Question 1

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.

Accepted Answer

When you purchase a Treasury bond, it represents an asset to you because it is an investment from which you expect to receive future payments. For the U.S. government, however, the bond is a liability because it represents money the government must pay back to bondholders in the future.

Question 2

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

Accepted Answer

C

Question 3

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

Accepted Answer

NASDAQ is a stock exchange and not a financial intermediary. Financial intermediaries are institutions that facilitate the flow of funds between borrowers and lenders, such as banks, insurance companies, and mutual funds.

Question 4

Which of the following is NOT a financial intermediary?
A) mutual fund
B) bank
C) stock exchange
D) insurance company

Accepted Answer

The stock exchange is not a financial intermediary, as it is a platform where buyers and sellers of securities come together to trade. Financial intermediaries are institutions that transfer funds between savers and borrowers, such as banks, mutual funds, and insurance companies.

Question 5

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.

Accepted Answer

The answer of Financial markets
A) channel funds indirectly between borrowers...

Question 6

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

Accepted Answer

Wells Fargo Bank is a financial institution, not a financial asset. Financial assets include things like bonds, loans, and certificates of deposit, which represent a claim to future cash flows.

Question 7

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.

Accepted Answer

Securitization is the process of converting loans into securities. Through this process, banks and financial institutions package together loans – such as mortgages, car loans, or credit card debt – and sell them to investors as securities. This helps lenders to reduce their risk exposure and increase their liquidity, while providing investors with an opportunity to invest in a diversified pool of debt instruments.

Question 8

Financial securities that represent partial ownership of a corporation are known as
A) bonds.
B) stocks.
C) coupons.
D) dividends.

Accepted Answer

Bonds are debt securities, not partial ownership of a corporation. Coupons refer to the interest payments on bonds. Dividends are payments made to stockholders as a distribution of profits, but they do not represent ownership in the same way that stocks do.

Question 9

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.

Accepted Answer

Funds typically flow indirectly through financial intermediaries such as banks, which receive deposits from lenders and then make loans to borrowers. This intermediary function helps to reduce risk for both parties and allows for more efficient allocation of resources in the economy. While financial markets can also facilitate the transfer of funds, they typically do so indirectly through intermediaries. Government agencies may play a role in certain types of lending, but they are not the primary source of funds flow in most markets.

Question 10

Which of the following assets is the most liquid?
A) money market mutual fund
B) computer
C) washing machine
D) U.S. Treasury bond

Accepted Answer

Money market mutual funds are considered the most liquid asset as they are easily and quickly converted to cash without significant price difference. Computer and washing machine are physical assets that are difficult to sell quickly and may not retain their value over time. U.S. Treasury bond is a relatively liquid asset, but selling it may involve transaction costs and can take some time.

Question 11

Which of the following is NOT a key financial service provided by the financial system?
A) risk sharing
B) profitability
C) liquidity
D) information

Accepted Answer

Profitability is not a financial service provided by the financial system, but rather a goal of individual financial institutions. The key financial services provided by the financial system are risk sharing, liquidity, and information.

Question 12

The bond market is important because
A) it is the major source of borrowed funds for U.S. business.
B) it provides a rate of return significantly greater than the stock market.
C) it provides foreign purchasers of U.S. products a means to exchange their currencies for U.S. dollars.
D) it provides a way for businesses and governments to borrow funds from savers and it is the market that determines interest rates.

Accepted Answer

The bond market is important because it provides a way for businesses and governments to borrow funds from savers and it is the market that determines interest rates. This is important for both the borrowers and the lenders as it allows them to achieve their financial goals. Additionally, the bond market influences other financial markets such as the stock market and the foreign exchange market.

Question 13

The financial system is primarily a means by which
A) borrowers can use savers' funds until the savers themselves need the funds.
B) money is put into circulation.
C) the government puts into operation its plans for the economy.
D) business firms distribute their goods.

Accepted Answer

The financial system serves as an intermediary between savers and borrowers, allowing borrowers to access funds from savers until the savers themselves need the funds. This is accomplished through channels such as banks, mutual funds, and insurance companies. The financial system does not directly put money into circulation, implement government plans for the economy, or distribute goods on behalf of business firms.

Question 14

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.

Accepted Answer

Liquidity refers to the ease with which an asset can be exchanged for money. Choices A and B are incorrect, as they do not capture the essence of liquidity, and choice D is incorrect because it confuses liquidity with market supply and demand.

Question 15

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.

Accepted Answer

Economists define risk as the chance that the value of financial assets will change from what you expect. The other options mentioned are not definitions of risk in economics.

Question 16

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.

Accepted Answer

When you buy a bond issued by Intel, Intel is taking on a liability to pay you interest and eventually repay the principal of the bond. Therefore, the bond is a liability to Intel. For you, the bond represents an asset because you are entitled to receive interest payments and eventually the repayment of the principal.

Question 17

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.

Accepted Answer

Financial intermediaries such as banks and other depository institutions accept deposits from savers and then lend these funds out to borrowers. They act as middlemen or intermediaries between savers and borrowers, facilitating the transfer of funds between the two. The New York and American Stock exchanges are not financial intermediaries, as they are trading platforms for stocks and securities. Financial intermediaries do not generally issue claims on individual borrowers directly to savers, but instead pool funds from multiple savers and use them to issue loans or invest in securities. Financial intermediaries are not owned and operated by the federal government, although they are subject to regulations from government agencies such as the Federal Reserve.

Question 18

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.

Accepted Answer

The financial system communicates information and connects individual savers with borrowers, making it easier for savers to invest their money without having to search for individual borrowers. However, it does not guarantee a return on investment, eliminate risk in the stock market, or reduce the difference in returns between different types of Treasury bonds.

Question 19

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.

Accepted Answer

Financial intermediaries serve as a bridge between savers and borrowers. They take in money from savers and lend it to borrowers to generate income from the interest rate spread. This process helps to promote economic growth and efficiency by matching borrowers with the necessary capital to invest in projects that will benefit society as a whole. Options A, C, and D are not primary functions of financial intermediaries.

Question 20

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.

Accepted Answer

The mortgage is a liability to the borrower because they are responsible for making payments on it. However, it is an asset to the bank because they hold a claim on the property until the mortgage is fully paid off. The bank can even sell the mortgage to another financial institution, which would generate revenue for the bank.

Quiz 1: Introducing Money and the Financial System

If you purchase a Treasury bond,the Treasury bond is

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

Which of the following is NOT a financial intermediary?

Which of the following is NOT a financial intermediary?

Financial markets

Which of the following is NOT a financial asset?

Securitization is the process of

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

Funds flow from lenders to borrowers

Which of the following assets is the most liquid?

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

The bond market is important because

The financial system is primarily a means by which

Economists define liquidity as

Economists define risk as

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

Financial intermediaries

By providing and communicating information,the financial system

The main role of financial intermediaries is to

If a bank grants you a mortgage,the mortgage is