Question 1

A dividend is:

Accepted Answer

A)   a financial asset that represents partial ownership of a company.
B)   a payment made periodically to all shareholders of a company.
C)   an agreement in which a lender gives money to a borrower in exchange for a promise to repay the amount loaned plus an agreed-upon amount of interest.
D)   a promise by the bond issuer to repay the loan, at a specified maturity date, and to pay periodic interest at a specific percentage rate.E) None of the above
F) A) and B)

Question 2

Market risk is:

Accepted Answer

A)   risk that is broadly shared by the entire market or economy.
B)   risk that is unique to a particular company or asset.
C)   likely to be predictable, and generally reflected in interest rates.
D)   the reason the economy suffers inflation from time to time.E) A) and C)
F) All of the above

Question 3

A booming economy can make investors:

Accepted Answer

A)   eager to borrow money, and shift the demand curve for loanable funds to the right.
B)   eager to borrow money, and shift the supply curve for loanable funds to the right.
C)   wary of future downturns, and shift the demand curve for loanable funds to the left.
D)   wary of future downturns, and shift the supply curve for loanable funds to the left.E) A) and B)
F) A) and C)

Question 4

Bonds are often referred to as fixed-income securities because:

Accepted Answer

A)   of the set interest rate.
B)   they are much more commonly held by retirees.
C)   they adjust interest payments with the inflation rate.
D)   the price you pay for bonds is fixed.E) A) and B)
F) None of the above

Question 5

Savings and investment are equal:

Accepted Answer

A)   at the equilibrium in the market for loanable funds.
B)   because banks regulate their flow.
C)   at an interest rate set by the Fed.
D)   when banks operate according to banking regulations.E) A) and B)
F) B) and C)

Question 6

In the market for loanable funds, the supply curve:

Accepted Answer

A)   represents savers.
B)   is downward sloping.
C)   reflects that more people will choose to save the lower is the interest rate.
D)   is made up of people who want to borrow funds.E) B) and D)
F) A) and C)

Question 7

After taking out a one year loan with an annual interest rate of 10 percent, Tommy pays $3,300 back to the bank. The principal of the loan must be ___________ and the interest payment must be ___________.

Accepted Answer

A)   $3,000; $300
B)   $3,300; $300
C)   $300; $3,300
D)   $300; $3,000E) A) and D)
F) A) and C)

Question 8

When the government increases its demand for loanable funds, it causes the:

Accepted Answer

A)   demand for loanable funds curve to shift to the right.
B)   demand for loanable funds curve to shift to the left.
C)   supply of loanable funds curve to shift to the right.
D)   supply of loanable funds curve to shift to the left.E) A) and B)
F) A) and C)

Question 9

In financial markets, sellers are people who:

Accepted Answer

A)   have cash on hand and are willing to let others use it, for a price.
B)   want to spend money on something of value right now, but don't have cash on hand.
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) All of the above
F) A) and B)

Question 10

An example of a seller in a financial market would be:

Accepted Answer

A)   entrepreneurs starting new ventures.
B)   the government when it needs to finance public spending.
C)   individuals who have a savings account.
D)   families buying new carsE) B) and C)
F) C) and D)

Question 11

Economists use the word investment to refer to the portion of income that is:

Accepted Answer

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

Question 12

Which of the following goods is least liquid?

Accepted Answer

A)   Cash
B)   Checking account
C)   Car
D)   HouseE) A) and B)
F) C) and D)

Question 13

The efficient market hypothesis states that:

Accepted Answer

A)   markets currently contain all available information and correctly value instruments.
B)   when buyers and sellers act in their own best interest markets will be efficient.
C)   in order for markets to be efficient they need to be adequately regulated.
D)   markets currently contain an efficient amount of information for them to clear.E) B) and C)
F) All of the above

Question 14

The interest rate:

Accepted Answer

A)   is the price of borrowing money for a specified period of time.
B)   is expressed as a percentage per dollar borrowed and per unit of time.
C)   determines the total amount that must be paid back on a loan.
D)   All of these are true.E) A) and D)
F) A) and B)

Question 15

The basic purpose of financial markets is:

Accepted Answer

A)   match people who want money to spend now with people who want to save their money for later.
B)   buy and sell different currencies in order to make a profit.
C)   sell commodities to firms as inputs.
D)   buy commodities from firms and the government to sell to the public.E) B) and C)
F) A) and D)

Question 16

Banks act as an intermediary between savers and borrowers by determining the:

Accepted Answer

A)   price at which the quantity of funds saved will be equal to the quantity invested.
B)   quantity of funds that will be saved depending on the price.
C)   quantity of funds that will be borrowed, for any given quantity of savings.
D)   price at which the quantity of funds saved will be more than enough for those who want to borrow.E) A) and D)
F) None of the above

Question 17

Evidence from the Great Recession suggests that the crowding out effect:

Accepted Answer

A)   was minimal at that time.
B)   had a very detrimental effect on private savings.
C)   can be quite large in times of recession, and is reinforced with recent research from 2008.
D)   may hold, although the evidence is somewhat contradictory.E) A) and B)
F) A) and D)

Question 18

Credit risk is:

Accepted Answer

A)   the risk of a borrower defaulting on a loan.
B)   lower, the longer the length of the loan.
C)   lower, the larger the amount of the loan.
D)   the risk of not being able to get a loan when your credit is good.E) B) and C)
F) A) and D)

Question 19

Studies show that __________ households tend to save more of their income than others, and also show that ____________ households save more out of tax cuts than others do.

Accepted Answer

A)   richer; poorer
B)   richer; richer
C)   poorer; richer
D)   poorer; poorerE) C) and D)
F) A) and B)

Question 20

Financial intermediaries are:

Accepted Answer

A)   institutions that channel funds from people who have them to people who want them.
B)   government officials who bring together buyers and sellers in a market.
C)   those who negotiate terms of settlement between borrower and lender when one is in default.
D)   those who negotiate terms of settlement between buyer and seller when one is in default.E) B) and C)
F) B) and D)

Exam 14: The Basics of Finance

The basic purpose of financial markets is:

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The interest rate:

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Credit risk is:

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Bonds are often referred to as fixed-income securities because:

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The efficient market hypothesis states that:

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After taking out a one year loan with an annual interest rate of 10 percent, Tommy pays $3,300 back to the bank. The principal of the loan must be ___________ and the interest payment must be ___________.

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When the government increases its demand for loanable funds, it causes the:

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Evidence from the Great Recession suggests that the crowding out effect:

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A dividend is:

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Which of the following goods is least liquid?

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Financial intermediaries are:

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An example of a seller in a financial market would be:

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Economists use the word investment to refer to the portion of income that is:

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Banks act as an intermediary between savers and borrowers by determining the:

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Savings and investment are equal:

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Market risk is:

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In the market for loanable funds, the supply curve:

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Studies show that __________ households tend to save more of their income than others, and also show that ____________ households save more out of tax cuts than others do.

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In financial markets, sellers are people who:

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A booming economy can make investors:

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After taking out a one year loan with an annual interest rate of 10 percent, Tommy pays $3,300 back to the bank. The principal of the loan must be _ and the interest payment must be _.

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Studies show that households tend to save more of their income than others, and also show that __ households save more out of tax cuts than others do.

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