Ch01
Student: ___________________________________________________________________________
1. The term "financial system" refers to the collection of markets, individuals and institutions, laws,
regulations and techniques through which securities are traded and interest rates determined.
True False
2. When credit becomes more costly and less available, total spending for goods and services generally falls.
True False
3. The primary task of a financial system is to move scarce loanable funds from those who save to those who
borrow to buy goods and services and to make investments in new equipment and facilities so that the
global economy can grow and increase the standard of living enjoyed by its citizens.
True False
4. The money market is designed for the making of short-term loans. It is the institution through which
individuals and institutions with temporary surpluses of funds meet the needs of borrowers who have
temporary funds shortages (deficits).
True False
5. A market in which prices fully reflect the latest available information is an efficient market.
True False
6. A surplus of current revenues over current expenditures is a measure of current government saving.
True False
7. Business investment consists of purchases of plant and equipment and purchases of inventory.
True False
8. The purchase of a new home is a form of business investment.
True False
9. The purchase of financial claims is a guaranteed form of future income.
True False
10. Spending by federal, state and local governments for public facilities is a form of government savings.
True False
11. One of the most important contributions of the financial markets is to make possible the exchange of
current income for future income.
True False
,12. Credit represents a loan of funds in return for a promise of future payment.
True False
13. Interest payments on debt are a tax-deductible expense for households, but not for businesses.
True False
14. A NOW account is a type of savings account rather than a type of checking account.
True False
15. Commercial banks and retail stores, but not credit unions, may issue plastic credit cards.
True False
16. The financial markets offer businesses, consumers and governments protection against health, property and
income risk.
True False
17. The term "liquidity" refers to the ability of a financial asset to be converted quickly into cash with little risk
of loss.
True False
18. Money is the only perfectly liquid asset in the financial system.
True False
19. The financial asset which generally earns the lowest rate of return in the financial system is securities
issued by the federal government which are presumed by investors to be free of credit risk.
True False
20. A security evidencing a loan which matures within one year is a money market instrument.
True False
21. One of the most important functions of the capital market is to finance the working-capital needs of
corporations and to provide government with short-term funds in lieu of tax collections.
True False
22. Speculative purchases of securities and commodities are generally financed by loans from the money
market.
True False
23. The construction of office buildings, highways, schools and homes normally is financed by loans from the
capital market.
True False
,24. Financial instruments traded in the capital market have original maturities of greater than one year.
True False
25. The most important institution lending funds in the money market is the commercial bank.
True False
26. The largest borrower in the U.S. money market is Citibank, the nation's largest commercial bank.
True False
27. Most loans to families and individuals would be classified as money market instruments.
True False
28. The largest market for a single security in the world is the Treasury bill market.
True False
29. A short-term IOU issued by a large well-established corporation is known as commercial paper.
True False
30. The fact that professional investors operate daily in the financial marketplace, watching for profitable
opportunities arising from unusually attractive prices and interest rates on selected financial instruments
and adjusting their portfolios accordingly is often referred to as the force of profit maximization.
True False
31. The only value of the financial system is that it determines the cost of credit.
True False
32. The financial system determines the cost of credit and how much credit is available.
True False
33. The circular flow occurs between governments and households.
True False
34. Business determines what and how many goods and services will be produced.
True False
35. One way for the economy to expand is for households to set aside savings so that they will not return to the
spending stream.
True False
36. The tax status of interest paid on debt causes most individuals to think twice before using credit.
True False
, 37. Generally a business firm enters the capital market if it experiences a temporary surplus or deficit of funds.
True False
38. The money market is an excellent place for new corporations to borrow money.
True False
39. Federal funds are temporary cash surpluses held by the federal government.
True False
40. Speculators in securities are continually on the lookout for small differences in prices or interest rates
attached to different securities.
True False
41. Arbitrageurs help to maintain consistent prices between financial markets.
True False
42. The financial markets provide a means to protect businesses, consumers and governments against risk.
True False
43. The terms open market and negotiated market are often used interchangeably to mean the same thing.
True False
44. The principal function of the primary market is to raise money for investment in buildings and equipment.
True False
45. An example of a futures market transaction is to borrow money through a new mortgage.
True False
46. Forward markets and futures markets serve the same purpose in principle.
True False
47. The liquidity function of the financial system is designed to protect businesses, consumers and
governments against risks to people, property and income.
True False
48. The payments function of the financial system is designed to provide a means to store purchasing power
until needed at a future date for spending on goods and services.
True False
49. The financial system is rapidly evolving into a worldwide system, with increasingly intense competition
among financial institutions.
