Deck 2: Financial Assets, Money, Financial Transactions, and Financial Institutions

Question 1

Internal financing consists of drawing upon current income and accumulated savings to fund the acquisition of assets.

Answer 1

True

Question 2

According to the text, externally generated funds are the most important source of funds to acquire assets for most businesses and households.

Answer 2

False

Question 3

The so-called "leverage effect"
refers to boosting earnings through the use of debt whose cost is less than the earnings generated by the borrowed funds.

Answer 3

True

Question 4

The act of borrowing simultaneously gives rise to an equal volume of financial liabilities incurred.

Question 5

The business sector is typically a net borrower of funds in the financial marketplace.

Question 6

The household sector is typically a net lender of funds in the financial marketplace.

Question 7

Measured by total assets the most important financial institution is the insurance company.

Question 8

Commercial banks are contractual institutions.

Question 9

Savings banks are classified as investment institutions.

Question 10

An advantage of indirect finance is that secondary securities are attractive to a limited portion of the population.

Question 11

The "hedging principle"
involves attempting to match maturity of assets held to liabilities taken on.

Question 12

Financial assets usually have a high commodity value.

Question 13

The recent trend in which some of the best loan customers of banks and other financial intermediaries have chosen instead to raise the loanable funds they need directly from the open market is actually a new form of indirect finance or reintermediation.

Question 14

Recent trends in disintermediation have tended to increase the relative importance of banks within the global financial system.

Question 15

The M1 definition of the U. S. money supply includes small time and savings deposits.

Question 16

The sum of all U.S. currency and coin held by the public, travelers checks, NOW accounts and automatic funds transfer services represents the M2Z definition of the U.S. money supply.

Question 17

Much of the disintermediation experienced by modern financial intermediaries has occurred due to financial innovation within the global financial system.

Question 18

One of the most serious management problems encountered by financial intermediaries today is disintermediation - the loss of funds from a financial intermediary to direct or semidirect finance.

Question 19

Within the United States financial system the largest borrower of money in 2006 was the federal government.

Question 20

Within the United States financial system the largest borrower of money in 2006 was the local and state governments.

Question 21

Within the United States financial system the largest borrower of money in 2006 were individuals, borrowing $950 billion.

Question 22

Within the United States financial system the largest borrower of money in 2006 were nonfinancial businesses at $88 billion.

Question 23

The largest borrowers of money in descending order in 2006 were first, individuals, second, the federal government and third, the local and state governments.

Question 24

In the United States, banks hold approximately one quarter of the total resources of all US financial institutions, which in 2006 was $9.5 trillion.

Question 25

Money market funds held in US financial institutions went from zero in 1970 to just over $_5 trillion in 2006.

Question 26

The largest borrowers of money in descending order in 2006 were first, Corporations, second, the federal government and third, the local and state governments.

Question 27

The text notes that a liquid asset must possess all of the following characteristics except one. Which item listed below is not necessarily true for a liquid asset?

A) Price stability
B) Ready marketability
C) Reversibility
D) Divisibility
E) All of the above are necessary characteristics of a liquid asset

Question 28

For the most part secondary securities issued by financial intermediaries share all of the following characteristics except one. Identify which one.

A) Low risk
B) Long maturity
C) Small denominations
D) Liquidity
E) Convenience

Question 29

Money's role as a store of value is reduced or made less effective by:

A) Greater use of barter
B) Taxation
C) Declining prices for goods and services
D) Rising prices for goods and services
E) None of the above

Question 30

Portfolio choices made by financial institutions are affected by which of the following factors?

A) Relative rates of return expected on various uses of funds
B) Relative risk attached to different sources and uses of funds
C) Cost of incoming funds
D) Maturity and volatility of incoming funds
E) All of the above

Question 31

Current expenditures greater than current receipts characterizes a:

A) Surplus budget unit
B) Classical theory of interest
C) A financial intermediary
D) The hedging principle
E) Deficit budget unit

Question 32

U.S. savings bonds would be an example of what kind of financial asset (as defined in the textbook)?

