Quiz 1 Practice Questions

Question 1

Every financial market has the following characteristic.
A) It determines the level of interest rates.
B) It allows common stock to be traded.
C) It allows loans to be made.
D) It channels funds from lenders-savers to borrowers-spenders.

Answer 1

D

Question 2

Well-functioning financial markets
A) cause inflation.
B) eliminate the need for indirect finance.
C) cause financial crises.
D) allow the economy to operate more efficiently

Answer 2

D

Question 3

Financial markets improve economic welfare because
A) they channel funds from investors to savers.
B) they allow consumers to time their purchase better.
C) they weed out inefficient firms.
D) they eliminate the need for indirect finance.

Answer 3

B

Question 4

6) The principal lender-savers are
A) governments.
B) businesses.
C) households.
D) foreigners

Answer 4

C

Question 5

10) Which of the following can be described as involving direct finance?
A) A corporation issues new shares of stock.
B) People buy shares in a mutual fund.
C) A pension fund manager buys a short-term corporate security in the secondary market.
D) An insurance company buys shares of common stock in the over-the-counter markets

Answer 5

A

Question 6

Which of the following can be described as direct finance?
A) You take out a mortgage from your local bank.
B) You borrow $2,500 from a friend.
C) You buy shares of common stock in the secondary market.
D) You buy shares in a mutual fund.

Answer 6

B

Question 7

14) Securities are ________ for the person who buys them, but are ________ for the individual or firm that issues them.
A) assets; liabilities
B) liabilities; assets
C) negotiable; nonnegotiable
D) nonnegotiable; negotiable

Answer 7

A

Question 8

1) Which of the following statements about the characteristics of debt and equity is FALSE?
A) They can both be long-term financial instruments.
B) They can both be short-term financial instruments.
C) They both involve a claim on the issuer’s income.
D) They both enable a corporation to raise funds.

Answer 8

B- Debt instruments can indeed be short-term (such as treasury bills or commercial paper), but equity instruments, like stocks, are generally considered long-term investments, as they represent ownership in a company. Short-term financial instruments are typically related to debt, not equity.

Question 9

7) When I purchase ________, I own a portion of a firm and have the right to vote on issues important to the firm and to elect its directors.
A) bonds
B) bills
C) notes
D) stock

Answer 9

D

Question 10

Equity holders are a corporation’s ________. That means the corporation must pay all of its debt holders before it pays its equity holders.
A) debtors
B) brokers
C) residual claimants
D) underwriters

Answer 10

C- have claims on residual earnings

Question 11

10) A financial market in which previously issued securities can be resold is called a ________ market.
A) primary
B) secondary
C) tertiary
D) used securities

Answer 11

B

Question 12

An important function of secondary markets is to
A) make it easier to sell financial instruments to raise funds.
B) raise funds for corporations through the sale of securities.
C) make it easier for governments to raise taxes.
D) create a market for newly constructed houses.

Answer 12

A

Question 13

18) Secondary markets make financial instruments more
A) solid.
B) vapid.
C) liquid.
D) risky.

Answer 13

C

Question 14

asset is
A) an asset that can easily and quickly be sold to raise cash.
B) a share of an ocean resort.
C) difficult to resell.
D) always sold in an over-the-counter market.

Answer 14

A

Question 15

31) U.S. Treasury bills are traded in the
A) money market
B) stock market
C) capital market
D) equity market

Answer 15

A- The money market deals with short-term debt instruments, and Treasury bills are short-term securities issued by the U.S. government with maturities of one year or less.

Question 16

1) Prices of money market instruments undergo the least price fluctuations because of
A) the short terms to maturity for the securities.
B) the heavy regulations in the industry.
C) the price ceiling imposed by government regulators.
D) the lack of competition in the market.

Answer 16

A

Question 17

14) Bonds issued by state and local governments are called ________ bonds.
A) corporate
B) Treasury
C) municipal
D) commercial

Answer 17

C

Question 18

22) ________ bonds allow the holder to change them into a specific number of shares of stock at any time up to the maturity date.
A) Convertible
B) Treasury
C) Municipal
D) Commercial

Answer 18

A

Question 19

2) One reason for the extraordinary growth of foreign financial markets is
A) decreased trade.
B) increases in the pool of savings in foreign countries.
C) the recent introduction of the foreign bond.
D) slower technological innovation in foreign markets.

Answer 19

C

Question 20

3) Bonds that are sold in a foreign country and are denominated in the country’s currency in which they are sold are known as
A) foreign bonds.
B) Eurobonds.
C) equity bonds.
D) country bonds.

Answer 20

A

Question 21

4) Bonds that are sold in a foreign country and are denominated in a currency other than that of the country in which it is sold are known as
A) foreign bonds.
B) Eurobonds.
C) equity bonds.
D) country bonds.

Answer 21

B

Question 22

If Microsoft sells a bond in London and it is denominated in dollars, the bond is a
A) Eurobond.
B) foreign bond.
C) British bond.
D) currency bond.

