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Functions and Roles of Financial Institutions
and Markets in the Global Economy
True / False Questions
1.The term "financial system" refers to the collection of markets, individuals and institutions, laws, regulations and techniques through which securities are traded and interest rates determined.
TRUE
Difficulty: Medium
2.When credit becomes more costly and less available, total spending for goods and services generally falls.
TRUE
Difficulty: Hard
3.The primary task of a financial system is to move scarce loanable funds from those who save to those who borrow to buy goods and services and to make investments in new equipment and facilities so that the global economy can grow and increase the standard of living enjoyed by its citizens.
TRUE
Difficulty: Easy
4.The money market is designed for the making of short-term loans. It is the institution through which individuals and institutions with temporary surpluses of funds meet the needs of borrowers who have temporary funds shortages (deficits).
TRUE
Difficulty: Easy
5.A market in which prices fully reflect the latest available information is an efficient market.
TRUE
Difficulty: Medium
6.A surplus of current revenues over current expenditures is a measure of current government saving.
TRUE
Difficulty: Medium
7.Business investment consists of purchases of plant and equipment and purchases of inventory.
TRUE
Difficulty: Medium
8.The purchase of a new home is a form of business investment.
FALSE
Difficulty: Easy
9.The purchase of financial claims is a guaranteed form of future income.
FALSE
Difficulty: Medium
10.Spending by federal, state and local governments for public facilities is a form of government savings.
FALSE
Difficulty: Easy
11.One of the most important contributions of the financial markets is to make possible the exchange of current income for future income.
TRUE
Difficulty: Easy
12.Credit represents a loan of funds in return for a promise of future payment.
TRUE
Difficulty: Easy
13.Interest payments on debt are a tax-deductible expense for households, but not for businesses.
FALSE
Difficulty: Easy
14.A NOW account is a type of savings account rather than a type of checking account.
FALSE
Difficulty: Easy
15.Commercial banks and retail stores, but not credit unions, may issue plastic credit cards.
FALSE
Difficulty: Medium
16.The financial markets offer businesses, consumers and governments protection against health, property and income risk.
TRUE
Difficulty: Medium
17.The term "liquidity" refers to the ability of a financial asset to be converted quickly into cash with little risk of loss.
TRUE
Difficulty: Easy
18.Money is the only perfectly liquid asset in the financial system.
TRUE
Difficulty: Medium
19.The financial asset which generally earns the lowest rate of return in the financial system is securities issued by the federal government which are presumed by investors to be free of credit risk.
FALSE
Difficulty: Medium
20.A security evidencing a loan which matures within one year is a money market instrument.
TRUE
Difficulty: Easy
21.One of the most important functions of the capital market is to finance the working-capital needs of corporations and to provide government with short-term funds in lieu of tax collections.
FALSE
Difficulty: Easy
22.Speculative purchases of securities and commodities are generally financed by loans from the money market.
TRUE
Difficulty: Hard
23.The construction of office buildings, highways, schools and homes normally is financed by loans from the capital market.
TRUE
Difficulty: Medium
24.Financial instruments traded in the capital market have original maturities of greater than one year.
TRUE
Difficulty: Easy
25.The most important institution lending funds in the money market is the commercial bank.
TRUE
Difficulty: Easy
26.The largest borrower in the U.S. money market is Citibank, the nation's largest commercial bank.
FALSE
Difficulty: Medium
27.Most loans to families and individuals would be classified as money market instruments.
FALSE
Difficulty: Medium
28.The largest market for a single security in the world is the Treasury bill market.
TRUE
Difficulty: Medium
29.A short-term IOU issued by a large well-established corporation is known as commercial paper.
TRUE
Difficulty: Easy
30.The fact that professional investors operate daily in the financial marketplace, watching for profitable opportunities arising from unusually attractive prices and interest rates on selected financial instruments and adjusting their portfolios accordingly is often referred to as the force of profit maximization.
FALSE
Difficulty: Hard
31.The only value of the financial system is that it determines the cost of credit.
