1. The bond market is important because A) it is the major source of borrowed fu
ID: 1161405 • Letter: 1
Question
1. The bond market is important because
A) it is the major source of borrowed funds for U.S. business.
B) it provides a rate of return significantly greater than the stock market.
C) it is only subject to default risk and not the market risk that equities experience.
D) it provides a way for businesses and governments to borrow funds from savers and it is the market that
determines interest rates.
2. Which of the following economic variables is a flow variable?
A) Nominal GDP B) Government Deficit C) Capital Investment D) All are flow variables
3. Which of the following has been most responsible for financial innovation and the subsequent growth in living standards?
A) Government regulation B) Technology C) Profit seeking D) Economic research
4. In the short-run, the economic variable(s) that the Federal Reserve has significant effect on is (are)
A) inflation. B) output. C) unemployment. D) A & B only. E) A, B, & C.
5. The presence of transaction costs in financial markets explains, in part, why
A) financial intermediaries play such an important role in the direct finance financial markets.
B) equity and bond financing are less important methods than acquiring institutional loans when businesses need to
acquire funds.
C) businesses get more funds through financial intermediaries than equity markets.
D) direct financing is more important than indirect financing as a source of funds.
6. Typically, an asset with higher liquidity will have:
A) a higher price. B) a higher yield. C) greater risk. D) none of the preceding.
Use the following hypothetical data in the table below to answer Questions 7 & 8.
Time period 2025 2026 2027 2028 2029
Price index 200 240 284 292 296
7. During the time from period 2025 through period 2027,
A) the annual rate of inflation rises.
B) the annual rate of inflation falls.
C) prices are relatively stable when compared to the other periods.
D) deflation is rapid.
8. During the time from period 2027 through period 2029,
A) the annual rate of inflation rises.
B) the annual rate of deflation decreases slowly.
C) the annual rate of deflation increases slowly.
D) prices are relatively stable when compared to the other periods.
9. Secondary markets for financial instruments are important because, among other things,
A) they create liquidity by allowing for the relatively easy resale of financial instruments.
B) they make it easier for investors to hold a diversified portfolio of assets.
C) their existence encourages greater surplus transfer in the primary markets.
D) all of the above are true.
10. Which of the following instruments would most likely be utilized in the direct finance market?
A) Bank commercial loans. B) U.S. Treasury Bills.
C) Commercial Paper. D) Equities.
11. The managers of a firm met with a loan officer from a local bank to apply for a loan. They told the bank's loan
officer that the loan is intended to finance an expansion in the company’s production facility. Based on this
information, the loan officer granted the loan. However unexpected tariffs increased the cost of raw materials
needed in the production process and the loan had to be used to pay for materials rather than the planned
expansion. This incident is an example of
A) moral hazard.
B) market risk.
C) adverse selection.
D) banks' failing to charge high enough interest rates on business loans.
E) a situation in which direct finance, rather than indirect finance, should be employed.
12. From the choices below, indicate what is likely the most important asset category (in terms of $ value) in a
Money Market Mutual Fund.
A) Corporate Bonds B) Treasury Bills C) Non-Negotiable CDs D) Equities
13. Compared to interest rates on long-term U.S. Treasury debt, interest rates on short-term U.S. Treasury debt tends to
fluctuate________ and is usually __________ over time.
A) more: higher B) less: lower C) more; lower D) less; higher
14. Which of the following is true about legal tender?
A) Only legal tender may be used to pay taxes in the U.S.
B) Having legal tender status from the government is sufficient for something to be used as money.
C) Cash and checking accounts are legal tender.
D) None of the above is accurate.
15. When economists refer to the role of money as a unit of account, they mean that
A) most accounting systems reflect that goods are purchased with currency.
B) all goods are priced in terms of all other goods.
C) money gives traders a single, consistent way of measuring value in the economy.
D) money makes it possible for specialization to take place.
E) agents do not have to exercise their claim on scarce resources immediately.
16. The Federal Reserve System:
A) is required to make loans in the Fed Funds market
B) is required to create the money necessary for the U.S. Government to pay its bills.
C) is required to make loans to the U.S. Treasury.
D) is required to maintain price stability.
17. The interest rate that the Fed targets to indicate its stance on monetary policy is known as:
A) the discount rate. B) the prime rate. C) the fed funds rate. D) the standard rate.
18. Of money's three functions, the one that allows us to make decisions that maximize our satisfaction is its function as a
A) medium of exchange B) unit of account. C) standard of deferred payment D) store of value.
19. In the United States, money is backed by
A) gold and silver. B) Federal Reserve notes.
C) Congress D) Social infrastructure, political stability, and economic potential.
20. Which of the following would not be considered to be part of the money supply?
A) Currency in ATM machines
B) Coins stored in children’s piggy banks
C) U.S. Federal Reserve notes being used for transactions in India
D) A & B above
E) None of the above. All are part of the U.S. money supply.
Explanation / Answer
1. D. it provides a way for businesses and governments to borrow funds from savers and it is the market that determines interest rates.
2. D. All are flow. This is because they are calculated over a period of time, and not at a specific point in time.
3. D. Technology
4. A. Inflation
5. A) financial intermediaries play such an important role in the direct finance financial markets.'
6. A) a higher price
7). A). The annual inflation rises
8). C) the annual rate of deflation increases slowly.
9. D) all of the above are true.
10. A). Bank Commercial loans
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