Download CHAPTER 1

CHAPTER 1
Introduction and Overview
1. The study of economics is most concerned with which of the following?
a. What gets produced, how it gets produced and who get what
b. How to make a lot of money
c. Why stock prices fluctuate
d. What determines who owns the capital in society
ANSWER: a
2. Microeconomics is most concerned with which of the following?
a. The Federal Reserve System
b. The overall price level
c. The individual decision making processes of business firms and households
d. Business cycles and unemployment
ANSWER: c
3. Macroeconomics is most concerned with which of the following?
a. Consumer decision making
b. The level of economic activity in the aggregate economy
c. International Business Machines
d. The individual decision making processes of business firms
ANSWER: b
4. Economics is typically broken down into microeconomics and macroeconomics. Which of the
following statements is true?
a. Microeconomics is the study of the aggregate economy.
b. Macroeconomics is the study of individual households and firms in a particular market.
c. Macroeconomics is the study of the causes and consequences resulting from the sum of or
aggregate of all decisions made by households and firms in the economy.
d. Microeconomics is concerned with overall unemployment and inflation.
ANSWER: c
5. Finance is concerned with
a. how the financial system coordinates and channels the flow of funds from lenders to
borrowers (and vice versa).
b. how new funds get created by financial intermediaries in the borrowing process.
c. the study of the financial or monetary aspects of the production, spending, borrowing, and
lending decisions of an economy.
b. All of the above.
ANSWER: d
6. The term aggregate refers to which of the following?
a. Barriers to entry
b. Pricing behavior
c. Whole, total
d. Infinitesimal
ANSWER: c
7. Which of the following fails to meet the economist’s definition of a capital good?
1
2
Chapter 1
a. A factory that produces shoes
b. Cash on hand
c. A brand new computer system used by a business
d. Produced goods used to produce other goods
ANSWER: b
8. When economists refer to finance, to what are they referring?
a. The study of how individual decision-making units make decisions to finance their purchases
b. The study of the aggregate or total behavior of all households and firms in an economy
c. The study of how the financial system coordinates and channels the flow of funds from
lenders to borrowers and how new funds are created
d. The study of how society decides what gets produced, how it gets produced, and who gets it
ANSWER: c
9. The financial system is regulated and supervised to promote which of the following?
a. Competition and efficiency
b. A smooth-running financial system
c. The system’s overall health and stability
d. All of the above
ANSWER: d
10. The primary role of the financial system is to
a. allow the Fed to conduct monetary policy.
b. act as fiscal agent for the U.S. government.
c. print money.
d. channel the flow of funds from SSUs to DSUs.
ANSWER: d
11. History has shown that financial systems are
a. largely unchanging.
b. continuing changing and evolving.
c. inherently stable.
d. unaffected by financial innovation and regulatory changes.
ANSWER: b
12. Which of the following is not a depository institution?
a. Insurance companies
b. Mutual savings banks
c. Savings and loan associations
d. Commercial banks
ANSWER: a
13. Saving is
a. income not spent on consumption.
b. income spent on investment goods and financial assets.
c. income invested in financial assets only.
d. equal to over 15 percent of U.S. disposable income.
ANSWER: a
14. Which would be considered a use of saving?
Introduction and Overview
a. Buying stock in IBM
b. Buying a newly constructed vacation home in Idaho
c. Buying a new tractor for the farm
d. All of the above
ANSWER: d
15. A surplus spending unit is which of the following?
a. A person or firm that spends less than the income received
b. A unit of measure used by the Federal Reserve
c. The department in a bank that makes loans
d. Persons or firms that spend more than the income they receive
ANSWER: a
16. Why is financial intermediation important in an economy?
a. Because it facilitates the flows of spending between spending units
b. Because it coordinates and channels the flow of funds from lenders to borrowers
c. Because it creates new liquidity for an expanding economy
d. All of the above
ANSWER: d
17. When will saving equal the surplus funds a spending unit has available to lend?
a. When the spending unit purchases primary financial assets
b. When the spending unit purchases either direct or indirect financial assets
c. When the spending unit does not make any investment in capital, inventories, or newlyconstructed houses
d. When the spending unit purchases primary or secondary assets
ANSWER: c
18. Which of the following is not a universal characteristic of financial intermediaries?
a. Transferring funds from SSUs to DSUs
b. Issuing their own liabilities
c. Investing in financial assets
d. Issuing checkable deposits
ANSWER: d
19. The aim of regulatory policy in the financial system is to
a. generate government revenues.
b. promote a smooth-running and efficient financial system.
c. make it difficult for firms to enter the financial services market.
d. raise banking costs and create an outflow in the circular flow model.
