Question 1

Finding both parties to a trade who have something the other party wishes to trade for is called a:

Accepted Answer

Double coincidence of wants refers to the situation where both parties in a trade have something that the other wants or needs. It is necessary for a trade to occur but is often difficult to achieve without a medium of exchange.

Question 2

When a baker exchanges a pie for dollars, this is an example of dollars serving as:

Accepted Answer

When dollars are used to exchange goods or services, they are serving as a medium of exchange. Barter refers to direct exchange of goods or services without using money, a unit of account is a standard measure for pricing goods and services, and a store of value refers to the ability of money to retain its value over time.

Question 3

Your financial investments consist of U.S. government bonds maturing in twenty years and shares in a start-up internet company. If interest rates on newly issued government bonds increase, then the price of your bonds will ______ and the price of the shares you own will ____.

Accepted Answer

If the price of newly-issued bonds increases, then the price of current bonds will decrease. Similarly, the price of shares you own will also fall because those shares become less attractive when compared to newly-issued bonds.

Question 4

A financial intermediary that sells shares in itself to the public, and then uses the funds to buy a wide variety of financial assets is called a:

Accepted Answer

This description matches the definition of a mutual fund, which pools money from many investors to buy a diversified portfolio of financial assets. The mutual fund sells shares to the public and then uses the funds to invest in stocks, bonds, or other securities. Commercial banks and credit unions primarily offer traditional banking services, while a stock exchange provides a platform for buying and selling shares of individual companies.

Question 5

Money serves as a medium of exchange when:

Accepted Answer

Money functions as a medium of exchange when it is used to purchase goods and services. This means that it is accepted as payment for goods and services and can be exchanged for them. This is one of the primary functions of money, along with being a store of value and a unit of account.

Question 6

The ongoing search by savers for high returns leads the bond and stock markets to direct funds to the uses that appear:

Accepted Answer

Savers are looking for high returns, which suggests that they are seeking out productive uses of their funds. Therefore, the bond and stock markets are likely directing funds towards the uses that are most likely to be productive.

Question 7

When your grandfather keeps a bundle of $100 dollar bills behind a brick in the basement, this is an example of dollars serving as:

Accepted Answer

Dollars are serving as a store of value in this scenario, as they are being kept and preserved for future use.

Question 8

Suppose you have $200 with which you can buy shares of stock from two companies: ABC Hot Chocolate Company and XYZ Lemonade. Each company's stock currently sells for $100 per share. If the temperature next year is lower than average, the stock price for ABC will increase by $20, and the stock price for XYZ will not change. If the temperature next year is higher than average, the stock price for XYZ will increase by $20, and the stock price for ABC will not change. There is a 50% chance that it will be colder than average next year, and a 25% chance that it will be warmer than average. If you purchase two shares of XYZ stock and no shares of ABC stock, there is a ______ chance that your gain will be $40. Otherwise, your gain will be ______.

Accepted Answer

There is a 25% chance it will be warmer than average, leading to a $40 gain with XYZ. Otherwise, the gain is $0.

Question 9

Suppose you have $200 with which you can buy shares of stock from two companies: ABC Hot Chocolate Company and XYZ Lemonade. Each company's stock currently sells for $100 per share. If the temperature next year is lower than average, the stock price for ABC will increase by $20, and the stock price for XYZ will not change. If the temperature next year is higher than average, the stock price for XYZ will increase by $20, and the stock price for ABC will not change. There is a 50% chance that it will be colder than average next year, and a 25% chance that it will be warmer than average. If you purchase two shares of ABC stock and no shares of XYZ stock, there is a ______ chance that your gain will be $40. Otherwise, your gain will be ______.

Accepted Answer

If you buy two shares of ABC, your gain will be $40 if it is colder than average, which has a 50% chance. Otherwise, if it is warmer or average, your gain will be $0.

Question 10

You own shares in a well-managed and diversified company. If a booming economy decreases investors' concerns about market risk, then the price of your shares will _____, holding other factors constant.

