Chapter 1 & 2

Question 1

are crucial to a healthy economy.

Answer 1

Well-functioning financial markets and financial intermediaries

Question 2

Financial markets

Answer 2

1) Channel funds from savers to spenders which… 2) promotes the efficient allocation of capital which…3) contributes to higher production and greater efficiency.

Question 3

Borrowers sell securities (stock or bond) directly to savers in the financial market. A security is a liability (debt) for the seller and an asset for the buyer.

Answer 3

Direct Finance

Question 4

The financial intermediary borrows funds from saver and makes loans to borrowers. As a result, financial intermediaries incur risk.

Answer 4

Indirect Finance

Question 5

new issues of a security are sold to initial buyers

Answer 5

Primary market

Question 6

where previously issued securities are traded

Answer 6

Secondary market

Question 7

a)Make securities more liquid; liquidity– how easily and quickly an asset can be converted to cash without losing significant value.
b)It’s where price is determined for securities sold in the primary market.

Answer 7

Secondary market

Question 8

where longer-term debt instruments (maturity of 1 year or greater) and equity instruments are traded

Answer 8

Capital market

Question 9

where only short-term debt instruments (maturity less than 1year) are traded

Answer 9

Money market

Question 10

U.S. Treasury Bills–used to finance the federal government, most liquid of the money market instruments, low risk of default, no interest payments but are sold at a discount (price below par or face value)

Answer 10

Money Market Instruments

Question 11

has declined before almost every recession

Answer 11

Monetary growth