ECO 301 FINAL EXAM QUESTIONS WITH VERIFIED
ANSWERS
Chapter 2 - Overview of the financial system
function of financial markets and intermediaries - Answers - channel funds from agents
who want to lend to agents who want to borrow
indirect and direct finance - Answers - indirect- involves financial intermediary (bank)
direct- no intermediary
structure of financial markets - Answers - debt- contractual agreement where lender
pays borrower fixed amounts to maturity
equity- contractual agreement representing claims to a share in the income and assets
of a business
Primary and secondary markets - Answers - primary markets- newly issued securities
are issued
secondary markets- previously issued securities are traded
Two essential roles of secondary markets - Answers - 1. allow initial buyers of securities
to sell before security matures. Providing liquidity
2. allow primary market to make judgment about the value of newly issued by looking at
secondary market
money market - Answers - short term debt instruments are traded
capital market - Answers - intermediate/long-term debt and equity trades
Money Market Instruments - Answers - 1. us treasury bills
2. negotiable certificates of deposits (CDs)
3. commercial paper
4. repurchase agreements
5. federal funds
capital market instruments - Answers - 1. corporate stock
2. mortgages
3. corporate bonds
4. us gov. bonds
5. state and local gov bonds
6. us gov agency bonds
, Role of financial intermediaries - Answers - 1. Reduce transaction costs by economies
of scale
2. risk sharing and diversification
3. adverse selection (before loan) and moral hazard (after loan)
Types of financial intermediaries - Answers - 1. depository institutions (banks)
2. finance firms ( mutual funds)
Chapter 3 - Answers - What is money?
money - Answers - anything that is generally accepted as a payment for goods and
services or in the repayment of debts
wealth - Answers - value of all property of assets
3 functions of money - Answers - 1. medium of exchange (used to purchase goods and
services)
2. unit of account (value goods and services)
3. store of value (store wealth, extremely liquid)
money solves this problem - Answers - double coincidence of wants
5 Characteristics of money - Answers - 1. durable
2. portable
3. divisible
4. easily recognizable
5. difficult to counterfeit
types of money - Answers - fiat- no intrinsic value
commodity- intrinsic value (gold)
m1 - Answers - assets that are clearly used as a medium of exchange
-currency
-travelers checks
-demand deposits- checking accounts pay no interest
other checkable deposits- pay interest
m2 - Answers - m1 + other assets that provide limited check writing privileges
-small cd /repo
-savings deposits
-money market dep account
-retail money market fund shares
m3 - Answers - m2+other liquid assets
ANSWERS
Chapter 2 - Overview of the financial system
function of financial markets and intermediaries - Answers - channel funds from agents
who want to lend to agents who want to borrow
indirect and direct finance - Answers - indirect- involves financial intermediary (bank)
direct- no intermediary
structure of financial markets - Answers - debt- contractual agreement where lender
pays borrower fixed amounts to maturity
equity- contractual agreement representing claims to a share in the income and assets
of a business
Primary and secondary markets - Answers - primary markets- newly issued securities
are issued
secondary markets- previously issued securities are traded
Two essential roles of secondary markets - Answers - 1. allow initial buyers of securities
to sell before security matures. Providing liquidity
2. allow primary market to make judgment about the value of newly issued by looking at
secondary market
money market - Answers - short term debt instruments are traded
capital market - Answers - intermediate/long-term debt and equity trades
Money Market Instruments - Answers - 1. us treasury bills
2. negotiable certificates of deposits (CDs)
3. commercial paper
4. repurchase agreements
5. federal funds
capital market instruments - Answers - 1. corporate stock
2. mortgages
3. corporate bonds
4. us gov. bonds
5. state and local gov bonds
6. us gov agency bonds
, Role of financial intermediaries - Answers - 1. Reduce transaction costs by economies
of scale
2. risk sharing and diversification
3. adverse selection (before loan) and moral hazard (after loan)
Types of financial intermediaries - Answers - 1. depository institutions (banks)
2. finance firms ( mutual funds)
Chapter 3 - Answers - What is money?
money - Answers - anything that is generally accepted as a payment for goods and
services or in the repayment of debts
wealth - Answers - value of all property of assets
3 functions of money - Answers - 1. medium of exchange (used to purchase goods and
services)
2. unit of account (value goods and services)
3. store of value (store wealth, extremely liquid)
money solves this problem - Answers - double coincidence of wants
5 Characteristics of money - Answers - 1. durable
2. portable
3. divisible
4. easily recognizable
5. difficult to counterfeit
types of money - Answers - fiat- no intrinsic value
commodity- intrinsic value (gold)
m1 - Answers - assets that are clearly used as a medium of exchange
-currency
-travelers checks
-demand deposits- checking accounts pay no interest
other checkable deposits- pay interest
m2 - Answers - m1 + other assets that provide limited check writing privileges
-small cd /repo
-savings deposits
-money market dep account
-retail money market fund shares
m3 - Answers - m2+other liquid assets
