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Chapter 2 An Overview of the Financial System

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. !uestion "tatus: #revious Edition )$ %inancial markets have the basic function of ()e getting people with funds to lend together with people who want to borrow funds. ()f assuring that the swings in the business cycle are less pronounced. ()g assuring that governments need never resort to printing money. ()h both (a) and (b) of the above. ()i both (b) and (c) of the above. !uestion "tatus: #revious Edition )& %inancial markets improve economic welfare because ()' they allow funds to move from those without productive investment opportunities to those who have such opportunities. ()k they allow consumers to time their purchase better. ()l they weed out inefficient firms. ()m they do each of the above. ()n they do (a) and (b) of the above. !uestion "tatus: #revious Edition

$(%rederic ". )ishkin*Economics of Money, Banking, and Financial Markets, "eventh Edition

)+

,ell-functioning financial markets ()o cause inflation. ()p eliminate the need for indirect finance. ()- cause financial crises. ()r produce an efficient allocation of capital. ()s promote political instability. !uestion "tatus: .ew

)/

0 breakdown of financial markets can result in ()t an efficient allocation of capital. ()u rapid economic growth. ()v political instability. ()w stable prices. ()1 financial stability. !uestion "tatus: .ew

)2

,hich of the following can be described as direct finance ()y 3ou take out a mortgage from your local bank. ()4 3ou borrow 5$/66 from a friend. ()aa0 pension fund lends money to 7eneral )otors. ()bb 3ou buy shares in a mutual fund. ()cc.one of the above. !uestion "tatus: "tudy 7uide

)(

0ssume that you borrow 5$666 at 168 annual interest to finance a new business pro'ect. %or this loan to be profitable9 the minimum amount this pro'ect must generate in annual earnings is ()dd 5+66. ()ee5$61. ()ff 5$66. ()gg 51::. ()hh 5161. !uestion "tatus: .ew

);

3ou can borrow 5/666 to finance a new business venture. <his new venture will generate annual earnings of 5$/1. <he ma1imum interest rate that you would pay on the borrowed funds and still increase your income is ()ii $/8. ()'' 1$./8. ()kk 168. ()ll /8. ()mm 6./8. !uestion "tatus: .ew

=hapter $0n >verview of the %inancial "ystem$;

):

,hich of the following can be described as involving direct finance ()nn 0 corporation takes out a loan from a bank. ()oo #eople buy shares in a mutual fund. ()pp 0 corporation buys a short-term security issued by another corporation. ()-0n insurance company buys shares of common stock in the over-the-counter markets. ()rr .one of the above. !uestion "tatus: #revious Edition

)16

,hich of the following can be described as involving direct finance ()ss 0 corporation issues new shares of stock. ()tt #eople buy shares in a mutual fund. ()uu 0 pension fund manager buys a short-term corporate security in the secondary market. ()vv 0n insurance company buys shares of common stock in the over-the-counter markets. !uestion "tatus: #revious Edition

)11

,hich of the following can be described as involving direct finance ()ww 0 corporation issues new shares of stock. ()11 0 corporation buys a short-term security issued by another corporation. ()yy 0 pension fund manager buys commercial paper in the secondary market. ()44?oth (a) and (b) of the above. ()aaa ?oth (b) and (c) of the above. !uestion "tatus: #revious Edition

)1$

,hich of the following can be described as involving direct finance ()bbb 0 corporation issues new shares of stock through an investment bank. ()ccc 0 corporation buys a short-term security paper issued by another corporation. ()ddd 0 pension fund manager buys commercial paper in the primary market. ()eee 0ll of the above. ()fff ?oth (b) and (c) of the above. !uestion "tatus: #revious Edition

)1&

,hich of the following can be described as involving direct finance ()ggg 0 corporation takes out loans from a bank. ()hhh #eople buy shares in a mutual fund. ()iii 0 corporation buys a short-term corporate security in a secondary market. ()''' 0n insurance company buys shares of common stock in the primary markets. !uestion "tatus: #revious Edition

$:%rederic ". )ishkin*Economics of Money, Banking, and Financial Markets, "eventh Edition

)1+

,hich of the following can be described as involving direct finance ()kkk 0 corporation@s stock is traded in an over-the-counter market. ()lll #eople buy shares in a mutual fund. ()mmm 0 pension fund manager buys a short-term corporate security in the secondary market. ()nnn 0n insurance company buys shares of common stock in the over-the-counter markets. ()ooo .one of the above. !uestion "tatus: #revious Edition

)1/

,hich of the following can be described as involving direct finance ()ppp 0 corporation@s stock is traded in an over-the-counter market. ()--- 0 corporation buys a short-term security issued by another corporation. ()rrr 0 pension fund manager buys a short-term corporate security from the issuing corporation. ()sss ?oth (a) and (b) of the above. ()ttt ?oth (b) and (c) of the above. !uestion "tatus: #revious Edition