Answer 22

A

Question 23

8) If Volkswagen, a German company, sells a euro-denominated bond in London, the bond is a
A) Eurobond.
B) foreign bond.
C) currency bond.
D) Duetsche bond.

Answer 23

A

Question 24

11) Risk sharing is profitable for financial institutions due to
A) low transactions costs.
B) asymmetric information.
C) adverse selection.
D) moral hazard.

Answer 24

A- Financial institutions can profit from risk sharing because they benefit from economies of scale and expertise that allow them to lower transaction costs. By pooling and managing risk efficiently, they can create products that appeal to different risk preferences and expand their business.

Question 25

13) If the bad credit risks actively seek out a loan and are thus more likely to be selected, then financial intermediaries face the problem of A) moral hazard. B) adverse selection. C) free-riding. D) costly state verification.

Answer 25

B: adverse selection is when the sellers have information that buyers don’t or vise versa

Question 26

19) Conflicts of interest are a type of ________ problem that can happen when an institution provides multiple services. A) adverse selection B) free-riding C) discounting D) moral hazard

Answer 26

D

Question 27

1) To an economist, ________ is anything that is generally accepted in payment for goods or services or in the repayment of debt. A) wealth B) income C) money D) credit

Answer 27

C

Question 28

 5) The total collection of pieces of property that serve to store value is a person's A) wealth. B) income. C) money. D) credit.

Answer 28

A

Question 29

12) Which of the following is a TRUE statement? A) Money and income are flow variables. B) Money is a flow variable. C) Income is a flow variable. D) Money and income are stock variables.

Answer 29

C

Question 30

13) Which of the following statements uses the economists' definition of money? A) I plan to earn a lot of money over the summer. B) Betsy is rich—she has a lot of money. C) I hope that I have enough money to buy my lunch today. D) The job with New Company gave me the opportunity to earn more money.

Answer 30

C

Question 31

14) When we say that income is a flow variable, we mean that A) we must attach a time period to the measure for it to make sense. B) it is measured at a given point in time. C) it moves through our hands quickly. D) the value is constantly changing.

Answer 31

A

Question 32

Of money's three functions, the one that distinguishes money from other assets is its function as a A) store of value. B) unit of account. C) standard of deferred payment. D) medium of exchange.

Answer 32

D

Question 33

4) Compared to an economy that uses a medium of exchange, in a barter economy A) transaction costs are higher. B) transaction costs are lower. C) liquidity costs are higher. D) liquidity costs are lower

Answer 33

A

Question 34

7) Which of the following statements best explains how the use of money in an economy increases economic efficiency? A) Money increases economic efficiency because it is costless to produce. B) Money increases economic efficiency because it discourages specialization. C) Money increases economic efficiency because it decreases transactions costs. D) Money cannot have an effect on economic efficiency.

Answer 34

C

Question 35

9) Money ________ transaction costs, allowing people to specialize in what they do best. A) reduces B) increases C) enhances D) eliminates

Answer 35

A

Question 36

14) Kevin purchasing concert tickets with a $100 bill is an example of the ________ function of money. A) medium of exchange B) unit of account C) store of value D) specialization

Answer 36

A

Question 37

15) When money prices are used to facilitate comparisons of value, money is said to function as a A) unit of account. B) medium of exchange. C) store of value. D) payments-system ruler

Answer 37

A

Question 38

20) Because it is a unit of account, money A) increases transaction costs. B) reduces the number of prices that need to be calculated. C) does not earn interest. D) discourages specialization.

Answer 38

B

Question 39

21) Dennis notices that jackets are on sale for $99. In this case money is functioning as a A) medium of exchange. B) unit of account. C) store of value. D) payments-system ruler.

Answer 39

C- money is being used to express the price of the jacket allowing for valuation and comparison of goods and services

Question 40

22) As a store of value, money A) does not earn interest. B) cannot be a durable asset. C) must be currency. D) is a way of saving for future purchases.

Answer 40

D

Question 41

25) Increasing transactions costs of selling an asset make the asset A) more valuable. B) more liquid. C) less liquid. D) more moneylike.

Answer 41

C

Question 42

28) Ranking assets from most liquid to least liquid, the correct order is A) savings bonds; house; currency. B) currency; savings bonds; house. C) currency; house; savings bonds. D) house; savings bonds; currency.

Answer 42

B

Question 43

29) People hold money even during inflationary episodes when other assets prove to be better stores of value. This can be explained by the fact that money is A) extremely liquid. B) a unique good for which there are no substitutes. C) the only thing accepted in economic exchange. D) backed by gold.

Answer 43

A

Question 44

32) A hyperinflation is A) a period of extreme inflation generally greater than 50% per month. B) a period of anxiety caused by rising prices. C) an increase in output caused by higher prices. D) impossible today because of tighter regulations.