Accepted Answer

A booming economy generally leads to increased investor optimism and a higher demand for shares, which in turn drives up the price of the shares.

Question 11

The practice of spreading one's wealth over a variety of different financial investments in order to reduce overall risk is called:

Accepted Answer

Diversification involves spreading one's investments across different financial instruments, sectors, and markets to lower the overall risk. By diversifying, an investor can reduce their exposure to any one particular asset or type of risk. This practice can help to increase returns and reduce volatility over the long term.

Question 12

Double coincidence of wants is avoided if money is used as a:

Accepted Answer

Money serves as a medium of exchange, allowing people to exchange goods and services without the need for a double coincidence of wants. This means that individuals can sell what they have for money and then use that money to buy what they need or want.

Question 13

If you use $1,000 to purchase silver bullion, which you plan to keep in a safe, you are using money as:

Accepted Answer

In this case you use money to purchase a non-money asset, so the money is used as a medium of exchange. Note that the silver bullion is not a commonly accepted form of money.

Question 14

You own shares in a start-up internet company. If large swings in the stock market increase financial investors' concerns about market risk, then the price of your shares will _____, holding other factors constant.

Accepted Answer

Large swings in the stock market increase financial investors' concerns about market risk, which makes them more risk-averse. Therefore, they are likely to sell off riskier assets such as shares in start-up internet companies, leading to a decrease in the price of the shares.

Question 15

If you post your car on eBay with a Buy-It-Now price of $1,800, you are using money as:

Accepted Answer

In this case you are use money to set the price of an asset. Thus, money is used as a unit of account.

Question 16

Suppose you have $200 with which you can buy shares of stock from two companies: ABC Hot Chocolate Company and XYZ Lemonade. Each company's stock currently sells for $100 per share. If the temperature next year is lower than average, the stock price for ABC will increase by $20, and the stock price for XYZ will not change. If the temperature next year is higher than average, the stock price for XYZ will increase by $20, and the stock price for ABC will not change. There is a 50% chance that it will be colder than average next year, and a 25% chance that it will be warmer than average. If you purchase one share of ABC stock and one shares of XYZ stock, there is a ______ chance that your gain will be $20. Otherwise, your gain will be ______.

Accepted Answer

There is a 50% chance of colder weather (gain $20 from ABC) and a 25% chance of warmer weather (gain $20 from XYZ), totaling a 75% chance of a $20 gain. If neither happens (25% chance), the gain is $0.

Question 17

If you put a $20 bill in the pocket of your winter coat at the beginning of spring so that you will be surprised when you find it again next winter, you are using money as:

Accepted Answer

Money serves as a store of value when it is used to hold purchasing power over time. In this scenario, the $20 bill is being stored in the winter coat pocket for an extended period of time, giving it the function of a store of value.

Question 18

Stock prices increase when expected future dividends ____, interest rates _____, and/or the risk premium ______.

Accepted Answer

According to the dividend discount model, stock prices are directly proportional to the expected future dividends. Therefore, stock prices increase when expected future dividends increase. Similarly, when interest rates decline, the present value of future expected dividends increases, leading to a rise in stock prices. Lastly, when the risk premium decreases, investors require less compensation for taking on a higher risk, leading to higher stock prices. Hence, the correct option is D where stock prices increase when expected future dividends increase, interest rates decrease, and the risk premium decreases.

Question 19

Money is:

Accepted Answer

This is the definition of "money" when used as a medium of exchange.

Question 20

The direct trade of goods and services for other goods and services is called:

Accepted Answer

Barter is the direct exchange of goods and services without the use of money or a medium of exchange. Financial intermediation refers to the process of a financial institution acting as an intermediary between lenders and borrowers. Diversification refers to the strategy of spreading out investments to reduce risk. Using a medium of exchange refers to using money to facilitate the exchange of goods and services.

Quiz 9: Saving and Capital Formation