chap2_test bank 1-25Q

Question 1

Question 1: What is the role of the financial system?
A) True
B) False

Answer 1

Answer: A
Explanation: The financial system indeed gathers money from various sources like people, businesses, and government and channels it to those who need it, making option A true.

Question 2

Question 2: Is the financial system just a collection of financial markets?
A) True
B) False

Answer 2

Answer: B
Explanation: The financial system includes financial markets, but it is not limited to just that. It also encompasses financial institutions and services, making option B false.

Question 3

Question 3: Does purchasing a house require a cash purchase without a financial market?
A) True
B) False

Answer 3

Explanation: Without a financial market, purchasing a house would typically require a cash purchase, as you would not have access to mortgage loans or other financing options, so option A is true.

Question 4

Question 4: Are retail markets where direct transactions take place typically have a minimum transaction size of $1 million?
A) True
B) False

Answer 4

Answer: B
Explanation: Retail markets are not typically associated with such a high minimum transaction size. They are designed for smaller investors, so option B is true.

Question 5

Question 5: Do major buyers and sellers of securities in direct financial markets include various entities, including commercial banks, large corporations, the federal government, hedge funds, and some wealthy individuals?
A) True
B) False

Answer 5

Answer: A
Explanation: Yes, major buyers and sellers of securities in direct financial markets encompass all the mentioned entities, making option A true.

Question 6

Question 6: Are governments the principal lender-savers in the economy?
A) True
B) False

Answer 6

Answer: B
Explanation: Governments are typically not the principal lender-savers in the economy; they may borrow or lend in specific circumstances, but this is not their primary role. So, option B is true.

Question 7

Question 7: Are businesses the principal borrower-spenders in the economy?
A) True
B) False

Answer 7

Answer: A
Explanation: Yes, businesses are often the principal borrower-spenders in the economy as they take loans to invest in their operations and spend on various business activities, making option A true.

Question 8

Question 8: Do primary markets provide the means for investors to sell their securities to other investors?
A) True
B) False

Answer 8

Answer: B
Explanation: Primary markets are where securities are first issued and sold to investors by the issuer. They do not provide the means for investors to sell their securities to other investors directly, so option B is true.

Question 9

Question 9: Are secondary markets where the owners of outstanding securities can resell them to other investors and provide a means for investors to convert their securities into cash?
A) True
B) False

Answer 9

Answer: A
Explanation: Yes, secondary markets are where existing securities are traded between investors, allowing them to resell their securities and convert them into cash, making option A true.

Question 10

Question 10: Can direct financial markets be broadly labeled as wholesale markets for funding?
A) True
B) False

Answer 10

Answer: A
Explanation: Yes, direct financial markets can be broadly considered as wholesale markets for funding as they often involve large transactions and are used by institutional investors and organizations to raise capital, making option A true.

Question 11

Question 11: Is a privately held corporation that borrows from a regional commercial bank an example of a direct market transaction?
A) True
B) False

Answer 11

Answer: B
Explanation: This scenario involves borrowing from a commercial bank, which is an indirect market transaction, so option B is true.

Question 12

Question 12: Did the Financial Services Modernization Act of 1999 prohibit commercial banks from engaging in investment banking activities?
A) True
B) False

Answer 12

Answer: B
Explanation: The Financial Services Modernization Act of 1999, also known as the Gramm-Leach-Bliley Act, actually removed the Glass-Steagall restrictions and allowed commercial banks to engage in investment banking activities, making option B true.

Question 13

Question 13: Are major money center banks in the U.S allowed to provide investment banking services today?
A) True
B) False

Answer 13

Answer: A
Explanation: Yes, major money center banks in the U.S are allowed to provide investment banking services today, so option A is true.

Question 14

Question 14: Is a primary market any market in which owners of outstanding securities can resell them to other investors?
A) True
B) False

Answer 14

Answer: B
Explanation: A primary market is a financial market where new security issues are sold by companies directly to investors. A secondary market is where owners of existing securities can resell them to other investors, so option B is true.

Question 15

Question 15: Are most securities sales on the New York Stock Exchange considered secondary market transactions?
A) True
B) False

Answer 15

Answer: A
Explanation: Yes, most securities sales on the New York Stock Exchange are indeed secondary market transactions where existing securities are traded between investors, making option A true.

