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Unformatted text preview: Please choose the best answer of the choices presented in the multiple choice questions. 1. Which of the following would not be considered a characteristic of money? A. It is a store of value B. It is a means of payment C. It must have intrinsic value D. It is a unit of account 2. In a barter system: A. People have to specialize in order to have goods to trade B. People cannot specialize because they never know what goods will be desired C. People are less likely to specialize as extensively as they would in a monetary economy D. People must be self sufficient 3. How many prices would a trader of a particular good need to know in a barter economy with 5 goods? A. 5 B. 10 C. 20 D. 50 4. Suppose that in a barter economy Tom bakes bread and Hans produces chocolates. Tom wants chocolates but Hans doesn't like bread, so Hans is unwilling to trade with Tom. Tom's problem is an example of which problem associated with a barter system? A. Too much specialization B. Not enough prices C. The law of diminishing returns D. The double coincidence of wants problem 5. Money eliminates the need for: A. A search for a double coincidence of wants B. Government regulation C. Specialization of labor D. Financial Intermediaries 6. Gold would be a superior commodity money compared to wheat because: A. Wheat has a high value relative to weight, which gold does not B. It is easier to divide wheat into small units C. Wheat has more practical uses than gold D. Wheat is perishable 7. Which of the following statements is not true? A. For most of history gold has been the most common commodity money B. The most common form of money in the U.S. is not a commodity money C. Gold is an example of a fiat money D. U.S. currency is legal tender 1 8. The fact that U.S. currency is legal tender means: A. U.S. currency is good anywhere in the world B. The only money the government will accept for settlement of debts is U.S. currency C. Private businesses in the U.S. and the U.S. government must accept currency for payment D. It cannot be backed by gold or other metals 9. The value of fiat money: A. Comes from its intrinsic value B. Is worth more as a commodity than its value as money C. Comes from government decree D. Means that it is more desirable than currency 10. When the Continental Congress issued currency to finance the Revolutionary War, the Continental Congress: A. Issued too many "continentals," making the currency worthless B. Tied the value of the "continental" to gold C. Tied the value of the "continental" to gold to French "assignats." D. Made "continentals" legal tender 11. The money aggregate M2 includes: A. Large denomination time deposits B. Stock and bond mutual fund shares C. Savings deposits but not money market deposit accounts D. M1 12. To say an asset is liquid implies that: A. We are focusing on a category of assets that are in a physically liquid form, like oil B. We are considering assets that may be readily converted into a means of payment C. We are considering any asset that can be sold D. We are only considering U.S. currency 13. Which of the following assets is the most liquid? A. Art B. Demand deposits C. Houses D. Stocks 14. A crosscountry analysis of money growth shows that: A. The growth rate in the money supply was lower in countries with lower inflation rates B. The growth rate in the money supply was higher in countries with lower inflation rates C. The growth rate in the money supply was lower in countries with higher inflation rates D. The growth rate in the money supply was the same whether the countries had high or low inflation rates 2 15. Which of the following statements is correct? A. If you can buy the same goods this year as you bought last year with less money there must have been inflation B. If purchasing the same goods today that were purchased one year ago requires more money, there must have been deflation C. If purchasing the same goods today as one year ago requires less money, the money supply must have decreased D. If purchasing the same goods today as one year ago requires less money, the money supply must have increased 16. The Consumer Price Index (CPI): A. Tends to understate the impact of price changes B. Tends to overstate the impact of price changes due to substitution bias C. Is more accurate than the GDP deflator D. Assumes that consumers substitute away from cheaper goods 17. The purchasing power of money: A. Rises when inflation rises B. Decreases as the price level decreases C. Decreases with inflation D. Is not impacted by inflation, only by monetary policy 18. Financial instruments are different from money because: A. They can act as a store of value and money cannot B. They can be a means of payment but money cannot C. They can allow for the transfer of risk D. They have greater liquidity 19. Financial instruments are used to channel funds from: A. Savers to borrowers in financial markets and via financial institutions B. Savers to borrowers in financial markets but not through financial institutions C. Borrowers to savers in financial markets but not through financial institutions D. Borrowers to savers through financial institutions, but not in financial markets 20. Which of the following is not a financial instrument? A. A share of Microsoft stock B. A U.S. Treasury Bond C. An electric bill D. A life insurance policy 21. Financial markets enable the transfer of risk by: A. Requiring that riskaverse investors have access to U.S. Treasury bond markets B. Allowing individuals and firms less willing to bear risk to transfer risk to other individuals and firms more willing to bear risk C. Making sure that higher default risk is offset by greater liquidity D. Enabling even unsophisticated investors to purchase highly complex financial instruments 3 22. If financial markets didn't exist: A. Required returns would be lower since fewer instruments would trade B. Liquidity would diminish and returns would be lower C. More funds would flow directly between borrowers and savers D. Liquidity would diminish, reducing the flow of funds between borrowers and savers 23. A primary financial market is: A. Located only in New York, London, and Tokyo but can handle transactions anywhere in the world B. One where the borrower obtains funds directly from the lender for newly issued securities C. A market where U.S. Treasury bonds are traded D. One that can only deal in the highest investment grade securities 24. Secondary financial markets: A. Are financial markets for all financial instruments rated less than investment grade B. Are financial markets where existing securities are bought and sold? C. Eliminate the transaction costs for buyers and sellers D. Are only for stock 25. A bank is a financial intermediary. Which of the following statements is most accurate? A. The bank's depositors are the ultimate lenders and the bank is the ultimate borrower B. People seeking loans from the bank are the ultimate spenders while the bank is the ultimate lender C. The bank's depositors are the ultimate lenders, while those seeking loans from the bank are the ultimate spenders D. Those