Deck 1: Introducing Money and the Financial System

Question 1

Securitization is the process of

A)issuing stocks to finance capital spending.
B)issuing bonds to finance purchases of equipment and structures.
C)reducing risk by decreasing corporate debt loads.
D)converting loans into securities.

Answer 1

converting loans into securities.

Question 2

If you purchase a Treasury bond, the Treasury bond is

A)an asset to you as well as an asset to the U.S. government.
B)an asset to you, but a liability to the U.S. government.
C)a liability to you, but an asset to the U.S. government.
D)a liability to you as well as a liability to the U.S. government.

Answer 2

an asset to you, but a liability to the U.S. government.

Question 3

Which of the following assets is the most liquid?

A)money market mutual fund
B)computer
C)washing machine
D)U)S. Treasury bond

Answer 3

money market mutual fund

Question 4

Which of the following is NOT a key financial service provided by the financial system?

A)risk sharing
B)profitability
C)liquidity
D)information

Question 5

If a bank grants you a mortgage, the mortgage is

A)an asset to you as well as an asset to the bank.
B)an asset to you, but a liability to the bank.
C)a liability to you, but an asset to the bank.
D)a liability to you as well as a liability to the bank.

Question 6

Financial markets

A)channel funds indirectly between borrowers and lenders.
B)channel funds directly from lenders to borrowers.
C)act as go-betweens by holding a portfolio of assets and issuing claims based on that portfolio to savers.
D)generally provide lenders with lower returns than do financial intermediaries.

Question 7

Which of the following is NOT a financial asset?

A)a bond issued by Google
B)Wells Fargo Bank
C)a home mortgage loan
D)a certificate of deposit

Question 8

Which president said, "Prosperity is just around the corner"?

A)Herbert Hoover near the start of the Great Depression
B)Franklin Delano Roosevelt near the start of the Great Depression
C)George W. Bush near the start of the Great Recession
D)Barack Obama near the start of the Great Recession

Question 9

Which of the following is NOT a financial intermediary?

A)mutual fund
B)bank
C)stock exchange
D)insurance company

Question 10

Economists define risk as

A)the difference between the interest rate borrowers pay and the interest rate lenders receive.
B)the chance that the value of financial assets will change from what you expect.
C)the ease with which an asset can be exchanged for other assets or for goods and services.
D)the difference between the return on common stock and the return on corporate bonds.

Question 11

The financial system is primarily a means by which

A)funds are transferred from savers to borrowers.
B)money is put into circulation.
C)the government puts into operation its plans for the economy.
D)business firms distribute their goods.

Question 12

The main role of financial intermediaries is to

A)provide funds to the federal government to cover the budget deficit.
B)borrow funds from savers and lend them to borrowers.
C)provide advice to consumers on how they should handle their finances.
D)help ensure that there is enough money in circulation.

Question 13

Which of the following is NOT a financial intermediary?

A)NASDAQ
B)Allstate Insurance Company
C)Bank of America
D)Vanguard Total Stock Market Index Fund

Question 14

By providing and communicating information, the financial system

A)reduces the difference between the return on three-month U.S. Treasury bills and the return on thirty-year U.S. Treasury bonds.
B)relieves individual savers from the necessity of searching out individual borrowers.
C)eliminates the risk in investing in the stock market.
D)guarantees investors a reasonable return on their money.

Question 15

Economists define liquidity as

A)the difference between the return on the asset and the return on a long-term U.S. Treasury bond.
B)the fraction the asset makes up of an investor's portfolio.
C)the ease with which an asset can be exchanged for money.
D)the difference between the total demand for an asset and the total supply of the asset.

Question 16

Funds flow from lenders to borrowers

A)indirectly through financial markets.
B)directly through financial intermediaries.
C)indirectly through financial intermediaries.
D)primarily through government agencies.

Question 17

Financial securities that represent partial ownership of a corporation are known as

A)bonds.
B)stocks.
C)coupons.
D)dividends.

Question 18

Which of the following forms the largest share of household holdings of financial assets?

A)corporate equities
B)bank deposits
C)pension funds reserves
D)life insurance

Question 19

Financial intermediaries

A)include banks and other depository institutions.
B)include the New York and American Stock exchanges.
C)directly issue claims on individual borrowers to savers.
D)are owned and operated by the federal government.

Question 20

If you buy a bond issued by Intel, the bond is a(n):

A)liability to Intel and an asset to you.
B)liability to you and an asset to Intel.
C)liability to both you and Intel.
D)asset to both you and Intel.

