Financial system MCQs
2. Financial markets (a) facilitate the flow of funds from deficit to surplus units. (b) facilitate the flow of funds from surplus to deficit units. (c) are markets in which financial assets such as stocks and bonds can be bought and sold. (d) only answers b and c are correct.
d
3. What is the main difficulty with barter economy? (a) A household cannot consume more than what it earns. (b) The mis-match of desired quantity between buyers and sellers (c) Money does not exist (d) Double coincidence of wants
d
5. What is not an ideal characteristic for a good that can be used as money? (a) Homogeneity of quality. (b) Easy to carry. (c) Relatively scarce. (d) Having shiny surface.
d
6. What is NOT one of the most important factors to judge the quality of a financial centre? (a) Infrastructure. (b) Business environment. (c) People. (d) Diversity.
d
7. Which of the following statement about monetary economy is incorrect? (a) Broadly, there are two sectors in monetary economy: households and firms. (b) Households provide labour and lands to firms. (c) Firms are where productions are organized. (d) Households sell products to firms.
d
8. Which of the following statement is true about the economy with financial system? (a) All participants are either ultimate fund users or ultimate fund providers. (b) Households cannot spend more than what they have earned and saved. (c) Firms cannot invest more than what they have earned and saved. 3 (d) Money is available in the economy.
d
Which of the following are not main participants in financial market transactions? (a) households (b) financial institutions (c) governments (d) all of the above are main participants in financial market transactions
d
9. Discuss the role of money in the evolvement from barter economy to an advanced economy with financial system.
A: 1) Define barter economy 2) Talk about issues with barter economy 3) Talk about how money can help to tackle these issues 4) Talk about issues with money 5) Explain why the financial system is how it is today A barter economy is the most primitive type of economy as there is no other medium of exchange other than the goods one already posses. In a barter economy, production and consumption occur within households. The main flaw of the barter economy is the double coincidence of wants; a transaction only occurs if both agents, coincidentally want each other's goods. Money solves the problem of Coincidence of wants by providing a medium of exchange, a store of value, unit of account and a means of deferred payment. Furthermore, because money is divisible and easily portable, it makes it easier to process transactions and trade goods and services. Households provides land and labour to firms for which they receive wages, products and services in return. This is called the monetary economy. Even though the monetary economy facilitates the velocity of transactions and systematically smoothes out the processes of the barter economy , firms cannot invest more than they earn and households cannot consume more than their income. A household or firm could save up its proprietary income but this sometimes not feasible and is often inefficient. The evolution of the monetary economy into the financial system solves this problem by facilitating the flow of funds from surplus agents to the deficit agents. Efficient financial systems maximise the flow of funds to the most productive agents at the lowest cost.
4. What is (are) the primary role(s) of financial system? (a) An intermediary between the surplus agents and deficits agents (b) Transforming low risk claims to high risk claims (c) Transforming short-term claims to long-term claims (d) All of the above
Answer: A. Note: The transforming performed by financial system is to reconcile the mis-matched preferences of lenders and borrowers. It is not the function of a financial system. It is what the financial system does to fulfil its most important function.
