 7

Business investment consists of purchases of plant and equipment and purchases of inventory.

Question 8

The purchase of a new home is a form of business investment.

Question 9

The purchase of financial claims is a guaranteed form of future income.

Question 10

Spending by federal, state and local governments for public facilities is a form of government savings.

Question 11

One of the most important contributions of the financial markets is to make possible the exchange of current income for future income.

Question 12

Credit represents a loan of funds in return for a promise of future payment.

Question 13

Interest payments on debt are a tax-deductible expense for households, but not for businesses.

Question 14

A NOW account is a type of savings account rather than a type of checking account.

Question 15

Commercial banks and retail stores, but not credit unions, may issue plastic credit cards.

Question 16

The financial markets offer businesses, consumers and governments protection against health, property and income risk.

Question 17

The term "liquidity" refers to the ability of a financial asset to be converted quickly into cash with little risk of loss.

Question 18

Money is the only perfectly liquid asset in the financial system.

Question 19

The financial asset which generally earns the lowest rate of return in the financial system is securities issued by the federal government which are presumed by investors to be free of credit risk.

Question 20

A security evidencing a loan which matures within one year is a money market instrument.

Question 21

One of the most important functions of the capital market is to finance the working-capital needs of corporations and to provide government with short-term funds in lieu of tax collections.

Question 22

Speculative purchases of securities and commodities are generally financed by loans from the money market.

Question 23

The construction of office buildings, highways, schools and homes normally is financed by loans from the capital market.

Question 24

Financial instruments traded in the capital market have original maturities of greater than one year.

Question 25

The most important institution lending funds in the money market is the commercial bank.

Question 26

The largest borrower in the U.S. money market is Citibank, the nation's largest commercial bank.

Question 27

Most loans to families and individuals would be classified as money market instruments.

Question 28

The largest market for a single security in the world is the Treasury bill market.

Question 29

A short-term IOU issued by a large well-established corporation is known as commercial paper.

Question 30

The fact that professional investors operate daily in the financial marketplace, watching for profitable opportunities arising from unusually attractive prices and interest rates on selected financial instruments and adjusting their portfolios accordingly is often referred to as the force of profit maximization.

Question 31

The only value of the financial system is that it determines the cost of credit.

Question 32

The financial system determines the cost of credit and how much credit is available.

Question 33

The circular flow occurs between governments and households.

Question 34

Business determines what and how many goods and services will be produced.

Question 35

One way for the economy to expand is for households to set aside savings so that they will not return to the spending stream.

Question 36

The tax status of interest paid on debt causes most individuals to think twice before using credit.

Question 37

Generally a business firm enters the capital market if it experiences a temporary surplus or deficit of funds.

Question 38

The money market is an excellent place for new corporations to borrow money.

Question 39

Federal funds are temporary cash surpluses held by the federal government.

Question 40

Speculators in securities are continually on the lookout for small differences in prices or interest rates attached to different securities.

Question 41

Arbitrageurs help to maintain consistent prices between financial markets.

Question 42

The financial markets provide a means to protect businesses, consumers and governments against risk.

Question 43

The terms open market and negotiated market are often used interchangeably to mean the same thing.

Question 44

The principal function of the primary market is to raise money for investment in buildings and equipment.

Question 45

An example of a futures market transaction is to borrow money through a new mortgage.

Question 46

Forward markets and futures markets serve the same purpose in principle.

Question 47

The liquidity function of the financial system is designed to protect businesses, consumers and governments against risks to people, property and income.

Question 48

The payments function of the financial system is designed to provide a means to store purchasing power until needed at a future date for spending on goods and services.

Question 49

The financial system is rapidly evolving into a worldwide system, with increasingly intense competition among financial institutions.

Question 50

Current savings for business firms are equal to current retained earnings less operating expenses.

Question 51

Current investment for households includes purchases of household durables by individuals and families.

Question 52

Investment by governments includes the construction of new public facilities.

Question 53

The financial system operates to bring planned savings into balance with planned financial investment in stocks and bonds.

Question 54

A high proportion of young adults and newly formed families in a nation's population will generate a high level of national savings compared to countries with older populations because younger adults have greater need to build up savings for the future.

Question 55

A nation with a relatively low savings ratio will tend to have higher interest rates and more rapid inflation.

Question 56

Trading in financial instruments now spans the globe.

Question 57

Few companies or governments have the prestige or stature that would cause investors throughout the world to want to trade their particular securities.

Question 58

One of the most significant barriers to worldwide trading of securities is the delay in paying for and delivering securities to all parts of the globe.

Question 59

If there is imperfect information in a market, it is perfectly competitive.

Question 60

When savings flows fall, living standards rise because people spend more.

Question 61

The net wealth of an economic unit is determined by adding all the unit's assets to it net worth or equity capital.

Question 62

The financial services area where protection is provided against loss due to unfavorable movements in market prices or interest rates is known as agency services.

Question 63

The financial services area where protection is provided from loss of income or property in the event of death, disability, negligence or other adverse developments is known as hedging services.

Question 64

The financial services area where payments accounts against which the customer can write checks or wire funds to pay for purchases of goods and services is known as thrift services.

Question 65

Wealth holdings represent stored purchasing power that will be used in future periods to finance purchases of goods and services and increase society's standard of living.

Question 66

Financial transactions between nations have increased faster in volume than has international trade in goods and nonfinancial services.

Question 67

The world's standard of living increases if production increases while raising productivity.

Question 68

Current savings represents a flow of funds.

Question 69

Accumulated savings built up over time is referred to as a flow of funds.

Question 70

Personal savings are after-tax funds that are not consumed during the year.

Question 71

The term "financial system" refers to the collection of markets, individuals and institutions, laws, regulations and techniques through which cash is traded and interest rates determined.

Question 72

The construction of office buildings, highways, schools and homes normally is financed by loans from the money market.

Question 73

Most loans to families and individuals would be classified as capital market instruments.

Question 74

Arbitrageurs help to insure differentials between financial markets.

Question 75

The financial system determines:

A) The cost of credit
B) How much credit is available
C) The prices of securities
D) The quantity of securities issued by borrowers
E) All of the above

Question 76

According to your text, the nation's standard of living is increased through the mechanism of the financial system by:

A) Increasing interest rates
B) Reducing the volume of spending for goods and services
C) Lowering inflation
D) Stabilizing the economy's rate of growth
E) Making funds available

Question 77

In general, when the cost of credit declines,

A) Unemployment rises
B) Total spending decreases
C) Production is cut back
D) More jobs are created
E) The economy's rate of growth slows down

Question 78

The role of markets in a market-oriented economy like the United States is to:

A) Allocate resources
B) Distribute income
C) Produce needed goods and services
D) All of the above
E) None of the above

Question 79

The markets that serve the financial system may be classified in several different ways, including:

A) Money markets versus capital markets
B) Open markets versus negotiated markets
C) Primary markets versus secondary markets
D) Spot markets versus futures markets
E) All of the above

Question 80

The financial system and financial markets are responsible for providing which of the following services?

A) Credit services
B) Payment services
C) Liquidity
D) Facilitating the flow of savings
E) All of the above