EC4400 Exam 1

The components of the U.S. M1 money supply are demand and checkable deposits plus currency. currency plus savings deposits. currency plus travelers checks plus money market deposits. currency plus travelers checks.

currency plus travelers checks.

Ranking assets from most liquid to least liquid, the correct order is currency; savings bonds; house. savings bonds; house; currency. house; savings bonds; currency. currency; house; savings bonds.

currency; savings bonds; house.

Low stock market prices might ________ consumers willingness to spend and might ________ businesses willingness to undertake investment projects. increase; decrease increase; increase decrease; decrease decrease; increase

decrease; decrease

An increase in the time to the promised future payment ________ the present value of the payment. has no effect on increases is irrelevant to decreases

decreases

Financial institutions that accept deposits and make loans are called ________ institutions. depository underwriting contractual savings investment

depository

The primary liabilities of a commercial bank are mortgages. bonds. deposits. commercial paper.

deposits.

U.S. Treasury bills pay no interest but are sold at a ________. That is, you will pay a lower purchase price than the amount you receive at maturity. discount default collateral premium

discount

The process of indirect finance using financial intermediaries is called resource allocation. direct lending. financial liquidation. financial intermediation.

financial intermediation.

The market where one currency is converted into another currency is called the ________ market. bond stock foreign exchange derivatives

foreign exchange

Everything else held constant, a weaker dollar will likely hurt automobile manufacturers in Michigan that use domestically produced inputs. wheat farmers in Montana that sell domestically. furniture importers in California. textile exporters in South Carolina.

furniture importers in California.

As a store of value, money is a way of saving for future purchases. does not earn interest. must be currency. cannot be a durable asset.

is a way of saving for future purchases.

All of the following are necessary criteria for a commodity to function as money except it must be widely accepted. it must deteriorate quickly. it must be divisible. it must be easy to carry.

it must deteriorate quickly.

Secondary markets make financial instruments more liquid. vapid. solid. risky.

liquid

Bonds issued by state and local governments are called ________ bonds. municipal commercial corporate Treasury

municipal

In explaining the evolution of money new forms of money evolve to lower transaction costs. government regulation is the most important factor. paper money is always backed by gold and therefore more desirable than checks. commodity money, because it is valued more highly, tends to drive out paper money.

new forms of money evolve to lower transaction costs.

Currency includes paper money, coins, checks, and savings deposits. paper money and coins. paper money and checks. paper money, coins, and checks.

paper money and coins.

A breakdown of financial markets can result in political instability. stable prices. financial stability. rapid economic growth.

political instability.

The concept of ________ is based on the common-sense notion that a dollar paid to you in the future is less valuable to you than a dollar today. interest future value present value deflation

present value

Well-functioning financial markets cause financial crises. produce an efficient allocation of capital. eliminate the need for indirect finance. cause inflation.

produce an efficient allocation of capital.

Countries that experience very high rates of inflation may also have balanced budgets. constant money supplies. rapidly growing money supplies. falling money supplies.

rapidly growing money supplies.

Economies of scale enable financial institutions to avoid adverse selection problems. avoid the asymmetric information problem. reduce moral hazard. reduce transactions costs.

reduce transactions costs.

Equity holders are a corporation's ________. That means the corporation must pay all of its debt holders before it pays its equity holders. debtors underwriters residual claimants brokers

residual claimants

With an interest rate of 6 percent, the present value of $100 next year is approximately $106. $100. $94. $92.

94

If a security pays $55 in one year and $133 in three years, its present value is $150 if the interest rate is 5 percent. 10 percent. 12.5 percent. 15 percent.

10 percent.

Which of the following is a depository institution? A life insurance company A mutual fund A pension fund A credit union

A credit union

Which of the following is a contractual savings institution? A savings and loan association A mutual fund A credit union A life insurance company

A life insurance company

Which of the following sequences accurately describes the evolution of the payments system? Barter, coins made of precious metals, paper currency, checks, electronic funds transfers Barter, checks, paper currency, coins made of precious metals, electronic funds transfers Barter, coins made of precious metals, checks, paper currency, electronic funds transfers Barter, checks, paper currency, electronic funds transfers

Barter, coins made of precious metals, paper currency, checks, electronic funds transfers

Which of the following is included in both M1 and M2? Currency Money market deposit accounts Small-denomination time deposits Savings deposits

Currency

Which of the following is not a goal of financial regulation? Ensuring that investors never suffer losses Reducing moral hazard Ensuring the soundness of the financial system Reducing adverse selection

Ensuring that investors never suffer losses

Bonds that are sold in a foreign country and are denominated in a currency other than that of the country in which it is sold are known as Eurobonds. equity bonds. foreign bonds. country bonds.