Answer 44

A

Question 45

5) Paper currency that has been declared legal tender but is not convertible into coins or precious metals is called ________ money. A) commodity B) fiat C) electronic D) funny

Answer 45

B

Question 46

6) When paper currency is decreed by governments as legal tender, legally it must be A) paper currency backed by gold. B) a precious metal such as gold or silver. C) accepted as payment for debts. D) convertible into an electronic payment.

Answer 46

C

Question 47

18) In explaining the evolution of money A) government regulation is the most important factor. B) commodity money, because it is valued more highly, tends to drive out paper money. C) new forms of money evolve to lower transaction costs. D) paper money is always backed by gold and therefore more desirable than checks.

Answer 47

C

Question 48

19) A feature of cryptocurrencies that make them attractive as a medium of exchange is A) anonymous transactions. B) volatility of value. C) heavy regulations by the central bank. D) wide acceptance by businesses.

Answer 48

A

Question 49

20) Bitcoin and other cryptocurrencies fail to satisfy which two of the three functions of money? A) unit of account and store of value B) medium of exchange and unit of account C) medium of exchange and store of value D) bitcoin satisfies all of the functions of money

Answer 49

A- but really fail for all three checks of if something is money

Question 50

1) Recent financial innovation makes the Federal Reserve's job of conducting monetary policy A) easier, since the Fed now knows what to consider money. B) more difficult, since the Fed now knows what to consider money. C) easier, since the Fed no longer knows what to consider money. D) more difficult, since the Fed no longer knows what to consider money.

Answer 50

D

Question 51

3) Monetary aggregates are A) measures of the money supply reported by the Federal Reserve. B) measures of the wealth of individuals. C) never redefined since "money" never changes. D) reported by the Treasury Department annually.

Answer 51

A

Question 52

4) ________ is the narrowest monetary aggregate that the Fed reports. A) M0 B) M1 C) M2 D) M3

Answer 52

M1: M1 is narrower and more liquid than M2, M1 is part of M2, M1 includes currency, checking accounts, travelers checks, and other checking deposits but not savings that is part of M2 only

Question 53

8) The M1 measure of money includes A) small denomination time deposits. B) traveler's checks. C) money market deposit accounts. D) money market mutual fund shares.

Answer 53

b

Question 54

9) Which of the following is NOT included in the measure of M1? A) NOW accounts B) demand deposits C) currency D) savings deposits

Answer 54

D

Question 55

10) Which of the following is NOT included in the M1 measure of money but is included in the M2 measure of money? A) currency B) traveler's checks C) demand deposits D) small-denomination time deposits

Answer 55

D

Question 56

11) Which of the following is included in both M1 and M2? A) currency B) savings deposits C) small-denomination time deposits D) money market deposit accounts

Answer 56

A

Question 57

24) Which of the following statements accurately describes the two measures of the money supply? A) The two measures do not move together, so they cannot be used interchangeably by policymakers. B) The two measures' movements closely parallel each other, even on a month-to-month basis. C) Short-run movements in the money supply are extremely reliable. D) M2 is the narrowest measure the Fed reports.

Answer 57

B

Question 58

Every financial market has the following characteristic. It allows loans to be made. It allows common stock to be traded. It determines the level of interest rates. It channels funds from lenders-savers to borrowers-spenders.

Answer 58

It channels funds from lenders-savers to borrowers-spenders.

Question 59

The principal lender-savers are households businesses. governments. foreigners.

Answer 59

households

Question 60

Securities are ________ for the person who buys them, but are _________ for the individual or firm that issues them. assets; liabilities nonnegotiable; negotiable liabilities; assets negotiable; nonnegotiable

Answer 60

assets; liabilities

Question 61

Which of the following statements about the characteristics of debt and equities is TRUE? The income from bonds is typically more variable than that from equities. Bond holders are residual claimants. They can both be long-term financial instruments. Bonds pay dividends.

Answer 61

They can both be long-term financial instruments.

Question 62

Equity holders are a corporation’s _________. That means the corporation must pay all of its debt holders before it pays its equity holders. brokers debtors residual claimants underwriters

Answer 62

residual claimants

Question 63

_______ are the time and resources spent trying to exchange goods and services. Transaction costs Bargaining costs Contracting costs Barter costs

Answer 63

Transaction costs

Question 64

Money _______ transaction costs, allowing people to specialize in what they do best. increases eliminates reduces enhances

Answer 64

reduces

Question 65

Increasing transactions costs of selling an asset make the asset more money like less liquid. more liquid. more valuable.

Answer 65

less liquid.

Question 66

The Federal Reserve publishes the data on the monetary aggregates each week on Thursday. Wednesday. Friday. Monday

Answer 66

Thursday.

Question 67

When paper currency is decreed by governments as legal tender, legally it must be convertible into an electronic payment. paper currency backed by gold. accepted as payment for debts. a precious metal such as gold or silver.

Answer 67

accepted as payment for debts.

Question 68

If merchants in the country Zed choose to close their doors, preferring to be stuck with rotting merchandise rather than worthless currency, then one can conclude that Zed is experiencing a hyperinflation superdeflation. hyperdeflation. disinflation.

Answer 68

hyperinflation