Question 16

Question 16: Does an active secondary market for a security enhance the price of that security in the primary market?
A) True
B) False

Answer 16

Answer: A
Explanation: An active secondary market can indeed enhance the price of a security in the primary market by increasing its liquidity and attractiveness to investors, so option A is true.

Question 17

Question 17: Is the downside to a private placement transaction that it does not require the fees and expenses associated with an SEC registration?
A) True
B) False

Answer 17

Answer: B
Explanation: The downside of a private placement is that it often involves higher fees and expenses than a public offering due to the need for legal and marketing efforts, making option B true.

Question 18

Question 18: Are brokers market specialists who do not bear the risk of owning securities?
A) True
B) False

Answer 18

Answer: A
Explanation: Brokers typically facilitate securities transactions but do not take ownership or bear the risk of the securities, making option A true.

Question 19

Question 19: Does the term “money market” reflect the idea that the instruments traded in the money market are highly marketable and easily converted into cash?
A) True
B) False

Answer 19

Answer: A
Explanation: Yes, the term “money market” is used because the instruments traded in this market are highly liquid and easily converted into cash, making option A true.

Question 20

Question 20: Are equities with maturities greater than one year generally traded in the capital market?
A) True
B) False

Answer 20

Answer: A
Explanation: Equities with maturities greater than one year are typically traded in the capital market, which deals with longer-term investments, making option A true.

Question 21

Question 21: Do most companies use indirect market funding from financial institutions to obtain financing?
A) True
B) False

Answer 21

Answer: A
Explanation: Yes, many companies obtain financing indirectly through financial institutions, such as banks, making option A true.

Question 22

Question 22: Do business finance companies obtain the majority of their funds by selling equity?
A) True
B) False

Answer 22

Answer: B
Explanation: Business finance companies typically obtain funds through borrowing or lending, not by selling equity, making option B true.

Question 23

Question 23: Is the nominal rate of interest the rate of interest that is adjusted for inflation?
A) True
B) False

Answer 23

Answer: B
Explanation: The nominal rate of interest is the stated interest rate, and it is not adjusted for inflation. The real interest rate takes inflation into account, making option B true.

Question 24

Question 24: Are real rates of interest perfectly observable in the financial markets?
A) True
B) False

Answer 24

Answer: B
Explanation: Real rates of interest are not always perfectly observable in the financial markets, as they require an adjustment for inflation, which can be influenced by various factors, making option B true.

Question 25

Question 25: Is it impossible for the nominal rate of interest to be less than the real rate of interest?
A) True
B) False

Answer 25

Answer: B
Explanation: It is possible for the nominal rate of interest to be less than the real rate of interest when inflation erodes the purchasing power of money, making option B true.

Question 26

Question 26: Why is it difficult for individuals to participate in the direct financial markets?

A) The direct financial markets are retail markets with a typical minimum transaction size of $1 million.
B) The direct financial markets are wholesale markets with a typical minimum transaction size of $1 million.
C) Major buyers and sellers of securities in indirect financial markets include commercial banks, large corporations, the federal government, hedge funds, and some wealthy individuals.
D) Major buyers and sellers of securities in direct financial markets do not include commercial banks, large corporations, the federal government, hedge funds, and some wealthy individuals.

Answer 26

Answer: B
Explanation: Direct financial markets are typically wholesale markets with high minimum transaction sizes, making it difficult for individual investors to participate, which aligns with option B

Question 27

Question 27: What does an economy with a large flow of funds require?
A) a lot of gold reserves.
B) a frictionless market.
C) an efficient financial system.
D) all of the above.

Answer 27

Answer: C
Explanation: An economy with a large flow of funds requires an efficient financial system to allocate those funds effectively, as mentioned in option C.

Question 28

Question 28: What is part of both financial markets and financial institutions?
A) the U.S. Treasury.
B) the financial system.
C) the SEC.
D) none of the above

Answer 28

Answer: B
Explanation: Financial markets and financial institutions are both part of the broader financial system, as indicated in option B.

Question 29

Question 29: Where does much of the money that funds business loans in an economy originate from?
A) households
B) the U.S. government
C) small businesses
D) none of the above

Answer 29

Answer: A
Explanation: Much of the money that funds business loans in an economy comes from savings by households, as mentioned in option A.