)12

,hich of the following can be described as involving direct finance ()uuu 0 corporation issues new shares of stock. ()vvv 0 corporation buys a short-term security issued by another corporation. ()www 0 pension fund manager buys a short-term security from the issuing corporation. ()111 0ll of the above. ()yyy ?oth (b) and (c) of the above. !uestion "tatus: #revious Edition

)1(

,hich of the following can be described as involving indirect finance ()444 3ou make a loan to your neighbor. ()aaaa 0 corporation buys a share of common stock issued by another corporation. ()bbbb 3ou buy a A.". <reasury bill from the A.". <reasury. ()cccc 3ou make a deposit at a bank. !uestion "tatus: #revious Edition

)1;

,hich of the following can be described as involving indirect finance ()dddd 0 corporation takes out loans from a bank. ()eeee #eople buy shares in a mutual fund. ()ffff 0 corporation buys a short-term security issued by another corporation. ()gggg ?oth (a) and (b) of the above. !uestion "tatus: #revious Edition

=hapter $0n >verview of the %inancial "ystem&6

)1:

,hich of the following can be described as involving indirect finance ()hhhh 0 corporation issues new shares of stock. ()iiii #eople buy shares in a mutual fund. ()'''' 0 pension fund manager buys a short-term corporate security in the secondary market. ()kkkk ?oth (a) and (b) of the above. ()llll ?oth (b) and (c) of the above. !uestion "tatus: #revious Edition

)$6

,hich of the following can be described as involving indirect finance ()mmmm 0 corporation issues new shares of stock. ()nnnn 0 corporation buys a short-term security issued by another corporation. ()oooo 0 pension fund manager buys a short-term corporate security in the secondary market. ()pppp ?oth (a) and (b) of the above. !uestion "tatus: #revious Edition

)$1

,hich of the following can be described as involving indirect finance ()---- 0 bank buys a A.". <reasury bill from one of its depositors. ()rrrr 0 corporation buys a short-term security issued by another corporation. ()ssss 0 pension fund manager buys a short-term corporate security the primary market. ()tttt ?oth (b) and (c) of the above. !uestion "tatus: #revious Edition

)$$

,hich of the following can be described as involving indirect finance ()uuuu 0 corporation takes out loans from a bank. ()vvvv #eople buy shares in a mutual fund. ()wwww 0 corporation buys a short-term corporate security in a secondary market. ()1111 0ll of the above. ()yyyy >nly (a) and (b) of the above. !uestion "tatus: #revious Edition

)$&

,hich of the following can be described as involving indirect finance ()4444 #eople buy shares in a mutual fund. ()aaaaa 0 pension fund manager buys a short-term corporate security in the secondary market. ()bbbbb 0 corporation@s stock is issued in an over-the-counter market. ()ccccc 0ll of the above. ()ddddd >nly (a) and (b) of the above. !uestion "tatus: #revious Edition

&1%rederic ". )ishkin*Economics of Money, Banking, and Financial Markets, "eventh Edition

)$+

,hich of the following can be described as involving indirect finance ()eeeee 0 corporation@s stock is traded in an over-the-counter market. ()fffff 0 corporation buys a short-term security issued by another corporation. ()ggggg 0 pension fund manager buys a short-term security from the issuing corporation. ()hhhhh ?oth (a) and (b) of the above. !uestion "tatus: #revious Edition

)$/

,hich of the following can be described as involving indirect finance ()iiiii 0 corporation issues new shares of stock. ()''''' 0 corporation buys a short-term security issued by another corporation. ()kkkkk 0 bank buys a A.". <reasury bill from one of its depositors. ()lllll 0ll of the above. ()mmmmm ?oth (b) and (c) of the above. !uestion "tatus: #revious Edition

)$2

,hich of the following can be described as involving indirect finance ()nnnnn 3ou make a loan to your neighbor. ()ooooo 3ou buy a A.". <reasury bill from the bank. ()ppppp 3ou buy a A.". <reasury bill from the A.". <reasury. ()----- 0 corporation buys a short-term security issued by another corporation. !uestion "tatus: #revious Edition

)$(

,hich of the following are securities ()rrrrr 0 corporate bond ()sssss 0 share of <e1aco common stock ()ttttt 0 <reasury bill ()uuuuu Each of the above ()vvvvv >nly (a) and (b) of the above !uestion "tatus: #revious Edition

)$;

,hich of the following statements about the characteristics of debt and e-uity is untrue ()wwwww <hey can both be long-term financial instruments. ()11111 <hey can both be short-term financial instruments. ()yyyyy <hey both involve a claim on the issuer@s income. ()44444 <hey both enable a corporation to raise funds. ()aaaaaa .one of the above. !uestion "tatus: #revious Edition

