I. Function of Financial Markets

Question 1

True or False. Examples of Financial Markets are banks, insurance companies, pension funds, etc.

Answer 1

False. Financial Intermediaries

Question 2

True or False. Examples of Financial Intermediaries are bonds, stock markets, etc.

Answer 2

False. Financial Market

Question 3

_____ perform the essential economic function of channeling funds from people who have saved surplus of funds to people who have shortage of funds.

Answer 3

Financial markets

Question 4

Who is considered the principal lender-savers?

Answer 4

households

Question 5

Who are the lender-savers?

Answer 5

households, business enterprise, governments (state/local), foreigners.

Question 6

Who are the borrower-spenders?

Answer 6

business firms, government, households, foreigners

Question 6

Who are the most important borrower-spenders?

Answer 6

businesses and government (federal)

Question 7

True or False. There are two ways in which lender-savers provide funds to borrower-spenders.

Answer 7

True. Direct and Indirect Finance

Question 8

A flow of funds pertaining to savers who deposit their funds to financial intermediaries to provide loans to their borrowers.

Answer 8

Indirect finance

Question 9

A flow of funds where borrowers borrow funds directly from lenders through financial markets by selling securities/financial instruments.

Answer 9

Direct Finance

Question 10

T or F. Securities are assets for those who sell/issue them and liabilities for those who buy them.

Answer 10

False. should be the other way around.

Question 11

Why is this channeling of funds from savers to spenders so important to the economy?

Answer 11

Because it (financial market) promotes economic efficiency – it allows funds to
move from people who have no productive investment opportunities to those who have such opportunities, thereby contributing to increased efficiency in the economy.

Question 12

T or F. Financial markets are only beneficial for those who have businesses.

Answer 12

False. Could be any other reason

Question 13

T or F. You can use financial markets for other agendas such as personal growth or purpose.

Answer 13

True

Question 14

What are the other functions of financial markets? (Why do financial markets have an important function in the economy?)

Answer 14

• Allow funds to move from people who lack productive investment opportunities to people with such opportunities.
• Financial markets contribute to higher production and economic efficiency.
• Directly improve the well-being of consumers (timing their purchases better).
• Provide funds to the youth who buy what they need and can eventually afford it w/o forcing them to wait until they have saved enough for the entire purchase price.

Question 15

How does channeling of funds directly benefit the consumers?

Answer 15

by allowing them to make purchases when they need them most - it allows them to time their purchases better.

Question 16

T or F. Financial Markets should operate efficiently in order to improve the welfare of everyone in the society.

Answer 16

True

Question 17

What is the basic function of financial markets?

Answer 17

to channel funds from savers who have an
excess of funds to spenders who have a shortage of funds.

Question 18

Illustrate the flow of funds through the Financial System

Answer 18

Illustrate daw

Question 19

T or F. It is easier to transfer funds from a person who has no investment opportunities to one who has them, even without financial markets.

Answer 19

False. Without financial markets, it is hard to transfer funds from a person who has no
investment opportunities to one who has them

Question 20

What would the borrower and lender gain upon setting up in the financial market?

Answer 20

Lender - earn interest
Borrower - funds (to spend on his/her purpose)

• self-made question

Question 21

T or F. The existence of financial markets is only beneficial if someone borrows for the purpose of increasing production in a business.

Answer 21

False. The existence of financial markets is also beneficial even if someone borrows for a purpose other than increasing production in a business.