Eurobonds

U.S. dollar deposits in foreign banks outside the U.S. or in foreign branches of U.S. banks are called ________. Eurodollars outside dollars foreign dollars Atlantic dollars

Eurodollars

________ policy involves decisions about government spending and taxation. Systemic Monetary Financial Fiscal

Fiscal

Which of the following is not a secondary market? futures market foreign exchange market options market IPO market

IPO market

________ is the relative ease and speed with which an asset can be converted into a medium of exchange. Efficiency Deflation Liquidity Specialization

Liquidity

If an individual moves money from a small-denomination time deposit to a demand deposit account, M1 increases and M2 stays the same. M1 increases and M2 decreases. M1 stays the same and M2 stays the same. M1 stays the same and M2 increases.

M1 increases and M2 stays the same.

If an individual moves money from currency to a demand deposit account, M1 stays the same and M2 stays the same. M1 decreases and M2 stays the same. M1 stays the same and M2 increases. M1 increases and M2 stays the same.

M1 stays the same and M2 stays the same.

________ are financial intermediaries that acquire funds by selling shares to many individuals and using the proceeds to purchase diversified portfolios of stocks and bonds. Investment banks Mutual funds Credit unions Finance companies

Mutual funds

Which of the following is not included in the M1 measure of money but is included in the M2 measure of money? Traveler's checks Small-denomination time deposits Currency Demand deposits

Small-denomination time deposits

Which of the following statements about the characteristics of debt and equities is true? The income from bonds is typically more variable than that from equities. They can both be long-term financial instruments. Bonds pay dividends. Bond holders are residual claimants.

They can both be long-term financial instruments.

________ are the time and resources spent trying to exchange goods and services. Barter costs. Contracting costs. Bargaining costs. Transaction costs.

Transaction costs.

Which of the following is most likely to result from a stronger dollar? Americans will purchase fewer foreign goods. U.S. goods exported aboard will cost less in foreign countries, and so foreigners will buy more of them. U.S. goods exported abroad will cost more in foreign countries, and so foreigners will buy fewer of them. U.S. goods exported aboard will cost more in foreign countries and so foreigners will buy more of them.

U.S. goods exported abroad will cost more in foreign countries, and so foreigners will buy fewer of them.

Which of the following can be described as direct finance? You buy shares in a mutual fund. You buy shares of common stock in the secondary market. You take out a mortgage from your local bank. You borrow $2500 from a friend.

You borrow $2500 from a friend.

Which of the following can be described as involving indirect finance? You make a loan to your neighbor. You buy a U.S. Treasury bill from the U.S. Treasury. A corporation buys a share of common stock issued by another corporation in the primary market. You make a deposit at a bank.

You make a deposit at a bank.

Which of the following is not a financial institution? a business college a pension fund a life insurance company a credit union

a business college

A financial crisis is typically followed by an economic boom. a feature of developing economies only. not possible in the modern financial environment. a major disruption in the financial markets.

a major disruption in the financial markets.

A debt instrument sold by a bank to its depositors that pays annual interest of a given amount and at maturity pays back the original purchase price is called federal funds. commercial paper. a municipal bond. a negotiable certificate of deposit.

a negotiable certificate of deposit.

A hyperinflation is impossible today because of tighter regulations. a period of extreme inflation generally greater than 50% per month. an increase in output caused by higher prices. a period of anxiety caused by rising prices.

a period of extreme inflation generally greater than 50% per month.

When paper currency is decreed by governments as legal tender, legally it must be ________. accepted as payment for debts convertible into an electronic payment paper currency backed by gold a precious metal such as gold or silver

accepted as payment for debts

If bad credit risks are the ones who most actively seek loans and, therefore, receive them from financial intermediaries, then financial intermediaries face the problem of moral hazard. adverse selection. costly state verification. free-riding.

adverse selection.

