Exam 1

Question 1

When the interest rate rises, people are:

Answer 1

more likely to save, that is, purchase a financial asset

Question 2

A rise in interest rates will cause short-term bond prices to:

Answer 2

fall less than long-term bond prices

Question 3

What is the most important asset category (in terms of $ value) in a money market mutual fund?

Answer 3

treasury bills

Question 4

In the US, the economic agent responsible for providing the 2nd most surplus to the indirect financial market for transfer to the borrower/spenders is normally:

Answer 4

business firms

Question 5

Risk that can be eliminated by diversification is referred to as:

Answer 5

idiosyncratic risk

Question 6

You tell the bank loan officer that you would like to borrow money to purchase a car. In reality you intend to use the money to pay off your losing bets made on the Kentucky Derby race. This is an example of:

Answer 6

the problem of adverse selection

Question 7

Which of the following agencies has some regulatory responsibility for the largest percentage of US commercial banks?

Answer 7

The FDIC

Question 8

The US Federal Reserve lends to the US Treasury by purchasing Treasury securities in the:

Answer 8

secondary market

Question 9

Liquidity would typically be highest for:

Answer 9

treasury bills

Question 10

The presence of transaction costs in financial markets explains, in part, why:

Answer 10

financial intermediaries and direct finance play such an important role in financial markets

Question 11

Whatever a society uses as money, the distinguishing characteristic is that is must

Answer 11

be generally acceptable as payment for goods and services or in the repayment of debt

Question 12

Even economists have difficulty defining money precisely because

Answer 12

the “moneyness” or liquidity of an asset is a matter of degree

Question 13

The currency component includes paper money and coins held in:

Answer 13

the hands of the nonbank public

Question 14

What is not a form of e-money?

Answer 14

Credit cards

Question 15

What are some financial intermediaries?

Answer 15

Insurance companies, BofA, Stock Market Index Fund

Question 16

In the macro economy funds mainly flow from savers to investors:

Answer 16

indirectly through financial intermediaries

Question 17

In the US, the lender of last resort is

Answer 17

the Federal Reserve

Question 18

The evolution of the payments system (what we utilize as money) has allowed for specialization. The most important economic benefit from specialization is that it

Answer 18

leads to an increase in the standard of living in an economy

Question 19

Other assets are inferior to money in the sense that

Answer 19

they generate transactions costs when they are exchanged for money

Question 20

Fiat money

Answer 20

money that would have no significant value if it were not being used as money

Question 21

The financial system performs the role of communicating information by

Answer 21

incorporating all available information into the prices of financial assets

Question 22

Securitization is the process of

Answer 22

converting non liquid financial assets into liquid financial assets

Question 23

A $2 bill is an examle of

Answer 23

fiat money

Question 24

To be considered short-term, debt instruments have a maturity no longer than

Answer 24

1 year

Question 25

Compared to interest rates on long-term US agency debt, interest rates on short-term US agency debt tends to fluctuate ______ and is usually _____ over time.

Answer 25

more: lower

Question 26

The interest rate that the Fed targets to indicate its stance on monetary policy is known as:

Answer 26

the Fed Funds Rate