Deck 1: Introducing Money and the Financial System

Question 1

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.

Answer 1

borrowers can use savers' funds until the savers themselves need the funds.

Question 2

Which of the following statements is correct?

A)The financial sector is a large source of jobs in the U.S. economy, but a relatively small source of jobs in other major economies.
B)The financial sector is a relatively small source of jobs in the U.S. economy, but a large source of jobs in other major economies.
C)The financial sector is a large source of jobs in the U.S. and other major economies.
D)The financial sector is a relatively small but important source of jobs in the U.S. and other major economies.

Answer 2

The financial sector is a relatively small but important source of jobs in the U.S. and other major economies.

Question 3

Which of the following is NOT a financial instrument?

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

Answer 3

Wachovia Bank

Question 4

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 other assets or for goods and services.
D)the difference between the total demand for an asset and the total supply of the asset.

Question 5

Which of the following assets is the most liquid?

A)Money market mutual fund
B)Computer
C)Washing machine
D)U.S. Treasury bond

Question 6

The financial system accounts for about what percentage of the U.S. economy's value added (GDP)?

A)2%
B)22%
C)42%
D)72%

Question 7

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 8

The experiences of Eastern Europe and the former Soviet Union have demonstrated that

A)using private networks in a financial system to channel funds from savers to borrowers is not a good approach.
B)using the government to channel funds from savers to borrowers is not a good approach.
C)the government can be very effective in increasing private saving.
D)savers are usually willing to lend greater amounts than borrowers wish to borrow.

Question 9

Economists define risk as

A)the difference between the interest rate borrowers pay and the interest rate lenders receive.
B)the degree of uncertainty of an asset's return.
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 10

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 11

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 12

Why would a saver with $10,000 be more likely to put it into a bank account than to lend it directly to a borrower?

A)Direct loans of that sort are not legal in the United States.
B)Banks pay higher interest rates on deposits than individual borrowers are likely to pay to individual lenders.
C)It is easier and less risky to save money in a bank account and allow the bank to serve as a go-between with potential borrowers.
D)Interest received from a bank is deductible on the federal income tax, whereas interest received from an individual borrower is not.

Question 13

All of the following were events in the financial world in the early 2000s EXCEPT

A)fears of deflation in Japan, the Eurozone, and the United States.
B)governments of Eastern Europe abandoned communism.
C)Argentina defaulted on its public debt.
D)the value of the dollar declined significantly.

Question 14

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.

Question 15

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 16

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 17

During the past twenty years

A)the volume of worldwide cross-border transactions in stocks and bonds grew very rapidly, but the volume of international bank lending declined.
B)the volume of international bank lending grew very rapidly, but the volume of worldwide cross-border transactions in stocks and bonds declined.
C)the volume of worldwide cross-border transactions in stocks and bonds and the volume of international bank lending both grew rapidly.
D)global investment in the stock of multinational corporations in 1990 was lower than it had been in 1980.

Question 18

Formerly in Eastern Europe and the Soviet Union, funds were transferred between savers and borrowers primarily through the

A)banking system.
B)stock market.
C)bond market.
D)government.

Question 19

The average pay for jobs is highest in which of the following sectors?

A)The financial sector
B)The wholesale and retail trade sector
C)The manufacturing sector
D)The construction sector

Question 20

The "international capital market" refers to

A)the London Stock Exchange.
B)the market for lending and borrowing across national boundaries.
C)the buying and selling of machinery and equipment across national boundaries.
D)the international section of the New York Stock Exchange.

Question 21

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)was dissolved in the late 1980s.

Question 22

Why are stories about movements in the money supply prominent in the news media?

Question 23

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 24

When a saver deposits funds in a bank, she may earn about 5% on the deposit. When the bank lends these funds out, it may charge the borrower 9% on the loan. Why don't the saver and the borrower get together directly and avoid the bank? In that situation wouldn't the saver be able to earn more on her funds and the borrower have to pay less to borrow these funds?

Question 25

Which of the following is the primary way that businesses raise funds externally?

A)Loans from financial institutions
B)Stocks
C)Bonds
D)Retained earnings

Question 26

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.

Question 27

To be useful, an economic theory should

A)be based on reasonable assumptions.
B)generate predictions that can be verified with actual data.
C)actually have its predictions corroborated with data.
D)be based on reasonable assumptions, generate predictions that can be verified with actual data, and actually have its predictions corroborated with data.

Question 28

The best way to determine if the assumptions of an economic model are appropriate is to

A)examine whether they are consistent with common sense.
B)determine whether they are similar to assumptions used in other economic models.
C)test them by comparing the predictions of the model to actual data.
D)consider whether the assumptions are simple enough to be understood by users of the model.

Question 29

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 30

Changes in the money supply are associated with all of the following EXCEPT changes in

A)prices.
B)interest rates.
C)output.
D)taxes.

Question 31

Which of the following is a trend towards globalization that has taken place since the 1980s?

A)International bank lending has grown by more than twenty-fold.
B)The market value of multinational corporations is in the trillions of dollars.
C)Cross-border transactions in stocks and bonds have grown by nearly 30% annually in the 1980s.
D)All of the above

Question 32

Which of the following was an important consequence of the regulatory reforms that followed the deposit insurance crisis of the 1980s and early 1990s?

A)An unprecedented consolidation of the U.S. banking industry
B)A series of bank panics
C)Unprecedentedly high interest rates
D)New restrictions on interstate banking

Question 33

If you had been advising one of the governments in Eastern Europe following the fall of Communism, would you have stressed the importance for economic growth of establishing strong financial markets or the importance of establishing a strong system of financial intermediaries? Explain.

Question 34

Which of the following rankings of sources of funds for businesses from the least important to the most important is correct?

A)Stock issues, bond issues, loans from financial institutions
B)Bond issues, stock issues, loans from financial institutions
C)Loans from financial institutions, stock issues, bond issues
D)Loans from financial institutions, bond issues, stock issues

Question 35

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 36

Economic analysis is useful in

A)explaining current developments.
B)predicting future developments.
C)both explaining current developments and predicting future developments.
D)explaining current developments, but not in predicting future developments.