FALSE
Difficulty: Medium
32.The financial system determines the cost of credit and how much credit is available.
TRUE
Difficulty: Medium
33.The circular flow occurs between governments and households.
FALSE
Difficulty: Medium
34.Business determines what and how many goods and services will be produced.
FALSE
Difficulty: Easy
35.One way for the economy to expand is for households to set aside savings so that they will not return to the spending stream.
FALSE
Difficulty: Medium
36.The tax status of interest paid on debt causes most individuals to think twice before using credit.
FALSE
Difficulty: Hard
37.Generally a business firm enters the capital market if it experiences a temporary surplus or deficit of funds.
FALSE
Difficulty: Hard
38.The money market is an excellent place for new corporations to borrow money.
FALSE
Difficulty: Medium
39.Federal funds are temporary cash surpluses held by the federal government.
FALSE
Difficulty: Easy
40.Speculators in securities are continually on the lookout for small differences in prices or interest rates attached to different securities.
TRUE
Difficulty: Medium
41.Arbitrageurs help to maintain consistent prices between financial markets.
TRUE
Difficulty: Easy
42.The financial markets provide a means to protect businesses, consumers and governments against risk.
TRUE
Difficulty: Easy
43.The terms open market and negotiated market are often used interchangeably to mean the same thing.
FALSE
Difficulty: Medium
44.The principal function of the primary market is to raise money for investment in buildings and equipment.
TRUE
Difficulty: Medium
45.An example of a futures market transaction is to borrow money through a new mortgage.
FALSE
Difficulty: Medium
46.Forward markets and futures markets serve the same purpose in principle.
TRUE
Difficulty: Medium
47.The liquidity function of the financial system is designed to protect businesses, consumers and governments against risks to people, property and income.
FALSE
Difficulty: Hard
48.The payments function of the financial system is designed to provide a means to store purchasing power until needed at a future date for spending on goods and services.
FALSE
Difficulty: Hard
49.The financial system is rapidly evolving into a worldwide system, with increasingly intense competition among financial institutions.
TRUE
Difficulty: Easy
50.Current savings for business firms are equal to current retained earnings less operating expenses.
FALSE
Difficulty: Hard
51.Current investment for households includes purchases of household durables by individuals and families.
False
Difficulty: Medium
52.Investment by governments includes the construction of new public facilities.
TRUE
Difficulty: Medium
53.The financial system operates to bring planned savings into balance with planned financial investment in stocks and bonds.
FALSE
Difficulty: Easy
54.A high proportion of young adults and newly formed families in a nation's population will generate a high level of national savings compared to countries with older populations because younger adults have greater need to build up savings for the future.
FALSE
Difficulty: Medium
55.A nation with a relatively low savings ratio will tend to have higher interest rates and more rapid inflation.
TRUE
Difficulty: Hard
56.Trading in financial instruments now spans the globe.
TRUE
Difficulty: Easy
57.Few companies or governments have the prestige or stature that would cause investors throughout the world to want to trade their particular securities.
TRUE
Difficulty: Easy
58.One of the most significant barriers to worldwide trading of securities is the delay in paying for and delivering securities to all parts of the globe.
TRUE
Difficulty: Medium
59.If there is imperfect information in a market, it is perfectly competitive.
FALSE
Difficulty: Easy
60.When savings flows fall, living standards rise because people spend more.
FALSE
Difficulty: Easy
61.The net wealth of an economic unit is determined by adding all the unit's assets to it net worth or equity capital.
FALSE
Difficulty: Medium
62.The financial services area where protection is provided against loss due to unfavorable movements in market prices or interest rates is known as agency services.
FALSE
Difficulty: Hard
63.The financial services area where protection is provided from loss of income or property in the event of death, disability, negligence or other adverse developments is known as hedging services.
FALSE
Difficulty: Medium
64.The financial services area where payments accounts against which the customer can write checks or wire funds to pay for purchases of goods and services is known as thrift services.
FALSE
Difficulty: Easy
65.Wealth holdings represent stored purchasing power that will be used in future periods to finance purchases of goods and services and increase society's standard of living.
