Test 1 Quizzes

Question 1

We use ______________ to transfer resources from savers to investors and to transfer risk to those who are best equipped to bear it.

Answer 1

Financial Instruments

Question 2

__________________ monitor and stabilize the economy.

Answer 2

Central banks

Question 3

The _____________________ act (passed in 2010) is the largest U.S. regulatory change to the financial system since the 1930s.

Answer 3

Dodd-Frank

Question 4

The reason your repayments total more than the original loan amount is that you are paying interest to compensate the lender for _____________.

Answer 4

The time during which you used the funds

Question 5

Risk requires _____________________.

Answer 5

Compensation

Question 6

Which of the following is an example of paying someone else to shoulder a risk you don’t want to take?

Answer 6

Purchasing car insurance

Question 7

Stock exchanges are organized to eliminate ____________________.

Answer 7

The need for costly information gathering

Question 8

In order for people to be willing to participate in a market, they must __________________.

Answer 8

Perceive it as fair

Question 9

Financial markets gather information from a large number of individual participants and aggregate it into ___________ that signals what is valuable and what is not.

Answer 9

A set of prices

Question 10

_______________ improves welfare.

Answer 10

Stability

Question 11

Today, much of the activity that once occurred in big-city financial exchanges is handled by ______________.

Answer 11

Electronic networks

Question 12

Which of the following is NOT a characteristic of money?

Answer 12

Source of interest
They are:
Means of payment
Unit of account
Store of wealth

Question 13

Funding liquidity refers to a financial institution’s ability to _______________________.

Answer 13

Borrow money to buy securities or make loans

Question 14

___________ has been the most common commodity-based money.

Answer 14

Gold

Question 15

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

Answer 15

A government must be able and willing to control the quantity

Question 16

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.

Answer 16

Fiat

Question 17

What is the most common downfall of government-issued paper currencies (as demonstrated by two examples presented in the book)?

Answer 17

The quantity of the currency issued becomes excessive

Question 18

What is the primary reason that fiat currencies “work” as a means of payment?

Answer 18

The government that issues them mandate that businesses & individuals accept them

Question 19

For most individuals, the most common form of electronic funds transfer is _______________.

Answer 19

The automated clearing house transaction

Question 20

A ________________ is a promise by a bank to lend the cardholder money with which to make purchases.

Answer 20

Credit card

Question 21

Which of the following is NOT included in the measure of M2?
M1
Savings deposits (accounts)
Retail money market mutual fund shares
M0

Answer 21

M0

Question 22

Compared to the period of 1960 to 1980, what happened during the period of 1990 to 2009?

Answer 22

Growth in M2 stopped being a useful tool for forecasting inflation

Question 23

What function do financial instruments play that money does not?

Answer 23

They allow for the transfer of risk

Question 24

Which of the following can a wheat farmer use to mitigate the risk of falling grain prices?

Answer 24

A wheat futures contract

Question 25

A(n) _________________ is the person or institution on the other side of a contract.

Answer 25

Counterparty

Question 26

Which of the following is an example of a derivative instrument?
Stock
Bond
Options
Treasury bonds

Answer 26

Options

Question 27

In order to provide liquidity, financial markets need to be structured in a way that ___________.

Answer 27

Transaction costs are low

Question 28

________________are where a borrower obtains funds directly from a lender by selling newly issued securities.

Answer 28

Primary financial markets

Question 29

What is the primary difference between an over-the-counter market and an electronic communication network?

Answer 29

Most trades in an over-the-counter network involve broker/dealers, whereas trades in electronic communication networks do not

Question 30

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

Answer 30

I, II, and III

Question 31

Financial institutions are also known as __________________________.

Answer 31

Financial Intermediaries

Question 32

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

Answer 32

Reduce transaction costs by specializing in the issuance of standardized securities

Question 33

_________________________ invest individual and company contributions in stocks, bonds, and real estate in order to provide payments to retired workers.

Answer 33

Pension funds