ANSWER: b
20. Money is
a. only cash and currency.
b. cash, currency, and credit cards.
c. something which is used and generally accepted as payment.
d. income not spent on consumption.
ANSWER: c
21. Which of the following would be an example of saving?
a. The purchase of a study guide for your class
3
4
Chapter 1
b. The purchase of a corporate bond
c. Paying your rent
d. Using coupons to buy diapers at a department store
ANSWER: b
22. The difference between Surplus Spending Units (SSUs) and Deficit Spending Units (DSUs) can
best be described by the following:
a. DSUs spend less on consumption and investment goods than their current income while
SSUs spend more on consumptions and investment than their current income.
b. DSUs spend more on consumption and investment than their current income while SSUs
spend less on consumption and investment than their current income.
c. SSUs need to borrow (or spend savings).
d. DSUs need to lend (or accumulate savings).
ANSWER: b
23. One factor complicating the analysis of the financial system and the economy is
a. the influence of politicians on both the economy and the financial system.
b. the lack of regulation of the financial system.
c. the continuous change and innovation in the financial system.
d. the lack of change in the financial system compared to the constantly fluctuating economy.
ANSWER: c
24. A deficit spending unit is which of the following?
a. The department in a bank that issues credit cards
b. Another unit of measure used by the Federal Reserve
c. A person or firm that spends less money than they receive in income
d. A person or firm that spends more than they receive in income
ANSWER: d
25. If John receives $2000 monthly in net wages and spends $700 in rent, $500 on a car payment,
$250 on entertainment, and $200 on groceries he is a(n)
a. deficit spending unit.
b. negative cash disbursement.
c. surplus spending unit.
d. accrued wage unit.
ANSWER: c
26. Which of the following is an example of investment?
a. The purchase of a new computer system by a business firm
b. The acquisition of a newly constructed starter home by a young couple
c. The purchase of a new forklift by a construction company
d. All of the above
ANSWER: d
Introduction and Overview
27. Deregulation
a. is the implementing or phasing in of new regulations.
b. is the removing or phasing out of some existing regulations.
c. is any regulation which pertains to accounting debits.
d. was a trend in the financial system prior to the 1970s, but the trend of the 1970s and 1980s
was toward greater regulation.
ANSWER: b
28. Nguyen’s income is $40,000. If Nguyen spends $36,000 on consumption, $4,000 on a newlyconstructed vacation home, then Nguyen
a. Is not saving.
b. Has saving equal to $4,000.
c. Has surplus funds of $4,000.
d. Has saving of an indeterminate amount.
ANSWER: b
29. Purchasing bonds for the expansion of a software firm would be considered
a. direct finance.
b. indirect finance.
c. bond refunding.
d. bond discounting.
ANSWER: a
30. Which of the following would not be considered a financial intermediary?
a. Benson's Credit Union
b. Palmyra State Bank
c. Whitewater Savings and Loan
d. a large stock brokerage firm
ANSWER: d
31. Which of the following is a characteristic of all financial intermediaries?
a. Transferring funds from DSUs to SSUs
b. Buying their own liabilities
c. Purchasing financial assets
d. Accepting deposits
ANSWER: c
32. Default on a loan occurs when
a. the borrower is unable to make principal or interest payments when due.
b. the borrower pays off the loan early.
c. The true risks of making the loan were not considered.
d. The borrower pays the principal early but not the interest payments.
ANSWER: a
33. Of the following, which would be least liquid?
a. One share of stock in Disney
b. A ten-carat diamond
c. $1000 cash
d. None of the above; they are all considered highly liquid.
ANSWER: b
34. Financial intermediaries exist because they
5
6
Chapter 1
a. offer secondary claims that are attractive to lenders.
b. allow for greater diversification.
c. decrease the transactions costs of borrowing and lending.
d. All of the above.
ANSWER: d
35. The FDIC was created
a. during the Great Depression of the 1930s.
b. during the Second World War.
c. during the Korean War.
d. during the 1970s oil crisis.
ANSWER: a
36. Depository Institutions consist of
a. commercial banks.
b. savings & loan associations and mutual savings banks.
c. credit unions.
d. All of the above.
ANSWER: d
37. The principal source of funds for depository institutions consists of which of the following?
a. Deposits of domestic and foreign individuals, business firms, and governments
b. Loans from the Federal Reserve
c. Loans from foreigners
d. U.S. Government notes
ANSWER: a
38. The largest group of financial intermediaries are
a. money market mutual funds.
b. insurance companies.
c. depository institutions.
d. finance companies.