TRUE
Difficulty: Easy
66.Financial transactions between nations have increased faster in volume than has international trade in goods and nonfinancial services.
TRUE
Difficulty: Medium
67.The world's standard of living increases if production increases while raising productivity.
TRUE
Difficulty: Hard
68.Current savings represents a flow of funds.
TRUE
Difficulty: Easy
69.Accumulated savings built up over time is referred to as a flow of funds.
FALSE
Difficulty: Medium
70.Personal savings are after-tax funds that are not consumed during the year.
TRUE
Difficulty: Hard
71.The term "financial system" refers to the collection of markets, individuals and institutions, laws, regulations and techniques through which cash is traded and interest rates determined.
FALSE
Difficulty: Medium
72.The construction of office buildings, highways, schools and homes normally is financed by loans from the money market.
FALSE
Difficulty: Medium
73.Most loans to families and individuals would be classified as capital market instruments.
TRUE
Difficulty: Medium
74.Arbitrageurs help to insure differentials between financial markets
FALSE
Difficulty: Medium
Multiple Choice Questions
75.The financial system determines:
A.The cost of credit
B.How much credit is available
C.The prices of securities
D.The quantity of securities issued by borrowers
E.All of the above
Difficulty: Medium
76.According to your text, the nation's standard of living is increased through the mechanism of the financial system by:
A.Increasing interest rates
B.Reducing the volume of spending for goods and services
C.Lowering inflation
D.Stabilizing the economy's rate of growth
E.Making funds available
Difficulty: Medium
77.In general, when the cost of credit declines,
A.Unemployment rises
B.Total spending decreases
C.Production is cut back
D.More jobs are created
E.The economy's rate of growth slows down
Difficulty: Hard
78.The role of markets in a market-oriented economy like the United States is to:
A.Allocate resources
B.Distribute income
C.Produce needed goods and services
D.All of the above
E.None of the above
Difficulty: Easy
79.The markets that serve the financial system may be classified in several different ways, including:
A.Money markets versus capital markets
B.Open markets versus negotiated markets
C.Primary markets versus secondary markets
D.Spot markets versus futures markets
E.All of the above
Difficulty: Easy
80.The financial system and financial markets are responsible for providing which of the following services?
A.Credit services
B.Payment services
C.Liquidity
D.Facilitating the flow of savings
E.All of the above
Difficulty: Easy
81.According to the text, several different financial assets and instruments have served as a medium of exchange or means of making payments in recent years. Which instrument listed below is not considered a means of making payments or a medium of exchange?
A.Checking accounts
B.NOW accounts
C.Negotiable certificates of deposit
D.Debit cards
E.Credit cards
Difficulty: Medium
82.The ______is designed for the making of short-term loans where individuals and institutions with temporary surpluses of funds meet borrowers who have temporary cash shortages.
A.Money market
B.Capital market
C.Open market
D.Negotiated market
E.Primary market
Difficulty: Easy
83.The ______is designed to finance long-term investments, making possible the construction of factories, office buildings, highways, bridges, schools, homes and apartments.
A.Money market
B.Capital market
C.Secondary market
D.Negotiated market
E.Primary market
Difficulty: Easy
84.One of the financial markets listed below is not part of the nation's capital market. Which one is not?
A.Mortgage market
B.Corporate bond market
C.Municipal bond market
D.Commercial paper market
E.Stock market
Difficulty: Medium
85.One of the financial markets listed below is not part of the money market. Which one is not?