Question 21

In the United States, monetary policy is carried out by

A)the Federal Reserve System.
B)Congress.
C)the President.
D)Congress and the President acting together.

Question 22

What made the recession of 2007-2009 different than any other recession since the Great Depression?

A)the government did not implement a fiscal stimulus
B)the Fed failed to reduce interest rates
C)it was accompanied by a financial crisis
D)the impact was primarily limited to the financial sector

Question 23

In the United States, the lender of last resort is

A)Fannie Mae.
B)the Federal Reserve.
C)the Federal Deposit Insurance Corporation.
D)Securities and Exchange Commission.

Question 24

The financial system performs the role of communicating information by

A)constantly increasing the liquidity of most assets.
B)constantly reducing the riskiness of most assets.
C)incorporating all available information into the prices of financial assets.
D)providing to investors for a nominal charge all government reports available about a particular company.

Question 25

Liquidity

A)is the best available measure of the riskiness of an asset.
B)is a characteristic of money, and of no other asset.
C)is the ease with which an asset can be exchanged for money.
D)was declining for many financial assets during the 1990s.

Question 26

All of the following took place during the economic crisis that began in 2007 EXCEPT:

A)the financial system was disrupted
B)large portions of the U.S. economy were cut off from the funds they needed to thrive
C)there was a devastating decline in the production of goods and services throughout the economy
D)unlike households, most businesses still had easy access to funds

Question 27

A "primary market" is a market

A)for government securities.
B)in which newly issued claims are sold to buyers by borrowers.
C)in which newly issued claims are sold by savers to borrowers.
D)for debt by large or "primary" corporations.

Question 28

A decline in bank lending has the most significant effect on

A)small businesses.
B)large businesses.
C)state governments.
D)federal government.

Question 29

The Federal Reserve System

A)is in charge of managing the New York Stock Exchange.
B)is headed by the Secretary of the Treasury.
C)is the central bank of the United States.
D)is responsible for conducting fiscal policy for the United States.

Question 30

Which of the following assets is the least liquid?

A)money market mutual fund
B)stock
C)treasury bond
D)house

Question 31

Increased liquidity in recent decades has reduced interest rates on which of the following assets (holding constant all other things that affect interest rates)?

A)U)S. government bonds
B)bonds issued by large corporations
C)business loans
D)bonds issued by state governments

Question 32

Diversification refers to the

A)splitting of wealth into many assets.
B)difference between the liquidity of an asset and its risk.
C)difficulty of converting investments in common stocks into investments in bonds.
D)difficulty of selling common stocks in a weak market.

Question 33

The leading federal regulatory body for financial markets in the United States is the

A)Federal Bureau of Investigation.
B)Securities and Exchange Commission.
C)Federal Financial Market Bureau.
D)Investors Protection Agency.

Question 34

Monetary policy refers to the government's

A)decisions on how much money to spend.
B)decisions on how much money to collect in taxes.
C)plans for retiring the national debt.
D)management of the money supply and interest rates to achieve macroeconomic objectives.

Question 35

Economists define money as

A)cash in circulation.
B)deposits in commercial banks.
C)anything that people are willing to accept in payment for goods and services or to pay off debts.
D)bonds issued by large corporations.

Question 36

Owners of small firms in countries with weak banking systems have to rely on funds from all of the following EXCEPT:

A)their own savings
B)local lenders who charge high interest rates
C)global investors
D)the savings of relatives and friends

Question 37

A bank lending depositors' money to a local business and a pension fund investing contributions in shares of a company are similar financial activities in that

A)both involve the use of financial markets.
B)both involve funds being channeled from savers to borrowers through financial intermediaries.
C)both involve a reduction in the overall level of liquidity in the financial system.
D)both involve in an increase in the overall level of risk in the financial system.

Question 38

The purpose of diversification is to

A)increase the liquidity of a financial portfolio.
B)reduce the brokerage fees involved in managing a financial portfolio.
C)reduce risk.
D)reduce tax liability.

Question 39

The financial system provides risk sharing by allowing

A)borrowers to obtain funds either directly or indirectly.
B)savers to earn interest tax-free.
C)borrowers to convert liabilities into assets.
D)savers to hold many assets.

Question 40

The distinguishing feature of a well-functioning financial market is the

A)continual increase in the liquidity of most assets.
B)continual reduction in the riskiness of most assets.
C)increased ease of converting common stocks into bonds.
D)incorporation of available information into asset prices.

Question 41

The financial crisis of 2007-2009 worsened after the failure of which firm?

A)General Motors
B)Lehman Brothers
C)Bear Stearns
D)American International Group (AIG)

Question 42

Which firm did the Treasury allow to fail during the financial crisis?

