ECON 345 Money and Banking midterm 1
Securities are ________ for the person who buys them, but are ________ for the individual or firm that issues them.
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
Markets in which funds are transferred from those who do not have a productive use for them to those who do are called _______.
Financial Markets
Bonds that are sold in a foreign country and are denominated in the country's currency in which they are sold are known as _______>
Foreign bonds
_________ are financial intermediaries that acquire funds by selling shares to many individuals and using the proceeds to purchase diversified portfolios of stocks and bonds.
Mutual funds
Which of the following can be described as involving direct finance?
People buying shares of common stock in the primary markets.
A brake down of financial markets can result in ______>
Political instability.
There is a _____, association between inflation and the growth rate of money ______
Positive; supply
The process where financial intermediaries create and sell low-risk assets and use the proceeds to purchase riskier assets is known as ______>
Risk sharing
A financial marker in which previously issued securities can be resold is called a _____ market?
Secondary
Which of the following statements ins true?
The average price of goods and services in an economy is called the aggregate price level
Which of the following is a true statement?
The conversion of a barter economy to one that uses money increases efficiency by reducing transaction costs.
Adverse selection is a problem associated with equity and debt contracts arising from ______/
The lender's relative lack of information about the borrower's potential returns and risk of his investment activities
Which of the following statements about financial markets and securities is true?
The maturity of a debt instrument is the number of years to that instrument's expiration date.
The stock market is important because it is ______.
The most widely followed financial markets in Canada
When we say that money is a stock variable, we mean that
The quantity of money is measured at a given point in time
The foreign exchange rate is _____.
The relative price of two currencies
Financial markets improve economic welfare because __________.
They allow consumers to time their purchase better.
Which of the following statements about the characteristics of debt and equities is true?
They can be both long-term financial instruments.
An important feature of money market mutual funds shares is
They offer deposit type accounts
introduction of cheques into the payments system reduced the costs of exchanging goods and services. Another advantage of cheques is that ________.
They provide convenient receipts for purchases
The time and money spent in carrying out financial transactions are called _________.
Transaction costs
Which of the following instruments are traded in a money market?
Treasury bills
Budget deficits can be a concern because they might ______.
Ultimately lead to higher inflation
When an investment bank _______ securities, it guarantees a price for a corporation's securities and then sells them to the public.
Underwrites
Everything else constant, a stronger Canadian dollar will mean that ________
Vacationing in England becomes less expensive.
A person's house is a part of their _______.
Wealth
The bond markets are important because they are
Where corporation and governments borrow to finance their activities.
Which of the following can be described as direct finance?
You borrow $ from a friend.
Which of the following can be described as involving indirect finance?
You make a deposit at a bank.
An investment intermediary that lends funds to consumers is
a finance company
Monetary aggregates are
measures of the money supply reported by the Bank of Canada
Of money's three functions, the one that distinguishes money from other assets is its function as a
medium of exchange
During hyperinflations
money no longer functions as a good store of value and people may resort to barter transactions on a much larger scale.
currency includes
paper money and coins
The evolution of the payments system from barter to precious metals, then to fiat money, then to checks can best be understood as a consequence of
precious metals were difficult to carry and transport
Evidence from business cycle fluctuations in Canada indicates that _____.
recessions have been preceded by a decline in the growth rate of money.
Because it is a unit of account, money
reduces the number of prices that need to be calculated
Even economists have no single, precise definition of money because
the "moneyness" or liquidity of an asset is a matter of degree
The currency component includes paper money and coins held in
the hands of the nonbank public
Compared to an economy that uses a medium of exchange, in a barter economy
transaction costs are higher
A share of common common stock is a claim on a corporation's ______.
Earnings and assets
An increase in interest rate might ____ saving because more can be earned in interest income
Encourage
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 is
5%
Which of the following is an example of an intermediate-term bond?
A bond between 1 year and 10 years
A security is also known as _______.
A financial instrument
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
A negotiable certificate of deposit
Which of the following benefits directly from an increase in the cooptation's profitability?
A shareholder
Chartered banks, trust and mortgage loan companies, and credit unions and caisses popularizes ________.
Accept deposits and make loans
Collateral is ________ the lender receives if the borrower does not pay back the loan.
An asset
A liquid asset is _________.
An asset that can be easily and quickly be sold to raise cash.
A sharp increase in the growth of the money supply is likely followed by _____.