A.U.S. Treasury bill market
B.Market for negotiable CDs of $100,000 or more
C.Market for federal funds
D.Market for Eurodollar deposits
E.Market for consumer installment loans
Difficulty: Medium
86.The financial markets that provide for the immediate delivery of securities are known as:
A.Spot markets
B.Futures markets
C.Forward markets
D.Option markets
E.None of the above
Difficulty: Medium
87.The market for trading newly issued securities is known as the:
A.Money market
B.Cash market
C.Spot market
D.Primary market
E.Open market
Difficulty: Easy
88.Trading in securities previously issued takes place in the:
A.Open market
B.Secondary market
C.Primary market
D.Negotiated market
E.Capital market
Difficulty: Easy
89.According to your text, the basic commodity being traded in all the financial markets is:
A.Securities
B.Capital
C.Forward markets
D.Credit
E.None of the above
Difficulty: Medium
90.The circular flow of funds includes which of the following:
A.Consumer units
B.Households
C.Government
D.All of the above
E.None of the above
Difficulty: Easy
91.Which type of market is not part of the circular flow?
A.Factor market
B.Information market
C.Financial market
D.Product market
E.All of the above
Difficulty: Medium
92.If households set aside funds that are not returned to the spending stream the economy will:
A.Expand
B.Contract
C.Operate at a normal level
D.Do nothing
E.None of the above
Difficulty: Hard
93.The financial system provides all the following services except:
A.Furnish credit
B.Payment services
C.Equitably distribute wealth
D.Provide liquidity
E.Risk protection
Difficulty: Medium
94.The largest borrower in the money market is:
A.Businesses
B.Government
C.Households
D.Commercial banks
E.None of the above
Difficulty: Medium
95.To gain access to the money market an institution must:
A.Have an excellent credit rating
B.Be well known
C.Be large
D.All of the above
E.None of the above
Difficulty: Medium
96.The largest market in the world for a single security is:
A.The capital market
B.The money market
C.The treasury bill market
D.The federal funds market
E.None of the above
Difficulty: Medium
97.Arbitrage occurs when:
A.A new security is issued
B.A company is in need of funds
C.A large institution faces default
D.Interest rates in a sector of the financial market rise relative to other sectors
E.None of the above
Difficulty: Hard
98.The function of the financial system that consists of providing a channel through which the government can promote the goals of high employment and low inflation is called the:
A.Savings function
B.Wealth function
C.Credit function
D.Liquidity function
E.None of the above
Difficulty: Hard
99.The function of the financial system that consists of providing a means of raising funds by converting securities and other assets into cash balances is called the:
A.Savings function
B.Wealth function
C.Credit function
D.Liquidity function
E.None of the above
Difficulty: Hard
100.The market for delivery of securities usually within one or two business days is known as
A.The spot market
B.The forward market
C.The futures market
D.The primary market
E.None of the above
Difficulty: Medium
101.According to the text speculators perform an important function in the financial markets. They:
A.Create underpricing of certain securities, generating more attractive investment opportunities
B.Cause some securities to be overpriced which tends to drive out those securities
C.Level out the prices of securities
D.Help to prevent security fraud
E.None of the above
Difficulty: Medium
102.According to your text, a key trend in the financial system is:
A.Increasing competition
B.Greater risk
C.Growth of technology
D.Growth of debt
E.All of the above are key trends for the financial system
Difficulty: Medium
103.The U.S. savings rate was one of the lowest among major industrial nations prior to the great credit crisis of 2007-09 because of the:
A.High proportion of young adults in the U.S. population
B.Large government budget deficits
C.Tax structure which favors consumption and borrowing over savings
D.All of the above
E.None of the above
Difficulty: Hard
104.Current savings for a business firm is measured by:
A.Total business sales receipts less business operating expenses (including business taxes)
B.Current budget receipts less current budgetary expenditures
C.Purchases of plant and equipment and inventory and residential construction
D.Construction of new public facilities
E.None of the above
Difficulty: Hard
105.Current savings for a household is measured by:
A.Current consumption spending (including personal taxes) subtracted from personal income
B.Current budget receipts less current budgetary expenditures
C.Current retained earnings and noncash expenses
D.Purchases of household durable goods
E.None of the above
Difficulty: Hard
106.The most significant barriers to 24-hour worldwide trading of securities include:
A.Lack of adequate prestige or stature by most companies and governments
B.Lack of common operating rules and regulations among different exchanges and nations
C.Delays in payment for and delivery of securities
D.Lack of open access to membership on all exchanges
E.All of the above