A) Money
B) Equities
C) Negotiable debt
D) Nonnegotiable debt
E) None of the above

Question 33

According to the textbook, a new form of disintermediation has appeared in recent years in which:

A) Financial intermediaries sell of some of their loans in order to raise new capital
B) Financial intermediaries develop new types of deposits not previously available and thereby add to their capital base
C) Some of the best borrowing customers of financial intermediaries have recently chosen to raise funds directly from the open market
D) A and C are both correct
E) None of the above

Question 34

According to the text, insurance companies are classified as:

A) Depository institutions
B) Contractual institutions
C) Investment institutions
D) Finance companies
E) None of the above

Question 35

According to the textbook, savings and loan associations are classified as:

A) Depository institutions
B) Contractual institutions
C) Investment institutions
D) Short-term intermediaries
E) None of the above

Question 36

ITT decides to use receivables as collateral for debt it issues rather than borrow from the bank. This is an example of:

A) Asset reduction
B) Arbitrage
C) Hedging
D) Indirect finance
E) Disintermediation

Question 37

The sum of all U.S. currency and coin held by the public, NOW accounts and Automatic Transfer Services at all commercial banks, credit unions and thrift institutions is which definition of the U.S. money supply?

A) M1
B) M2
C) MZ2
D) L
E) None of the above

Question 38

On January 1, 1999, a new currency joined the world financial system. This currency is:

A) The Eurodollar
B) The Gold Standard
C) The Euro
D) The Euro Yen

Question 39

In 2006, the major sector of the economy that was the largest net lender of funds was

A) Households
B) Nonfinancial business firms
C) International sector
D) Federal government
E) State and local government to

Question 40

The biggest borrowers in 2006 were

A) Pension funds
B) Individuals
C) Governments (local, state and federal)
D) Households
E) A and B

Question 41

The biggest borrowers in 2006, in descending order were

A) Individuals, federal government, local and state government
B) Federal government, local and state government, nonfinancial businesses
C) Nonfinancial businesses, federal government, individuals
D) Federal government, nonfinancial businesses, local and state government
E) None of the above

Question 42

In the year 2006, the federal government sold assets of around $14 billion and then borrowed almost

A) $635 billion
B) $450 billion
C) $100 billion
D) $950 billion
E) $22 billion

Question 43

In 2006 the value of M1 was close to

A) $50 trillion
B) $1.4 trillion
C) $15 trillion
D) $72 billion
E) None of the above

Question 44

The value of M2 in 2006 was just over

A) $6.8 trillion
B) $10 trillion
C) $68 billion
D) $12.2 trillion
E) None of the above

Question 45

Between 1960 and 2006, the cost of living index, which measures the prices of consumer goods, increased

A) More than three times
B) More than five times
C) More than two times
D) More than eight times
E) More than 10 times

Question 46

Between the 1982-84 base period and 2006, the cost of living index, which measures the prices of consumer goods, increased

A) 100 to 200
B) 100 to 150
C) 200 to 300
D) 100 to 300
E) 0 to 100

Question 47

In the United States, banks hold approximately one quarter of the total resources of all US financial institutions, which in 2006 was

A) $9.5 trillion
B) $14.5 trillion
C) $72 trillion
D) $10 billion
E) None of the above

Question 48

Money market funds held in US financial institutions went from zero in 1970 to just over $_______ in

A) $100 billion
B) $1 trillion
C) $2 trillion
D) $10 trillion
E) $500 billion

Question 49

In the United States financial system M2Z is a

A) Money measure
B) Close to the transactions demand for money
C) Developed by the St. Louis Federal Reserve Bank
D) Was over $6.9 trillion in 2006
E) All of the above

Question 50

What is the difference between internal finance and external finance?

Question 51

What exactly is the relationship between the process of creating financial assets and liabilities and the acts of saving and investment? Why is that relationship important to your financial and economic well-being?

Question 52

What do the following terms mean? Deficit-budget unit (DBU)? Surplus-budget unit (SBU)? Balanced-budget unit (BBU)? Why are these concepts important?

Question 53

Explain what money is. What are its principal functions or roles within the system of money and capital markets? Within the economy?

Question 54

Can you distinguish between inflation and deflation? What do they have to do with money, if anything?

Question 55

What is direct finance? Semi-direct finance? Indirect finance?

Question 56

In the evolution of the financial system, which came first - direct, indirect or semi-direct finance? Why do you think this is so?

Question 57

What are the essential differences between primary and secondary securities? Why are these instruments important to the operation of the financial system?

Question 58

Which financial institutions are the largest within the financial system? Why do you think these are the largest financial institutions?

Question 59

What factors influence the particular financial assets each financial institution acquires?

Question 60

Identify which economic units are completely self-financed. Which economic units are deficit-budget units? Surplus-budget units? Balanced-budget units?

Question 61

ITT Corporation in the most recent period reported current sales receipts of $542 million, current
operating expenditures of $577 million and net new debt issued of $5 million. What change in holdings of
financial assets must have occurred over the period? Was ITT a deficit-, surplus- or balanced-budget unit
in the most recent period? Explain why.