Increasing the amount of information available to investors helps to reduce the problems of ________ and ________ in the financial markets. adverse selection; moral hazard adverse selection; economies of scale moral hazard; transactions costs adverse selection; risk sharing

adverse selection; moral hazard

The problem created by asymmetric information before the transaction occurs is called ________, while the problem created after the transaction occurs is called ________. costly state verification; free-riding moral hazard; adverse selection adverse selection; moral hazard free-riding; costly state verification

adverse selection; moral hazard

Collateral is ________ the lender receives if the borrower does not pay back the loan. a present a liability an asset an offering

an asset

A liquid asset is difficult to resell. a share of an ocean resort. always sold in an over-the-counter market. an asset that can easily and quickly be sold to raise cash.

an asset that can easily and quickly be sold to raise cash.

Money is the total collection of pieces of property that are a store of value. a flow of earnings per unit of time. anything that is generally accepted in payment for goods and services or in the repayment of debt. always based on a precious metal like gold or silver.

anything that is generally accepted in payment for goods and services or in the repayment of debt.

Money is defined as bills of exchange. the unrecognized liability of governments. a risk-free repository of spending power. anything that is generally accepted in payment for goods and services or in the repayment of debt.

anything that is generally accepted in payment for goods and services or in the repayment of debt.

Securities are ________ for the person who buys them, but are ________ for the individual or firm that issues them. nonnegotiable; negotiable assets; liabilities negotiable; nonnegotiable liabilities; assets

assets; liabilities

Typically, borrowers have superior information relative to lenders about the potential returns and risks associated with an investment project. The difference in information is called asymmetric information. risk sharing. moral selection. adverse hazard

asymmetric information.

Equity and debt instruments with maturities greater than one year are called ________ market instruments. capital federal benchmark money

capital

Financial markets promote economic efficiency by channeling funds from savers to investors. channeling funds from investors to savers. reducing investment. creating inflation.

channeling funds from savers to investors.

Compared to an electronic payments system, a payments system based on checks has the major drawback that legal liability is more clearly defined. fraud may be more difficult to commit when paper receipts are eliminated. checks are less costly to process. checks take longer to process, meaning that it may take several days before the depositor can get her cash.

checks take longer to process, meaning that it may take several days before the depositor can get her cash.

A disadvantage of ________ is that it is very heavy and hard to transport from one place to another. electronic money fiat money paper money commodity money

commodity money

To claim that a lottery winner who is to receive $1 million per year for twenty years has won $20 million ignores the process of deflation. face value. par value. discounting the future.

discounting the future.

High interest rates might ________ purchasing a house or car but at the same time high interest rates might ________ saving. encourage; encourage discourage; discourage discourage; encourage encourage; discourage

discourage; encourage

Reducing risk through the purchase of assets whose returns do not always move together is discounting. intermediation. diversification. intervention.

diversification.

An examination of revised money supply statistics, when compared to the initial statistics, suggests that the initial statistics provide a poor guide of monetary policy because they are usually underestimates of the revised statistics. do not provide a good guide to short-run movements in the money supply. provide a good guide of monetary policy, though they are usually underestimates of the revised statistics. are pretty good.

do not provide a good guide to short-run movements in the money supply.

The delivery of financial services electronically is called ________. e-commerce e-possible e-finance e-business

e-finance

A share of common stock is a claim on a corporation's liabilities. debt. earnings and assets. expenses.

earnings and assets.

For a commodity to function effectively as money it must be easily standardized, making it easy to ascertain its value. hard to carry around. deteriorate quickly so that its supply does not become too large. difficult to make change.

easily standardized, making it easy to ascertain its value.

When economists say that money promotes ________, they mean that money encourages specialization and the division of labor. contracting greed efficiency bargaining

efficiency

During the past two decades an important characteristic of the modern payments system has been the rapidly increasing use of fiat money. checks and decreasing use of currency. commodity monies. electronic fund transfers.

electronic fund transfers.

The price of one country's currency in terms of another country's currency is called the Dow Jones industrial average. prime rate. exchange rate. interest rate.

exchange rate.

If the price level doubles, the value of money more than doubles, due to scale economies. doubles. rises but does not double, due to diminishing returns. falls by 50 percent.

falls by 50 percent.