A)J)P. Morgan
B)Bear Stearns
C)Lehman Brothers
D)American International Group (AIG)

Question 43

Investment banks do NOT engage in which of the following?

A)proprietary trading
B)securitization
C)lending to households
D)underwriting

Question 44

All of the following accurately describe microlending EXCEPT:

A)it involves small loans
B)lending is primarily undertaken by the government
C)the borrowers are people who are attempting to start or expand a small business
D)many economists think it has aided economic growth in many low-income countries

Question 45

The Troubled Asset Relief Program (TARP)allowed

A)the Treasury to inject funds into commercial banks in return for stock in the banks.
B)the Fed to provide funds to commercial banks in return for stock.
C)the Treasury to insure bank deposits at major U.S. banks.
D)the Fed to make loans to banks as the lender of last resort.

Question 46

The process by which investment banks guarantee a certain price to a firm issuing stocks or bonds is known as:

A)underwriting
B)securitization
C)proprietary trading
D)microlending

Question 47

All of the following are examples of risky mortgages that became more common in the 2000s EXCEPT

A)alt-A mortgages.
B)adjustable-rate mortgages with low rates for a few years and then higher rates in later years.
C)mortgages requiring down payments of at least 20%.
D)subprime mortgages.

Question 48

All of the following represent returns to savers EXCEPT:

A)dividends on stocks
B)fees on loans
C)interest on deposits
D)coupon payments on bonds

Question 49

Which type of borrowers were least likely to default in their mortgage at the beginning of the financial crisis?

A)those with fixed-rate mortgages who made large down payments
B)those with alt-A loans
C)subprime borrowers
D)those with adjustable-rate mortgages

Question 50

How are interest payments on mortgages distributed to investors who own mortgage-backed securities?

Question 51

Fannie Mae and Freddie Mac both

A)sell bonds to investors and use the funds to purchase mortgages.
B)help regulate the banking system.
C)directly lend funds to people seeking mortgages.
D)reduce access to funds for mortgages by purchasing existing mortgages.

Question 52

Which of the following does NOT describe the relationship between banks and small business during the 2000s (prior to the financial crisis)?

A)Banks typically applied fixed guidelines for granting loans, leaving little room for personal judgment.
B)Fewer small businesses received loans as banks shifted their focus to mortgages.
C)Many small businesses were receiving loans from regional and national banks.
D)More banks became convinced that it would be profitable to loosen their loan guidelines to make more borrowers eligible to receive credit.

Question 53

Borrowers who stated but did not document their incomes are referred to as:

A)subprime
B)alt A
C)adjustable
D)securitized

Question 54

At the beginning of the financial crisis, banks were hurt by all of the following EXCEPT

A)declines in the value of mortgage-backed securities.
B)defaults on mortgages by those with subprime mortgages.
C)holding too many Treasury bonds.
D)not being repaid on loans to real estate developers.

Question 55

Briefly explain the process of securitizing mortgages.

Question 56

All of the following were significant changes in the mortgage market in the 2000s EXCEPT

A)investment banks became significant participants in the secondary mortgage market.
B)lenders loosened lending standards.
C)mortgage-backed securities became more popular with investors.
D)borrowers tended to increase the amount of their down payments.

Question 57

Alt-A borrowers were those who

A)used mortgages to purchase apartments.
B)chose adjustable-rate mortgages instead of fixed-rate mortgages.
C)borrowed using "interest-only" mortgages.
D)did not provide documentation of their income when applying for a mortgage.

Question 58

Which of the following best describes a "bubble"?

A)when the price of an asset reaches a new high
B)an unsustainable increase in the price of a class of assets
C)rapid increases in inflation
D)when bond prices rise more quickly than stock prices

Question 59

Briefly describe the process of microlending.

Question 60

Briefly discuss three reasons why firms may borrow funds from a bank.

Question 61

How did securitization and the bursting of the housing bubble contribute to the Financial Crisis of 2007-2009?

Question 62

The Fed and Treasury took action to restore the flow of funds from savers to borrowers in order to encourage all of the following EXCEPT:

A)increase the return to savers
B)enable households to purchase durable goods
C)increase the likelihood of purchases of houses
D)allow firms to finance purchases of structures and equipment

Question 63

What was the intent behind the intervention of the Fed and Treasury in financial markets during the Financial Crisis of 2007-2009?

Question 64

Why did some economists and policymakers criticize the Fed and Treasury for arranging the sale of Bear Stearns to JP Morgan Chase in 2008?