Question 1

The U.S. Treasury Department is primarily responsible for the amount of money that is created in the U.S. economy.

Accepted Answer

The Federal Reserve, not the Treasury Department, is primarily responsible for creating and controlling the amount of money in the U.S. economy. The Treasury Department is responsible for issuing government securities and managing the government's finances.

Question 2

Derivative securities may be used to speculate on the future price direction of the underlying financial assets or to reduce price risk associated with holding the underlying financial assets.

Accepted Answer

Derivative securities, such as options and futures, can be used for both speculative purposes (betting on the future price direction of the underlying asset) and to hedge or reduce risk associated with holding the underlying asset.

Question 3

The principle of finance that "reputation matters" implies that for institutions or businesses to be successful, they must have the trust and confidence of their customers, employees, and owners, as well as the community and society within which they operate.

Accepted Answer

The statement is true because reputation influences customer loyalty, employee satisfaction and retention, investment decisions, and regulatory compliance, among other factors that affect the financial performance of a company.

Question 4

Three financial system components are the U.S. Treasury, financial institutions, and financial markets.

Accepted Answer

The answer of Three financial system components are the U.S....

Question 5

Markets have informational efficiency.

Accepted Answer

Markets are generally considered to have informational efficiency, meaning that prices reflect all available information about a particular asset or security. However, there are different degrees of efficiency, with some markets being more efficient than others.

Question 6

Because the relative values of currencies may change, firms cannot use the currency exchange markets to reduce the risk of holding too much of certain currencies.

Accepted Answer

Firms can use currency exchange markets to reduce the risk of holding too much of certain currencies by exchanging them for other currencies with lower risk. However, the relative values of currencies may change and this can affect the effectiveness of this strategy.

Question 7

Money markets are where debt securities with maturities of one year or more are issued and traded.

Accepted Answer

Money markets are where debt securities with maturities of one year or less are issued and traded. Securities with maturities of one year or more are typically traded in the bond market.

Question 8

The principle of finance that "reputation matters" sometimes is harmed by the different objectives of owners and managers.

Accepted Answer

Owners and managers may have different goals and priorities, with owners often focused on maximizing profits and managers focused on maintaining their status and job security. In some cases, managers may make short-term decisions that harm the company's reputation in order to meet financial goals, which can ultimately hurt the company in the long run.

Question 9

Individuals and businesses hold money for purchases or payments they expect to make in the near future.

Accepted Answer

Individuals and businesses often hold money in order to make purchases or payments in the near future. This is a common practice for managing cash flow and ensuring that there is enough money available to cover upcoming expenses.

Question 10

In the United States, the central bank is the Federal Reserve System.

Accepted Answer

The Federal Reserve System, also known as the Fed, is the central bank of the United States.

Question 11

Financial system functions include accumulating savings and lending funds.

Accepted Answer

The financial system includes institutions such as banks and investment firms that allow individuals and businesses to save money and lend funds to those in need of financing. Therefore, the statement is true.

Question 12

Money markets are the markets where generally short-term assets are traded.

Accepted Answer

Money markets primarily deal with short-term assets such as Treasury bills, commercial paper, certificates of deposit, and repurchase agreements. These assets generally have maturities of less than one year.

Question 13

One of the most significant functions of the financial system is the creation of money, which serves as a medium of exchange.

Accepted Answer

The financial system creates money through various mechanisms such as fractional reserve banking, government printing of currency, and electronic transfers. Money acts as a medium of exchange in the economy, allowing individuals to buy and sell goods and services without bartering directly.

Question 14

The role of financial markets is to market and facilitate the transfer of financial assets.

Accepted Answer

Financial markets exist to enable the buying and selling of financial assets such as bonds, stocks, currencies, commodities, and derivatives, among other things. These markets offer investors and companies a range of tools for managing risk, raising capital, and generating profits. The buying and selling of financial assets are facilitated by dealers, brokers, and exchanges.

Question 15

An effective financial system is a complex mix of government and policy makers, a monetary system, financial institutions, and financial markets that interact to expedite the flow of financial capital from savings into investment.

Accepted Answer

An effective financial system is indeed a complex mix of government and policy makers, a monetary system, financial institutions, and financial markets that interact to expedite the flow of financial capital from savings into investment.

Question 16

Money markets are markets where equity securities and debt securities with maturities of greater than one year are traded.

Accepted Answer

Money markets are markets where short-term debt securities with maturities of one year or less are traded. Equity securities are traded in stock markets.

Question 17

Capital markets are markets where equity securities and debt securities with maturities of greater than one year are traded.

Accepted Answer

Capital markets are also known as securities markets and primarily deal in long-term securities such as stocks and bonds.

Question 18

The principle of finance that "management objectives may differ from owner objectives" can be resolved by increasing manager salaries.

Accepted Answer

Increasing manager salaries may incentivize them to align their objectives with those of the owners, but it does not guarantee that their objectives will necessarily be the same. Additionally, there may be other factors at play, such as differing risk preferences or time horizons, that make it difficult to fully align owner and manager objectives. Other solutions may include explicit contracts, monitoring mechanisms, or corporate governance structures.

Question 19

The secondary securities markets are involved in creating and issuing new securities, mortgages, and other claims to wealth.

Accepted Answer

The secondary securities market involves the buying and selling of existing securities, mortgages, and other claims to wealth. The primary securities market is involved in creating and issuing new securities.

Question 20

The role of the monetary system is to print and circulate currency.

Accepted Answer

While printing and circulating currency is a function of the monetary system, it also includes other important roles such as regulating interest rates, managing inflation, and controlling the money supply.

Quiz 1: The Financial Environment