seeking loans from the bank are the ultimate spenders; the bank's stockholders are the ultimate lenders 26. Financial intermediaries pool funds of: A. Many small savers and provide it to a few large borrowers B. Few large savers and provide it to many small borrowers C. Few large savers a few large borrowers D. Many small savers and provide it to many borrowers 27. Financial intermediaries include each of the following, except: A. The New York Stock Exchange B. Credit unions C. Savings banks D. Commercial banks 28. Which of the following are depository institutions? A. Credit unions B. Mutual funds C. Pension funds D. Insurance companies 4 29. Most individuals borrow: A. Directly without the use of a financial intermediary B. Using a financial intermediary because it lowers the cost of borrowing C. Using a financial intermediary, but would save money if they financed directly D. Without using financial intermediaries, preferring credit cards 30. Loans made between lenders and borrowers: A. Are assets to the borrowers? B. Are assets of the lenders? C. Are not taxable in the state of origination D. Are liabilities of the borrowers? 31. A collection of assets is known as a(n): A. Assetbacked security B. Derivative C. Futures contract D. Portfolio 32. A borrower has information that it does not make available to a prospective lender; this is an example of: A. A wise borrower and an unwise lender B. A transfer of risk C. Information asymmetry D. Liquidity risk 33. The owner of a small business applies for a bank loan and tells the loan officer that the funds will be used to expand inventory for the upcoming holiday season. The small business finds itself in need of additional funds to meet the monthly rent for the next quarter and the owner uses the loan proceeds to pay the rent. This is an example of: A. Liquidity risk B. Default risk C. A lack of diversification for the bank D. Information asymmetry 34. The U.S. government finances its budget deficits: A. Using direct finance B. By using a financial intermediary C. Using indirect finance D. Both through direct and indirect finance 35. Kate buys a share of Google. Google uses the funds raised from selling its stock to expand its operations into Asia. This is an example of: A. Direct finance B. Indirect finance C. Use of a financial institution D. A loan 5 36. One of the advantages of the financial system is: A. It gathers information about borrowers both before and after they obtain resources B. It communicates more information to lenders than borrowers C. It eliminates information asymmetry D. It makes sure that all information communicated is truthful 37. When the amount of direct and indirect financing are summed, the result is usually: A. Greater than 100% of GDP B. Equal to GDP C. Less than GDP D. Approximately 50% of GDP 38. The reason financial intermediaries play such an important role in economies has to do with all of the following except: A. Information costs B. High transaction costs C. Complexity of a lot of financial transactions D. The composition of GDP 39. Which of the following is not a role of a financial institution acting as a financial intermediary? A. Pooling the resources of small savers B. Formulating oversight regulations C. Providing ways to diversify risk D. Supplying liquidity 40. If financial intermediaries did not have the ability to pool the resources of small savers: A. Borrowers needing large amounts of money would find it more costly to obtain the funds B. The economy would grow faster C. People would likely save more D. The risk associated with lending would decrease 41. The reduction in transaction costs provided by financial intermediaries as a result of economies of scale benefit: A. Small borrowers and small savers B. Large borrowers but not small savers C. Society in the net, but small savers bear much of the cost D. Small borrowers but not small savers 42. Since one function of financial intermediaries is to provide liquidity: A. They must keep all of their funds in shortterm securities B. They keep almost all of their funds in cash C. They must know approximately how much liquidity their customers will need each day and have these funds available D. Regulations require financial intermediaries to keep 50% of their assets in cash 6 43. Mutual funds offer investors: A. A greater return for greater risk than what an investor can earn on his own B. A lower return for more risk than what the investor could earn on his own C. A lower return for less risk than what the investor could earn on his own D. A way for individuals to eliminate the idiosyncratic risk associated with any single investment 44. If a bank has 1,000 depositors, each of whom deposits $1,000 in the bank, and the bank makes 100 loans of $10,000 each, then each depositor has contributed: A. $100 to each loan B. $1 to each loan C. $10 to each loan D. $1000 to each loan 45. Asymmetric information poses two important obstacles to the smooth flow of funds from savers to investors. They are: A. Adverse selection, which arises before the transaction occurs, and moral hazard, which occurs after the transaction B. Moral hazard, which arises before the transaction occurs, and adverse selection, which occurs after the transaction C. Adverse selection and moral hazard, both of which occur after the transaction D. Adverse selection and moral hazard, both of which occur before the transaction 46. Which of the following could create a moral hazard for the managers of deposit institutions? A. An Economics Class B. Interest Rates C. Higher Premiums D. Federal Deposit Insurance 47. Which of the following is a problem of moral hazard? A. A lender cannot distinguish good risk from bad risk borrowers B. An individual who purchases auto insurance begins to leave his or her keys in the car while running into a store C. Life insurance companies offer an average premium to smokers and nonsmokers so they do not have to have two different premiums D. An auto insurance company charges higher premiums to younger drivers than what they charge to older drivers 48. The interest rates charged on most credit cards is: A. High due to the problem of adverse selection B. High because Visa and MasterCard have a virtual monopoly on this business C. High due to diseconomies of scale that exist in this market D. Lower than they should be given the problem of adverse selection 49. A home mortgage is a good example of: A. An unsecured loan B. A secured loan C. A high risk loan D. The problem of adverse selection 7 50. Credit may dry up at the start of an economic downturn because of all of the following except: A. Lenders require information and accurate information is more difficult to obtain B. It becomes more difficult for lenders to determine the creditworthiness of borrowers C. Lenders see greater risk in making loans to borrowers D. The freerider problem worsens during a downturn Please turn in to me the exam and scantron when you are done. 8 ...
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This note was uploaded on 02/12/2012 for the course ECON 101 taught by Professor Abrams during the Spring '11 term at Adams State University.
- Spring '11