FINANCIAL MARKETS AND INSTITUTIONS TEST
PAPER 2026 COMPLETE QUESTIONS AND
SOLUTIONS 100% CORRECT
◉ All economic units may be classified into one of the following
groups: Answer: 1. *Households*
2. *Business firms*
3. *Governments*- federal, state, local
4. *International sector*
◉ Each economic unit must operate within a budget constraint
imposed by its total income for the ________ Answer: *period*
◉ Three Budget Positions Answer: 1. *Balanced* budget position
2. *Surplus* budget position
3. *Deficit* budget position
◉ *Balanced* Budget Position Answer: Income and expenditures are
*EQUAL*
◉ *Surplus* Budget Position Answer: *Income exceeds*
expenditures
,◉ *Deficit* Budget Position Answer: *Expenditures exceed* income
◉ Typically, as a group, *businesses and government* are _____ and
households are _____ Answer: *DSUs ; SSUs*
◉ The purpose, role or function of a _________ system is to transfer
funds from SSUs to DSUs in an effective manner Answer: *financial*
◉ How can DSUs spend *more* than their income? Answer: 1.
*Converting some asset* owned to spendable funds
2. By *issuing claims against themselves*: borrowing and issuing an
IOU to the lender; a corporation may sell new stock, thereby issuing
a claim against itself
(in each instance above, the DSUs issue a claim to the SSUs)
◉ The job of bringing *SSUs and DSUs together* can be done in two
ways: Answer: 1. *Direct* financing
2. *Indirect* financing (intermediation financing)
◉ *Direct* Financing Answer: DSUs and SSUs exchange claims
*directly* and the claims issued by DSUs are called *direct* claims
, ◉ In most cases the exchange of claims and funds take place in the
_________ _______ Answer: *financial markets*
◉ *Private Placement* Answer: Transactions in private markets
Example: A corporation sells a bond issue to *single investor* (i.e.,
life insurance co.) or to a small group of typically institutional
investors
◉ *Investment Bankers* and *Securities Underwriting* Answer: The
investment banker purchases the security issue form the issuer and
resells the securities. Thus, the investment banker takes ownership
of the security.
◉ Underwriting *Spread* Answer: The difference between the
investment banker's purchase price sale price
◉ *Brokers* and *Dealers* Answer: Assist in the buying and selling
of securities *after the initial sale* of the security by the DSU
◉ Brokers serve as _______ by bringing buyer and seller together, and
receive a commission for their services Answer: *agents*
PAPER 2026 COMPLETE QUESTIONS AND
SOLUTIONS 100% CORRECT
◉ All economic units may be classified into one of the following
groups: Answer: 1. *Households*
2. *Business firms*
3. *Governments*- federal, state, local
4. *International sector*
◉ Each economic unit must operate within a budget constraint
imposed by its total income for the ________ Answer: *period*
◉ Three Budget Positions Answer: 1. *Balanced* budget position
2. *Surplus* budget position
3. *Deficit* budget position
◉ *Balanced* Budget Position Answer: Income and expenditures are
*EQUAL*
◉ *Surplus* Budget Position Answer: *Income exceeds*
expenditures
,◉ *Deficit* Budget Position Answer: *Expenditures exceed* income
◉ Typically, as a group, *businesses and government* are _____ and
households are _____ Answer: *DSUs ; SSUs*
◉ The purpose, role or function of a _________ system is to transfer
funds from SSUs to DSUs in an effective manner Answer: *financial*
◉ How can DSUs spend *more* than their income? Answer: 1.
*Converting some asset* owned to spendable funds
2. By *issuing claims against themselves*: borrowing and issuing an
IOU to the lender; a corporation may sell new stock, thereby issuing
a claim against itself
(in each instance above, the DSUs issue a claim to the SSUs)
◉ The job of bringing *SSUs and DSUs together* can be done in two
ways: Answer: 1. *Direct* financing
2. *Indirect* financing (intermediation financing)
◉ *Direct* Financing Answer: DSUs and SSUs exchange claims
*directly* and the claims issued by DSUs are called *direct* claims
, ◉ In most cases the exchange of claims and funds take place in the
_________ _______ Answer: *financial markets*
◉ *Private Placement* Answer: Transactions in private markets
Example: A corporation sells a bond issue to *single investor* (i.e.,
life insurance co.) or to a small group of typically institutional
investors
◉ *Investment Bankers* and *Securities Underwriting* Answer: The
investment banker purchases the security issue form the issuer and
resells the securities. Thus, the investment banker takes ownership
of the security.
◉ Underwriting *Spread* Answer: The difference between the
investment banker's purchase price sale price
◉ *Brokers* and *Dealers* Answer: Assist in the buying and selling
of securities *after the initial sale* of the security by the DSU
◉ Brokers serve as _______ by bringing buyer and seller together, and
receive a commission for their services Answer: *agents*