True False
Student: ___________________________________________________________________________
1. The term "financial system" refers to the collection of markets, individuals and institutions, laws,
regulations and techniques through which securities are traded and interest rates determined.
True False
2. When credit becomes more costly and less available, total spending for goods and services generally falls.
True False
3. The primary task of a financial system is to move scarce loanable funds from those who save to those who
borrow to buy goods and services and to make investments in new equipment and facilities so that the
global economy can grow and increase the standard of living enjoyed by its citizens.
True False
4. The money market is designed for the making of short-term loans. It is the institution through which
individuals and institutions with temporary surpluses of funds meet the needs of borrowers who have
temporary funds shortages (deficits).
True False
5. A market in which prices fully reflect the latest available information is an efficient market.
True False
6. A surplus of current revenues over current expenditures is a measure of current government saving.
True False
7. Business investment consists of purchases of plant and equipment and purchases of inventory.
True False
8. The purchase of a new home is a form of business investment.
True False
9. The purchase of financial claims is a guaranteed form of future income.
True False
10. Spending by federal, state and local governments for public facilities is a form of government savings.
True False
11. One of the most important contributions of the financial markets is to make possible the exchange of
current income for future income.
True False
,12. Credit represents a loan of funds in return for a promise of future payment.
True False
13. Interest payments on debt are a tax-deductible expense for households, but not for businesses.
True False
14. A NOW account is a type of savings account rather than a type of checking account.
True False
15. Commercial banks and retail stores, but not credit unions, may issue plastic credit cards.
True False
16. The financial markets offer businesses, consumers and governments protection against health, property and
income risk.
True False
17. The term "liquidity" refers to the ability of a financial asset to be converted quickly into cash with little risk
of loss.
True False
18. Money is the only perfectly liquid asset in the financial system.
True False
19. The financial asset which generally earns the lowest rate of return in the financial system is securities
issued by the federal government which are presumed by investors to be free of credit risk.
True False
20. A security evidencing a loan which matures within one year is a money market instrument.
True False
21. One of the most important functions of the capital market is to finance the working-capital needs of
corporations and to provide government with short-term funds in lieu of tax collections.
True False
22. Speculative purchases of securities and commodities are generally financed by loans from the money
market.
True False
23. The construction of office buildings, highways, schools and homes normally is financed by loans from the
capital market.
True False
,24. Financial instruments traded in the capital market have original maturities of greater than one year.
True False
25. The most important institution lending funds in the money market is the commercial bank.
True False
26. The largest borrower in the U.S. money market is Citibank, the nation's largest commercial bank.
True False
27. Most loans to families and individuals would be classified as money market instruments.
True False
28. The largest market for a single security in the world is the Treasury bill market.
True False
29. A short-term IOU issued by a large well-established corporation is known as commercial paper.
True False
30. The fact that professional investors operate daily in the financial marketplace, watching for profitable
opportunities arising from unusually attractive prices and interest rates on selected financial instruments
and adjusting their portfolios accordingly is often referred to as the force of profit maximization.
True False
31. The only value of the financial system is that it determines the cost of credit.
True False
32. The financial system determines the cost of credit and how much credit is available.
True False
33. The circular flow occurs between governments and households.
True False
34. Business determines what and how many goods and services will be produced.
True False
35. One way for the economy to expand is for households to set aside savings so that they will not return to the
spending stream.
True False
36. The tax status of interest paid on debt causes most individuals to think twice before using credit.
True False
, 37. Generally a business firm enters the capital market if it experiences a temporary surplus or deficit of funds.
True False
38. The money market is an excellent place for new corporations to borrow money.
True False
39. Federal funds are temporary cash surpluses held by the federal government.
True False
40. Speculators in securities are continually on the lookout for small differences in prices or interest rates
attached to different securities.
True False
41. Arbitrageurs help to maintain consistent prices between financial markets.
True False
42. The financial markets provide a means to protect businesses, consumers and governments against risk.
True False
43. The terms open market and negotiated market are often used interchangeably to mean the same thing.
True False
44. The principal function of the primary market is to raise money for investment in buildings and equipment.
True False
45. An example of a futures market transaction is to borrow money through a new mortgage.
True False
46. Forward markets and futures markets serve the same purpose in principle.
True False
47. The liquidity function of the financial system is designed to protect businesses, consumers and
governments against risks to people, property and income.
True False
48. The payments function of the financial system is designed to provide a means to store purchasing power
until needed at a future date for spending on goods and services.
True False
49. The financial system is rapidly evolving into a worldwide system, with increasingly intense competition
among financial institutions.
True False
