Question 1

Diversification is:

Accepted Answer

A)   the process by which risks are shared among many different assets or people.
B)   making a market more liquid by being always ready to buy or sell an asset.
C)   the interest rate at which one would lend if there were no risk of default.
D)   when a borrower fails to pay back a loan according to the agreed-upon terms.E) None of the above
F) A) and D)

Question 2

Those who believe that market prices always incorporate all available information believe:

Accepted Answer

A)   in the efficient-market hypothesis.
B)   that randomly choosing a stock is not as effective as technical or fundamental analysis.
C)   that current stock prices does not represent true value as correctly as is possible.
D)   All of these are true.E) B) and C)
F) A) and B)

Question 3

Which of the following goods is the most liquid?

Accepted Answer

A)   House
B)   Saving deposit
C)   Painting by Monet
D)   Antique sword from WWIE) B) and C)
F) None of the above

Question 4

In financial markets, buyers are people who:

Accepted Answer

A)   want to spend money on something of value right now, but don't have cash on hand.
B)   have cash on hand and are willing to let others use it, for a price.
C)   want to spend money on something of big value in the future, but don't know how to save for it.
D)   have cash promised to them at some future date.E) A) and B)
F) A) and C)

Question 5

A capital inflow occurs when:

Accepted Answer

A)   money saved domestically is invested in another country.
B)   money saved in another country finances domestic investment.
C)   there is a negative difference between capital inflows and capital outflows for a country.
D)   there is a positive difference between capital inflows and capital outflows of a country.E) A) and C)
F) None of the above

Question 6

If citizens expect to bear more of the burden for their own health care and retirement costs in the future, then we would expect their:

Accepted Answer

A)   demand for loanable funds further right than it would otherwise be.
B)   demand for loanable funds further left than it would otherwise be.
C)   supply of loanable funds further right than it would otherwise be.
D)   supply of loanable funds further left than it would otherwise be.E) B) and D)
F) C) and D)

Question 7

The transactions that take place in the financial markets:

Accepted Answer

A)   can be very complex.
B)   are very simple.
C)   are always to the buyer's advantage.
D)   are always to the seller's advantage.E) A) and D)
F) C) and D)

Question 8

Moral hazard describes a scenario in which:

Accepted Answer

A)   behaving morally produces a negative consequence.
B)   people behave more risky or renege on agreements when they do not face the full consequences of their actions
C)   people behave in a riskier fashion because they don't understand the consequences of their actions.
D)   when people behave morally they put themselves in a hazardous situation.E) A) and B)
F) A) and C)

Question 9

Because a bank has a very large pool of buyers and savers, it can:

Accepted Answer

A)   act as an intermediary between firms and government.
B)   provide liquidity to some individuals that deposit funds.
C)   diversify the risk of saving and borrowing for individuals.
D)   act in the best interest of society by ensuring there is enough money for people.E) A) and B)
F) B) and D)

Question 10

A liquidity provider is someone who:

Accepted Answer

A)   helps make a market more liquid by being always ready to buy or sell an asset.
B)   works at a bank and specializes in loans.
C)   works in the financial system.
D)   invest in the economy.E) All of the above
F) C) and D)

Question 11

Lenders generally want a higher interest rate to compensate them when loans stretch over a longer period because:

Accepted Answer

A)   the opportunity cost increases over time.
B)   there's more uncertainty about potential future investment opportunities.
C)   lenders want to be compensated for being unable to get their money back quickly.
D)   All of these are true.E) A) and B)
F) B) and D)

Question 12

The rate of return in loanable funds describes the:

Accepted Answer

A)   expected profit that a project will generate per dollar invested.
B)   cost of borrowing.
C)   interest rate on loans.
D)   the profit firms should make when investing borrowed funds.E) B) and C)
F) C) and D)

Question 13

When the government runs deficit, it causes the cost of borrowing to:

Accepted Answer

A)   increase, which decreases private demand for loanable funds.
B)   decrease, which decreases private demand for loanable funds.
C)   increase, which increases private demand for loanable funds.
D)   decrease, which increases private demand for loanable funds.E) A) and B)
F) C) and D)

Question 14

Bonds are a __________ liquid asset than other loans because they _____________.

Accepted Answer

A)   more; are standardized
B)   more; are guaranteed from default by the government
C)   less; are standardized
D)   less; are guaranteed from default by the governmentE) B) and D)
F) None of the above

Question 15

If expectations about the future don't change at all, then an economic downturn will generally:

Accepted Answer

A)   decrease savings at a given interest rate and shift the supply curve for loanable funds to the left.
B)   increase savings at a given interest rate and shift the supply curve for loanable funds to the left.
C)   decrease savings at a given interest rate and shift the supply curve for loanable funds to the right.
D)   increase savings at a given interest rate and shift the supply curve for loanable funds to the right.E) All of the above
F) A) and B)

Question 16

An example of an equity asset is:

Accepted Answer

A)   a stock.
B)   a dividend.
C)   an intermediary.
D)   a cash deposit.E) All of the above
F) A) and B)

Question 17

Savings is considered the portion of income:

Accepted Answer

A)   that is not immediately spent on consumption of goods and services.
B)   that is spent on productive inputs, such as factories, machinery, and inventories.
C)   that is placed in an individual's savings account.
D)   in any interest-bearing account.E) A) and B)
F) None of the above

Question 18

In a closed economy, national savings will be:

Accepted Answer

A)   lower than private savings if the government runs a deficit.
B)   higher than private savings if the government runs a deficit.
C)   lower than private savings if the government runs a surplus.
D)   equal to private savings if the government runs a deficit.E) All of the above
F) B) and C)

Question 19

The financial system is made up of the:

Accepted Answer

A)   institutions that bring together savers, borrowers, investors, and insurers in a set of interconnected markets where people trade financial products.
B)   government's offices that keep watch over all transactions conducted between savers and lenders.
C)   government's offices that regulate over all transactions conducted between borrowers and savers.
D)   government and monetary authority.E) A) and B)
F) A) and C)

Question 20

A bank will charge a higher interest rate the:

Accepted Answer

A)   longer is the length of the loan, and the higher the risk of repayment.
B)   longer is the length of the loan, and the lower the risk of repayment.
C)   shorter is the length of the loan, and the higher the risk of repayment.
D)   shorter is the length of the loan, and the lower the risk of repayment.E) B) and C)
F) B) and D)

Exam 14: The Basics of Finance

In a closed economy, national savings will be:

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A liquidity provider is someone who:

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Moral hazard describes a scenario in which:

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The transactions that take place in the financial markets:

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A capital inflow occurs when:

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Savings is considered the portion of income:

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The rate of return in loanable funds describes the:

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Diversification is:

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An example of an equity asset is:

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Which of the following goods is the most liquid?

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If citizens expect to bear more of the burden for their own health care and retirement costs in the future, then we would expect their:

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Lenders generally want a higher interest rate to compensate them when loans stretch over a longer period because:

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Because a bank has a very large pool of buyers and savers, it can:

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Bonds are a __________ liquid asset than other loans because they _____________.

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When the government runs deficit, it causes the cost of borrowing to:

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Those who believe that market prices always incorporate all available information believe:

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In financial markets, buyers are people who:

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A bank will charge a higher interest rate the:

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The financial system is made up of the:

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If expectations about the future don't change at all, then an economic downturn will generally:

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Bonds are a liquid asset than other loans because they ___.

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