ANSWER: c
39. One of the reasons that financial intermediaries exist is that
a. it is illegal for SSUs to lend directly to DSUs.
b. the vaults at financial intermediaries are safer for your money than your mattress or piggy
bank.
c. there is no system for SSUs to lend directly to DSUs.
d. financial intermediaries are better equipped to assess risk and to diversify portfolios.
ANSWER: d
40. Which of the following is a specialized secondary claim?
a. A checking account
b. Life insurance
c. A savings account
d. A share draft account
ANSWER: b
41. If J.P. purchases a newly issued share of stock in a well-known corporation, then he is engaging
in which of the following?
Introduction and Overview
a. Deficit spending
b. Indirect finance
c. Direct finance
d. Discrete finance
ANSWER: c
42. An example of indirect finance would be
a. purchasing a corporate bond issued by PepsiCo.
b. borrowing money from Norwest Bank to buy a used car.
c. lending money to someone to start a publishing company.
d. borrowing money from a friend to buy my ‘84 Mercury.
ANSWER: b
43. An example of direct finance would be
a. your professors deposits his or her salary in a checking account.
b. you purchase stock in IBM from a stock broker.
c. you use your ATM card to get cash on the weekend.
d. your employer makes a contribution to your pension fund.
ANSWER: b
44. Which of the following would best describe the Federal Reserve's most important function?
a. To influence the general health and performance of the economy
b. To lower interest rates
c. To increase the volume of funds transferred from DSUs to SSUs
d. To print and circulate money
ANSWER: a
45. The United States economy is composed of
a. the household and business sectors.
b. the government sector.
c. the rest-of-the-world sector.
d. All of the above.
ANSWER: d
46. The business cycle describes
a. long-run fluctuations in the level of economic activity.
b. short-run fluctuations in the level of economic activity.
c. low inflation.
d. full employment.
ANSWER: b
47. During periods of expansion, the economy usually has
a. high levels of unemployment and output.
b. decreases in the total quantity of goods and services produced.
c. sharp troughs.
d. falling levels of unemployment and increases in employment and output.
ANSWER: d
48. Which of the following best describes the order of business cycle phases?
a. Recession, trough, expansion, peak
b. Recession, expansion, peak, trough
7
8
Chapter 1
c. Recession, peak, expansion, trough
d. Recession, trough, contraction, peak
ANSWER: a
49. Fiscal policy refers to
a. short-run government monetary policy.
b. deliberate changes in government spending and taxing decisions to affect the level of
economic activity.
c. changes in government regulation and/or deregulation.
d. The changing of interest rates by the Fed to affect the level of economic activity.
ANSWER: b
50. Which of the following statements is false?
a. Finance studies how the financial system coordinates and channels the flows of funds from
SSUs to DSUs.
b. Household saving may be used for investment in new housing or to acquire financial assets.
c. Business saving may be used for investment in capital and inventories or to acquire financial
assets.
d. Financial instruments are financial assets to the issuer of the instrument and financial
liabilities to the holder.
ANSWER: d
51. Which of the following is not true?
a. The Federal Reserve is a quasi-independent government agency that serves as our nation’s
central bank.
b. The Fed’s influence begins with the depository institutions and their role in the money
supply process and then spreads to other intermediaries and financial markets in general.
c. The Fed implements fiscal policy whioh is all the attempts by the Fed to affect the level of
economic activity.
d. The Fed affects the total volume of funds available for lending in the economy.
ANSWER: c
52. In economic terms, equilibrium refers to a state of the economy
a. from which there is no tendency to deviate—a state of rest.
b. when it is at the upper or lower turning point of the business cycle.
c. when there are both high unemployment and inflation.
d. when markets fail to clear.
ANSWER: a
53. Prior to the Great Depression of the 1930s, many economists viewed the economy as
a. self-correcting.
b. inherently stable.
c. usually operating at full employment.
d. All of the above.
ANSWER: d
Introduction and Overview
54. The government's economic policy prior to the Great Depression of the 1930s was one of
a. activist stabilization.
b. Keynesian theory.
c. laissez faire.
d. recession.
ANSWER: c
55. The lowest levels of both inflation and unemployment occurred in the
a. 1960s and 1990s.
b. 1970s.
c. 1980s.
d. 2000s.
ANSWER: a
56. The recession of the early 1990s caused many to be concerned due to
a. the depth of the contraction.
b. the lengthy time frame over which it occurred.
c. the lethargic or slow recovery that followed.
d. the rapid inflation that accompanied it.
ANSWER: c
57. By increasing interest rates seven times within a 1year period beginning in early 1994, the Fed
attempted to
a. slow the growth of the economy.
b. increase inflation rates.
c. decrease direct foreign investment.
d. stimulate the U.S. Savings Bond market.
