Money & Banking Chapter 2.1

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: D
Financial markets have the basic function ofA) getting people with funds to lend together with people who want to borrow funds.B) assuring that the swings in the business cycle are less pronounced. C) assuring that governments need never resort to printing money. D) providing a risk-free repository of spending power. Answer: A
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) eliminate the need for indirect finance. Answer: B
Well-functioning financial markets A) cause inflation.B) eliminate the need for indirect finance. C) cause financial crises.D) produce an efficient allocation of capital. Answer: D
A breakdown of financial markets can result in A) financial stability.B) rapid economic growth. C) political instability.D) stable prices. Answer: C
The principal lender-savers are A) governments.B) businesses. C) households. D) foreigners. Answer: C
Which of the following can be described as direct finance? A) You take out a mortgage from your local bank.B) You borrow $2500 from a friend.C) You buy shares of common stock in the secondary market. D) You buy shares in a mutual fund. Answer: B
Assume that you borrow $2000 at 10% annual interest to finance a new business project. For this loan to be profitable, the minimum amount this project must generate in annual earnings isA) $400. B) $201. C) $200. D) $199. Answer: B
You can borrow $5000 to finance a new business venture. This new venture will generate annual earnings of $251. The maximum interest rate that you would pay on the borrowed funds and still increase your income isA) 25%. B) 12.5%.C) 10%. D) 5%. Answer: D
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: A
Which of the following can be described as involving direct finance? A) A corporation takes out loans from a bank.B) People buy shares in a mutual fund.C) A corporation buys a short-term corporate security in a secondary market. D) People buy shares of common stock in the primary markets. Answer: D
Which of the following can be described as involving indirect finance?A) You make a loan to your neighbor.B) A corporation buys a share of common stock issued by another corporation in the primary market.C) You buy a U.S. Treasury bill from the U.S. Treasury.D) You make a deposit at a bank. Answer: D
Which of the following can be described as involving indirect finance?A) You make a loan to your neighbor.B) You buy shares in a mutual fund.C) You buy a U.S. Treasury bill from the U.S. Treasury.D) A corporation buys a short-term security issued by another corporation in the primary market. Answer: B
Securities are ________ for the person who buys them, but are ________ for the individual or firm that issues them.A) assets; liabilities B) liabilities; assetsC) negotiable; nonnegotiable D) nonnegotiable; negotiable Answer: A
With ________ finance, borrowers obtain funds from lenders by selling them securities in the financial markets.A) activeB) determinedC) indirect D) direct Answer: D
With direct finance funds are channeled through the financial market from the ________ directly to the ________.A) savers, spendersB) spenders, investorsC) borrowers, savers D) investors, savers Answer: A
Open Question: Distinguish between direct finance and indirect finance. Which of these is the most important source of funds for corporations in the United States? Answer: With direct finance, funds flow directly from the lender/saver to the borrower. With indirect finance, funds flow from the lender/saver to a financial intermediary who then channels the funds to the borrower/investor. Financial intermediaries (indirect finance) are the major source of funds for corporations in the U.S.

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