Test Bank For The Economics Of Money Banking And Financial Markets 6th Canadian Edition By Mishkin

Test Bank For The Economics Of Money Banking And Financial Markets 6th Canadian Edition By Mishkin

Economics of Money, Banking, and Financial Markets 6e (Mishkin)

Chapter 2   An Overview of the Financial System

2.1   Function of Financial Markets

1) Every financial market has which of the following characteristics?

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

Diff: 1      Type: MC

Skill:  Recall

Objective:  2.1 Compare and contrast direct and indirect finance

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) providing a risk-free repository of spending power

Answer:  A

Diff: 1      Type: MC

Skill:  Recall

Objective:  2.1 Compare and contrast direct and indirect finance

3) Financial markets improve economic welfare because ________.

A) they channel funds from investors to savers

B) they allow consumers to time their purchase better

C) they weed out inefficient firms

D) eliminate the need for indirect finance

Answer:  B

Diff: 2      Type: MC

Skill:  Recall

Objective:  2.1 Compare and contrast direct and indirect finance

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

Answer:  D

Diff: 3      Type: MC

Skill:  Recall

Objective:  2.1 Compare and contrast direct and indirect finance

5) A breakdown of financial markets can result in ________.

A) financial stability

B) rapid economic growth

C) political instability

D) stable prices

Answer:  C

Diff: 2      Type: MC

Skill:  Recall

Objective:  2.1 Compare and contrast direct and indirect finance

6) The principal lender-savers are ________.

A) governments

B) businesses

C) households

D) foreigners

Answer:  C

Diff: 1      Type: MC

Skill:  Recall

Objective:  2.1 Compare and contrast direct and indirect finance

7) 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) You buy shares of common stock in the secondary market.

D) You buy shares in a mutual fund.

Answer:  B

Diff: 2      Type: MC

Skill:  Applied

Objective:  2.1 Compare and contrast direct and indirect finance

8) Assume that you borrow $2000 at 10 percent 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

Answer:  B

Diff: 2      Type: MC

Skill:  Applied

Objective:  2.1 Compare and contrast direct and indirect finance

9) 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 percent

B) 12.5 percent

C) 10 percent

D) 5 percent

Answer:  D

Diff: 3      Type: MC

Skill:  Applied

Objective:  2.1 Compare and contrast direct and indirect finance

10) Which of the following can be described as involving direct finance?

A) A corporation issues new shares of stock.

B) People buy shares in a mutual fund.

C) A pension fund manager buys a short-term corporate security in the secondary market.

D) An insurance company buys shares of common stock in the over-the-counter markets.

Answer:  A

Diff: 3      Type: MC

Skill:  Recall

Objective:  2.1 Compare and contrast direct and indirect finance

11) Which of the following can be described as involving direct finance?

A) A corporation takes out loans from a bank.

B) People buy shares in a mutual fund.

C) A corporation buys a short-term corporate security in a secondary market.

D) People buy shares of common stock in the primary markets.

Answer:  D

Diff: 3      Type: MC

Skill:  Applied

Objective:  2.1 Compare and contrast direct and indirect finance

12) Which of the following can be described as involving indirect finance?

A) You make a loan to your neighbor.

B) A corporation buys a share of common stock issued by another corporation in the primary market.

C) You buy a Canadian Treasury bill from the Bank of Canada.

D) You make a deposit at a bank.

Answer:  D

Diff: 3      Type: MC

Skill:  Applied

Objective:  2.1 Compare and contrast direct and indirect finance

13) Securities are ________ for the person who buys them, but are ________ for the individual or firm that issues them.

A) assets; liabilities

B) liabilities; assets

C) negotiable; nonnegotiable

D) nonnegotiable; negotiable

Answer:  A

Diff: 2      Type: MC

Skill:  Recall

Objective:  2.1 Compare and contrast direct and indirect finance

14) With ________ finance, borrowers obtain funds from lenders by selling them securities in the financial markets.

A) active

B) determined

C) indirect

D) direct

Answer:  D

Diff: 2      Type: MC

Skill:  Applied

Objective:  2.1 Compare and contrast direct and indirect finance

15) How do financial intermediaries play an important role in the economy?

Answer:  Financial intermediaries play an important role in the economy because they provide liquidity services, they lower transaction costs through economies of scale, they reduce the risk exposure of investors through risk sharing, and they solve the asymmetric information problems of adverse selection and moral hazard. By doing this, they allow small savers and borrowers to benefit from the existence of financial markets and its instruments. They also improve economic efficiency because they help financial markets to channel funds from lenders-savers to people with productive investment opportunities.