Test 1 Quizzes Flashcards
We use ______________ to transfer resources from savers to investors and to transfer risk to those who are best equipped to bear it.
Financial Instruments
__________________ monitor and stabilize the economy.
Central banks
The _____________________ act (passed in 2010) is the largest U.S. regulatory change to the financial system since the 1930s.
Dodd-Frank
The reason your repayments total more than the original loan amount is that you are paying interest to compensate the lender for _____________.
The time during which you used the funds
Risk requires _____________________.
Compensation
Which of the following is an example of paying someone else to shoulder a risk you don’t want to take?
Purchasing car insurance
Stock exchanges are organized to eliminate ____________________.
The need for costly information gathering
In order for people to be willing to participate in a market, they must __________________.
Perceive it as fair
Financial markets gather information from a large number of individual participants and aggregate it into ___________ that signals what is valuable and what is not.
A set of prices
_______________ improves welfare.
Stability
Today, much of the activity that once occurred in big-city financial exchanges is handled by ______________.
Electronic networks
Which of the following is NOT a characteristic of money?
Source of interest They are: Means of payment Unit of account Store of wealth
Funding liquidity refers to a financial institution’s ability to _______________________.
Borrow money to buy securities or make loans
___________ has been the most common commodity-based money.
Gold
In order for a commodity-based currency to be successful as a means of payment, unit of account, and store of wealth each of the following characteristics is important EXCEPT ________________.
It must be useable in some form by most people
It must be durable
It must have a high value relative to its weight and size
A government must be able and willing to control the quantity
A government must be able and willing to control the quantity
Currency that has no commodity backing it up and is valuable primarily because of a government’s order or edict is referred to as ___________ currency.
Fiat
What is the most common downfall of government-issued paper currencies (as demonstrated by two examples presented in the book)?
The quantity of the currency issued becomes excessive
What is the primary reason that fiat currencies “work” as a means of payment?
The government that issues them mandate that businesses & individuals accept them
For most individuals, the most common form of electronic funds transfer is _______________.
The automated clearing house transaction
A ________________ is a promise by a bank to lend the cardholder money with which to make purchases.
Credit card
Which of the following is NOT included in the measure of M2? M1 Savings deposits (accounts) Retail money market mutual fund shares M0
M0
Compared to the period of 1960 to 1980, what happened during the period of 1990 to 2009?
Growth in M2 stopped being a useful tool for forecasting inflation
What function do financial instruments play that money does not?
They allow for the transfer of risk
Which of the following can a wheat farmer use to mitigate the risk of falling grain prices?
A wheat futures contract
A(n) _________________ is the person or institution on the other side of a contract.
Counterparty
Which of the following is an example of a derivative instrument? Stock Bond Options Treasury bonds
Options
In order to provide liquidity, financial markets need to be structured in a way that ___________.
Transaction costs are low
________________are where a borrower obtains funds directly from a lender by selling newly issued securities.
Primary financial markets
What is the primary difference between an over-the-counter market and an electronic communication network?
Most trades in an over-the-counter network involve broker/dealers, whereas trades in electronic communication networks do not
In order for financial markets to function effectively, _______________________.
I. Transaction costs must be kept low
II. The information the market pools and communicates must be accurate and widely available
III. The promises of borrowers to pay lenders in the market must be credible
I, II, and III
Financial institutions are also known as __________________________.
Financial Intermediaries
Financial institutions _________________________.
Are regulated by the Federal Communications Commission
Reduce transaction costs by specializing in the issuance of standardized securities
Increase the problems caused by asymmetric information
Make short-term loans while taking in long-term deposits
Reduce transaction costs by specializing in the issuance of standardized securities
_________________________ invest individual and company contributions in stocks, bonds, and real estate in order to provide payments to retired workers.
Pension funds
