tb02 - Chapter 2 An Overview of the Financial System T...

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Chapter 2 An Overview of the Financial System T Multiple Choice 1) Every financial market has the following characteristic: (a) It determines the level of interest rates. (b) It allows common stock to be traded. (c) It allows loans to be made. (d) It channels funds from lenders-savers to borrowers-spenders. Answer: D Question Status: Previous Edition 2) Financial markets have the basic function of (a) getting people with funds to lend together with people who want to borrow funds. (b) assuring that the swings in the business cycle are less pronounced. (c) assuring that governments need never resort to printing money. (d) both (a) and (b) of the above. (e) both (b) and (c) of the above. Answer: A Question Status: Previous Edition 3) Financial markets improve economic welfare because (a) they allow funds to move from those without productive investment opportunities to those who have such opportunities. (b) they allow consumers to time their purchase better. (c) they weed out inefficient firms. (d) they do each of the above. (e) they do (a) and (b) of the above. Answer: E Question Status: Previous Edition 4) Well-functioning financial markets (a) cause inflation. (b) eliminate the need for indirect finance. (c) cause financial crises. (d) produce an efficient allocation of capital. (e) promote political instability. Answer: D Question Status: New
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An Overview of the Financial System 27 5) A breakdown of financial markets can result in (a) an efficient allocation of capital. (b) rapid economic growth. (c) political instability. (d) stable prices. (e) financial stability. Answer: C Question Status: New 6) Which of the following can be described as direct finance? (a) You take out a mortgage from your local bank. (b) You borrow $2500 from a friend. (c) A pension fund lends money to General Motors. (d) You buy shares in a mutual fund. (e) None of the above. Answer: B Question Status: Study Guide 7) Assume that you borrow $2000 at 10% annual interest to finance a new business project. For this loan to be profitable, the minimum amount this project must generate in annual earnings is (a) $400. (b) $201. (c) $200. (d) $199. (e) $101. Answer: B Question Status: New 8) You can borrow $5000 to finance a new business venture. This new venture will generate annual earnings of $251. The maximum interest rate that you would pay on the borrowed funds and still increase your income is (a) 25%. (b) 12.5%. (c) 10%. (d) 5%. (e) 0.5%. Answer: D Question Status: New 9) Which of the following can be described as involving direct finance? (a) A corporation takes out a loan from a bank. (b) People buy shares in a mutual fund. (c) A corporation buys a short-term security issued by another corporation. (d) An insurance company buys shares of common stock in the over-the-counter markets.
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tb02 - Chapter 2 An Overview of the Financial System T...

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