Paper currency that has been declared legal tender but is not convertible into precious metals is called ________ money. electronic funny fiat commodity

fiat

Financial institutions search for ________ has resulted in many financial innovations. regulations higher risk higher profits respect

higher profits

American companies can borrow funds only in foreign financial markets. only from the U.S. government. in both U.S. and foreign financial markets. only in U.S. financial markets.

in both U.S. and foreign financial markets.

An individual's annual salary is her wealth. income. liabilities. money.

income.

The conversion of a barter economy to one that uses money does not increase economic efficiency. increases efficiency by reducing the need to specialize. increases efficiency by reducing the need to exchange goods and services. increases efficiency by reducing transactions costs.

increases efficiency by reducing transactions costs.

An increase in stock prices ________ the size of people's wealth and may ________ their willingness to spend, everything else held constant. decreases; increase increases; decrease decreases; decrease increases; increase

increases; increase

An important financial institution that assists in the initial sale of securities in the primary market is the stock exchange. investment bank. commercial bank. brokerage house.

investment bank.

Monetary aggregates are measures of the wealth of individuals. reported by the Treasury Department annually. never redefined since "money" never changes. measures of the money supply reported by the Federal Reserve.

measures of the money supply reported by the Federal Reserve.

The management of money and interest rates is called ________ policy and is conducted by a nation's ________ bank. fiscal; central monetary; central fiscal; superior monetary; superior

monetary; central

If peanuts serve as a medium of exchange, a unit of account, and a store of value, then peanuts are reserves. bank deposits. loanable funds. money.

money

Since it does not have to be converted into anything else to make purchases, ________ is the most liquid asset. stock gold artwork money

money

To an economist, ________ is anything that is generally accepted in payment for goods and services or in the repayment of debt. income money credit wealth

money

The difference between money and income is that money is a stock and income is a flow. money is a flow and income is a stock. there is no difference money and income are both stocks. there is no difference money and income are both flows.

money is a stock and income is a flow.

An example of the problem of ________ is when a corporation uses the funds raised from selling bonds to fund corporate expansion to pay for Caribbean cruises for all of its employees and their families. credit risk risk sharing adverse selection moral hazard

moral hazard

The higher a security's price in the secondary market the ________ funds a firm can raise by selling securities in the ________ market. less; primary more; primary more; secondary less; secondary

more; primary

A financial market in which previously issued securities can be resold is called a ________ market. primary used securities tertiary secondary

secondary

A restriction on bank activities that was repealed in 1999 was separation of commercial banking from the securities industries. the prohibition of the payment of interest on checking deposits. minimum down payments on loans to purchase securities. restrictions on credit terms.

separation of commercial banking from the securities industries.

If the maturity of a debt instrument is less than one year, the debt is called ________. intermediate-term prima-term long-term short-term

short-term

When I purchase ________, I own a portion of a firm and have the right to vote on issues important to the firm and to elect its directors. bills stock bonds notes

stock

Long-term debt has a maturity that is ________. between one and ten years. less than a year. ten years or longer. between five and ten years.

ten years or longer.

When compared to exchange systems that rely on money, disadvantages of the barter system include: the requirement of a double coincidence of wants. lowering the cost of exchange to those who would specialize. lowering the cost of exchanging goods over time. encouraging specialization and the division of labor.

the requirement of a double coincidence of wants.

Prices of money market instruments undergo the least price fluctuations because of the short terms to maturity for the securities. the lack of competition in the market. the price ceiling imposed by government regulators. the heavy regulations in the industry.

the short terms to maturity for the securities.

Compared to an economy that uses a medium of exchange, in a barter economy transaction costs are lower. liquidity costs are lower. transaction costs are higher. liquidity costs are higher.

transaction costs are higher.

The time and money spent in carrying out financial transactions are called economies of scale. transaction costs. liquidity services. financial intermediation.

transaction costs.

Government regulations to reduce the possibility of financial panic include all of the following except transactions costs. restrictions on assets and activities. deposit insurance. disclosure.

transactions costs.

Dennis notices that jackets are on sale for $99. In this case money is functioning as a ________. store of value payments-system ruler unit of account medium of exchange

unit of account

Everything else constant, a stronger dollar will mean that vacationing in England becomes less expensive. vacationing in England becomes more expensive. French cheese becomes more expensive. Japanese cars become more expensive.

vacationing in England becomes less expensive.

The total collection of pieces of property that serve to store value is a person's wealth. income. credit. money.

wealth.