An increase in the inflation rate
14. Which of the following are the largest financial intermediaries in the Canadian economy?
Banks
The Canada Deposit Insurance Corporation regulates ______.
Banks
Which of the following sequences accurately describes the evolution of the payment system?
Barter, coins made from precious metals, paper currency, cheques, electronic funds transfers
When I purchase ________, I am lending the corporation funds for a specific time. When I purchase a corporation's _________, I become an owner in the corporation.
Bond; stock
__________ work in the secondary markets matching buyers with sellers of securities.
Brokers.
Equity and debt instruments with maturities greater than one year are called ________ market instruments.
Capital
1. Financial Markets promote economic efficiency by _______.
Channeling funds to those who have a productive use for them.
The M1+ measure of money includes
Chequable deposits
Compared to an electronic payments system, a payments system based on checks has the major drawback that
Cheques take longer to process, meaning that it may take several days before the depositor can get their cash
A short-term debt instrument issued by well-known corporations is called
Commercial paper
A disadvantage of ______ is that it can be very heavy and hard to transport from one place to another.
Commodity money
Lower interest rates might cause a corporation to _____ building a new plant that would provide more jobs.
Consider
Bonds issued by corporations are called _________ bonds.
Corporate
Which of the following is not included in the measure of M2?
Currency
Financial crises are characterized by _______.
Decline in asset prices.
Treasury bills are considered the safest of all money market instruments because there is no risk of ________.
Default
A budget ____ occurs when government expenditures exceed tax revenues for a particular time period.
Deficit
The primary liabilities of a chartered bank are ____.
Deposits
Treasury bills pay no interest but are sold at a _________. That is, you will pay lower purchase price than the amount you receive at maturity.
Discount bonds
The price of one country's currency in terms of another country's is called the _______.
Foreign exchange rate
Financial markets have the basic function of ________.
Getting people with funds to lend together with people who want to borrow funds.
The interest rate on long-term corporate bonds is _____, on average than other interest rates. The spread between it and other rates ____ over time.
Higher; fluctuates
Canadian companies can borrow funds _____.
In both Canadian and foreign financial markets.
Which of the following is a true statement?
Income is a flow variable
One reason for the extraordinary growth of foreign financial markets is _______.
Increases in the pool of savings in foreign countries.
A fall in the level of prices ____.
Increases the value of money.
The evolution of the payments system from barter to precious metals, then to fiat money, then to checks can best be understood as a consequence of
Innovations that reduced the costs of exchanging goods and services
Contractual savings institutions include ___.
Life insurance companies
Secondary markets make financial instruments more _________.
Liquid
_______ is the relative ease and speed with which an asset can be converted into a medium of exchange.
Liquidity
Long-term debt has a maturity that is ________.
Longer than 10 years
If an individual moves money from a demand deposit account to a money market mutual fund,
M1+ decreases and M2 Decreases
If an individual moves money from a chequing account to a money market mutual fund,
M1+ decreases and M2+ stays the same
Financial intermediaries provide customers with liquidity services. Liquidity services __________.
Make it easier for customers to conduct transactions.
An important function of secondary markets is to ______.
Make it easier to sell financial instruments to raise funds
Everything else held constant, an increase in interest rates on student loans ____.
May increase the cost of education
Budget deficits are important because deficits _____.
May lead to a financial crisis
_________ theory relates changes in the quantity of money to changes in aggregate economic activity and the price level.
Monetary
If peanuts serve as a medium of exchange, a unit of account, and a store of value, then peanuts are
Money
Which of the following statements best explains how the use of money in an economy increases economic efficiency?
Money increases economic efficiency because it decreases transaction costs.
________ is used to make purchases while ______ is the total collection of pieces of property that serve to store value.
Money, Wealth
If bad credit risks are the ones who most actively seek loans then financial intermediaries face the problem of
adverse selection
Changes in stock prices _______.
affect firms' decisions to sell stock to finance investment spending
Money is ________.
anything that is generally accepted in payment for goods and services or in the repayment of debt.
Whatever a society uses as money, the distinguishing characteristic is that it must
be generally acceptable as payment for goods and services or in the repayment of debt
Reducing risk through the purchase of assets whose returns do not always move together is
diversification
The concept of diversification is captured by the statement
don't put all your eggs in one basket
The conversion of a barter economy to one that uses money ________.
increases efficiency by reducing transactions costs