ECO 316 Week 1 Chapter 3 Overview of the Financial System

In this file of ECO 316 Week 1 Chapter 3 Overview of the Financial System you will find the next information:

3.1 Multiple Choice Questions

1) The main reason for trade in financial assets is

2) The primary purpose of the financial system is to

3) The process of matching borrowers and lenders performed by the financial system

4) Borrowers generally demand funds through the financial system in order to

5) Why do savers supply funds?

6) All of the following are forms of savings EXCEPT

7) Borrowers promise to repay borrowed funds

8) Promises given by borrowers to lenders are

9) Promises given by borrowers to lenders are

10) If you purchase a Treasury bond, the Treasury bond is

11) If a bank grants you a mortgage, the mortgage is

12) If you have a checking account at a bank, the checking account is

13) A car loan that a bank grants to you is

14) Funds flow from lenders to borrowers

15) Financial markets

16) Financial intermediaries

17) Which of the following is NOT a financial intermediary?

18) Which of the following is NOT a key service provided by the financial system?

19) The risk involved in owning a financial asset is best thought of as

20) Fluctuations in the market price of a corporate bond

21) A financial portfolio

22) Diversification refers to the

23) Which of the following represents the most diversification for someone who currently owns share of stock in Intel?

24) The purpose of diversification is to

25) Diversification reduces the riskiness of a financial portfolio provided

26) The financial system provides risk sharing by allowing

27) Financial markets enable individuals to transfer risk by

28) Savers who take advantage of the service of transfer risk offered by the financial system

29) Risk sharing

30) Liquidity

31) Savers view the liquidity of financial assets as a benefit because

32) Which of the following assets is the most liquid?

33) Which of the following assets is the least liquid?

34) One value to investors of holding stock or bonds is that

35) Which of the following statements is true?

36) Which of the following assets has become significantly more liquid during the past two decades?

37) Thirty years ago, banks

38) Increased liquidity during the past two decades has reduced interest rates on which of the following assets (holding constant all other things that affect interest rates)?

39) When borrowers possess information about their opportunities or activities that they don’t disclose to lenders or creditors, a problem of

40) The managers of a firm seek to obtain a loan from a local bank. They tell the bank’s loan officer that the loan is intended to finance an expansion in the company, but in reality they intend to use the funds to finance next month’s payroll. This incident is an example of

41) 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 on the Super Bowl. This is an example of

42) The financial system performs the role of communicating information by

43) Information on financial assets is communicated

44) The distinguishing feature of a well-functioning financial market is the

45) In a well-functioning financial market, the prices of a company’s stocks and bonds will rise

46) Financial markets provide arrangements for

47) Financial markets

48) Which of the following would NOT be an example of a financial market transaction?

49) A “primary market” is a market

50) Which of the following would be most likely to use a financial market?

51) The most commonly used claim in financial markets is

52) The amount that a borrower borrows is referred to as the

53) Interest is best thought of as

54) The maturity of a debt instrument refers to

55) Long-term debt instruments have a maturity of at least

56) Which of the following is an example of a debt instrument?

57) Which of the following is an example of a short-term debt instrument?

58) An automobile loan is likely to be a(an)

59) When a borrower issues a debt instrument to a lender,

60) When economists refer to default risk on a debt instrument, they are referring to

61) Which of the following is an example of an equity?

62) The periodic payments received by owners of equity are referred to as

63) If a business fails to make a profit

64) In 2006, the total value of debt instruments was

65) Which of the following is NOT true of stock markets?

66) Secondary markets for financial instruments are important because, among other things,

67) Trading in capital markets involves

68) Trading in money markets involves

69) Money markets

70) In comparing money market instruments to capital market instruments, we can say that

71) The most common auction markets are

72) Which of the following is NOT true of over-the-counter markets?

73) In comparing money market and capital market instruments, money market instruments are typically

74) Derivative markets exist in order to

75) Financial intermediaries

76) When a bank makes a car loan, the loan

77) Financial intermediaries pool the funds of

78) Small savers prefer to use financial intermediaries rather than make loans to borrowers directly because

79) Economists believe that the major reason that financial intermediaries move a greater volume of funds between borrowers and lenders than do financial markets is

80) In which of the following financial assets did U.S. households have the most invested in 2006?

81) In which of the following financial assets in financial intermediaries did U.S. households have the most invested in 2006?

82) Financial innovation

83) Financial integration refers to

84) In the early nineteenth century in the United States

85) The decline in the dominance of U.S. financial markets has been the result of

86) Which of the following is NOT an important reason why governments around the world regulate financial markets?

87) The leading federal regulatory body for financial markets in the United States is the

88) The Securities and Exchange Commission was founded in

89) Trading by managers who own large amounts of a firm’s stock or trading by others who have privileged information is known as

90) Policy makers are particularly concerned about the financial soundness of financial intermediaries because

91) Savings institutions, such as savings-and-loan associations,

92) When assessing the effects of regulation of the financial system, we can say that regulation

93) U.S. Treasury bills

94) Which of the following is a money market asset?

95) Which of the following is a capital market asset?

96) Which of the following money market instruments had the largest amount outstanding in 2006?

97) Which of the following statements concerning the Sarbanes-Oxley Act of 2002 is true?

3.2 Essay Questions

1) As a country develops, will businesses become or less likely to borrow in financial markets? Explain.

2) The financial system allows some savers and borrowers to transfer risk to other savers and borrowers. Why do savers and borrowers differ in their willingness to bear risk?

3) Suppose you start up an Internet company and, although you are currently not profitable, you are very confident that you will be quite profitable in the near future. Assuming that you are able to issue either debt or equity to raise the funds necessary to expand your business, which would you prefer to issue?

4) According to the text: “many economists link the severity of the Great Depression of the 1930s to the breakdown in the banking system’s ability to provide financial services.” The beginning of the Great Depression also coincided with a stock market crash. Why might the problems of the banking system have been more damaging to the economy than the problems on the stock market?

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