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CHAPTER 1 TRUE/FALSE QUESTIONS (T) 1. The purpose of the financial system is to bring savers and borrowers together. (F) 2. Businesses are never DSUs. (T) 3. A financial claim is an “IOU” from a deficit spending unit. (T) 4. Investment bankers help DSUs bring new primary security issues to market. (F) 5. Deposits in a credit union by a household are an example of direct finance. (F) 6. When an SSU owns a financial claim created by financial intermediation, its residual claim is against a DSU. (F) 7. Assets of financial intermediaries include direct financial claims only. (F) 8. Finance companies take small consumer deposits and make large consumer loans. (T) 9. Liabilities of financial intermediaries are indirect financial claims. (T) 10. Direct finance requires a more or less exact match of preferences. (F) 11. There must be an equal number of DSUs and SSUs in a period. (T) 12. Every financial claim appears on two balance sheets. (T) 13. Without a financial sector, real investment must be financed internally by the DSU. (T) 14. Depository intermediaries issue claims that are for the most part highly liquid. (T) 15. A household is an SSU when income for the period exceeds spending. (F) 16. An SSU must hold a claim until its scheduled maturity. (T) 17. Financial claims or securities are written for the mutual benefit of both SSU and DSU. (F) 18. DSUs and SSUs always have some contact with each other in financial markets. (T) 19. Commercial banks lend to businesses in direct financial markets. (F) 20. “Futures contract” and “forward contract” are interchangeable terms. (T) 21. Mortgages are capital market debt securities. (T) 22. Households are the major source of funds to the financial system. (F) 23. Secondary markets are important because they provide funds directly to DSUs. 1
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(F) 24. Primary markets offer liquidity and ways for investors to alter the risk of their portfolios. (T) 25. The New York Stock Exchange is an example of an organized exchange. (T) 26. The money market provides liquidity; the capital market finances economic growth. (T) 27. Private placements are the simplest form of direct finance. (T) 28. Competition among financial intermediaries tends to force interest rates downward. (T) 29. Money markets have a greater variety of investors than borrowers. (F) 30. Every asset is someone else’s liability, but not every liability is someone else’s asset. (T) 31. All money market instruments are short-term debt. (T) 33. The money market is a dealer market, not an exchange, and has no specific location. (T) 34. Money market borrowers are small in number compared to money market lenders. (T) 35. The money market is a market where liquidity is bought and sold. (T) 36. Commercial banks are the major issuer and investor of money market securities. () 37. Organized exchanges are less “exclusive” than over-the-counter markets.
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