ANSWER: a
58. If we divide U.S. government policy history into two phases—pre-1930s, post 1930s—which of
the following sets of labels would be most applicable?
a. Activist, laissez faire
b. Laissez faire, activist
c. Activist, more activist
d. Laissez faire, more laissez faire
ANSWER: b
59. The financial system
a. coordinates the flow of funds from lenders to borrowers.
b. creates new liquidity for the economy.
c. Both a and b.
d. None of the above.
ANSWER: c
60. Which of the following is most likely to be a lender?
a. A DSU
b. An SSU
c. A non-financial corporation
d. A member of the Federal Reserve Board of Governors
ANSWER: b
61. SSUs are influenced by which of these?
9
10
Chapter 1
a. Expected rate of return
b. Risk of loss
c. Liquidity
d. All of the above
ANSWER: d
62. In direct finance, financial claims are held by which of these?
a. DSUs
b. Financial intermediaries
c. Both of the above
d. None of the above
ANSWER: d
63. The spending and taxing decisions of the Congress and president that affect household and
business decisions are called
a. monetary policy.
b. deficit reduction policy.
c. fiscal policy.
d. None of the above
ANSWER: c
64. What is the main reason financial intermediaries exist?
a. To minimize transaction costs associated with lending and borrowing
b. To increase risk and reduce liquidity
c. To pool funds from DSUs
d. To offer a menu of contingent financial claims which are relatively safe and liquid
ANSWER: a
65. Which institutions are central to the process of determining the nation's money supply?
a. Commercial banks, savings and loan associations, credit unions, and mutual savings banks
b. Insurance companies
c. Private and public pension funds
d. None of the above; only the Fed determines the nation’s money supply
ANSWER: a
66. The Federal Reserve's monetary policy influences which of the following?
a. Interest rates
b. The volume of funds available for lending
c. The overall health and stability of the economy
d. All of the above
ANSWER: d
67. Credit card balances are considered which of the following?
a. Money
b. Loans
c. Cash
d. None of the above
ANSWER: b
Introduction and Overview
68. Transaction costs are best defined as
a. costs associated with checkable deposits.
b. charges associated with making financial assets only.
c. costs associated with borrowing and lending or making other exchanges.
d. charges from failing to repay a financial claim.
ANSWER: c
69. The "Misery" index is defined as
a. the unemployment rate.
b. the inflation rate.
c. the sum of the unemployment rate and the inflation rate.
d. None of the above.
ANSWER: c
70. In a recession,
a. unemployment falls and economic activity rises.
b. unemployment falls and economic activity falls.
c. unemployment rises and economic activity falls.
d. employment rises and economic activity falls.
ANSWER: c
71. Monetary policy is determined by
a. the Federal Government.
b. the Federal Reserve.
c. the business cycle.
d. depository institutions.
ANSWER: b
72. A household that spends more on consumption and investment goods than its current income is
which of the following?
a. A surplus spending unit
b. A deficit spending unit
c. Not saving
d. Engaging in direct finance
ANSWER: b
73. Which of the following is false?
a. When SSUs lend directly to DSUs, direct finance occurs.
b. When SSUs put their funds in financial intermediaries, which then lend to DSUs, indirect
finance occurs.
c. Financial intermediaries acquire the funds of DSUs by issuing claims on themselves. They
use the funds to purchase the financial claims of SSUs.
d. Among others, financial intermediaries include life and casualty insurance companies,
pension funds, mutual funds and money market mutual funds.
ANSWER: c
11
12
Chapter 1
74. Liquidity is the
a. ease with which a financial instrument can be converted to cash without loss of value.
b. rate at which the economy is changing.
c. term used to describe the Federal Reserve quasi-independent government relationship.
d. amount of time a DSU has to repay a debt.
ANSWER: a
75. Monetary policy is defined as
a. the rules regarding borrowing and lending at banks.
b. those policies which limit the interest rates banks may pay on deposits.
c. the Federal Reserve's efforts to promote the overall health and stability of the economy.
d. the SSU policy regarding to whom they should lend money.
ANSWER: c
76. Maturity is which of the following?
a. The degree to which a financial instrument can be converted to cash without loss of value
b. The rate at which the economy is changing
c. The term used to describe the Federal Reserve quasi-independent government relationship
d. The amount of time a DSU has to repay a debt
ANSWER: d
77. Which of the following financial intermediaries do not issue contingent liabilities?
a. Finance companies
b. casualty insurance companies
c. persion funds
d. life insurance companies
ANSWER: a
78. Checkable deposits are
a. subject to withdrawal by writing a check
b. issued only by commercial banks
c. issued by all financial intermediaries
d. not money.
ANSWER: a