=hapter $0n >verview of the %inancial "ystem&$

)$:

,hich of the following statements about the characteristics of debt and e-uity are true ()bbbbbb <hey can both be long-term financial instruments. ()cccccc <hey can both be short-term financial instruments. ()dddddd <hey both involve a claim on the issuer@s income. ()eeeeee ?oth (a) and (b) of the above. ()ffffff ?oth (a) and (c) of the above. !uestion "tatus: #revious Edition

)&6

,hich of the following statements about the characteristics of debt and e-uity are true ()gggggg <hey can both be long-term financial instruments. ()hhhhhh <hey both involve a claim on the issuer@s income. ()iiiiii <hey both enable a corporation to raise funds. ()'''''' 0ll of the above. ()kkkkkk >nly (a) and (b) of the above. !uestion "tatus: #revious Edition

)&1

,hich of the following statements about the characteristics of debt and e-uity are true ()llllll <hey can both be long-term financial instruments. ()mmmmmm <hey can both be short-term financial instruments. ()nnnnnn Bebt is a claim on the issuer@s assets9 but e-uity is a claim on the issuer@s income. ()oooooo ?oth (a) and (b) of the above. ()pppppp ?oth (a) and (c) of the above. !uestion "tatus: #revious Edition

)&$

,hich of the following statements about financial markets and securities are true ()------ 0 bond is a debt security that promises to make payments for a specified period of time. ()rrrrrr <he maturity of a debt instrument is the time (term) to that instrument@s e1piration date. ()ssssss 0 debt instrument is short term if its maturity is less than one year. ()tttttt 0ll of the above are true. !uestion "tatus: #revious Edition

)&&

,hich of the following statements about financial markets and securities are true ()uuuuuu 0 bond is a long-term security that promises to make periodic payments called dividends to the firm@s residual claimants. ()vvvvvv 0 debt instrument is long term if its maturity is ten years or longer. ()wwwwww <he maturity of a debt instrument is the number of years (term) to that instrument@s e1piration date. ()111111 0ll of the above are true. ()yyyyyy ?oth (a) and (c) are correct. !uestion "tatus: Cevised

&&%rederic ". )ishkin*Economics of Money, Banking, and Financial Markets, "eventh Edition

)&+

,hich of the following statements about the characteristics of debt and e-uities is true ()444444 <hey can both be long-term financial instruments. ()aaaaaaa ?ond holders are residual claimants. ()bbbbbbb <he income from bonds is typically more variable than that from e-uities. ()ccccccc ?onds pay dividends. ()ddddddd .one of the above. !uestion "tatus: "tudy 7uide

)&/

,hich of the following statements about financial markets and securities are true ()eeeeeee 0 bond is a long-term security that promises to make periodic payments called dividends to the firm@s residual claimants. ()fffffff 0 debt instrument is intermediate term if its maturity is less than one year. ()ggggggg 0 debt instrument is long term if its maturity is ten years or longer. ()hhhhhhh <he maturity of a debt instrument is the number of years (term) to that instrument@s e1piration date. ()iiiiiii ?oth (a) and (d) are correct. !uestion "tatus: Cevised

)&2

,hich of the following statements about financial markets and securities are true ()''''''' 0 bond is a debt security that promises to make payments for a specified period of time. ()kkkkkkk E-uities often make periodic payments called dividends and are considered to be long-term securities because they have no maturity date. ()lllllll 0 debt instrument is short term if its maturity is less than ten years. ()mmmmmmm 0ll of the above are true. ()nnnnnnn >nly (a) and (b) of the above are true. !uestion "tatus: #revious Edition

)&(

,hich of the following statements about financial markets and securities are true ()ooooooo 0 debt instrument is short term if its maturity is between one and ten years. ()ppppppp E-uities often make periodic payments called dividends and are considered to be long-term securities because they have no maturity date. ()------0 debt instrument is long term if its maturity is more than one year. ()rrrrrrr >nly (a) and (b) of the above are true. ()sssssss >nly (b) and (c) of the above are true. !uestion "tatus: #revious Edition

)&;

"ecurities are DDDDD for the person who buys them9 but are DDDDD for the individual or firm that issues them. ()ttttttt assetsE liabilities ()uuuuuuu liabilitiesE assets ()vvvvvvv negotiableE nonnegotiable ()wwwwwww nonnegotiableE negotiable !uestion "tatus: #revious Edition

=hapter $0n >verview of the %inancial "ystem&+

)&:

%orty or so dealers establish a FmarketG in these securities by standing ready to buy and sell them. ()1111111 "econdary stocks ()yyyyyyy "urplus stocks ()4444444 A.". government bonds ()aaaaaaaa =ommon stocks !uestion "tatus: #revious Edition

)+6

,hich of the following are primary markets ()bbbbbbbb <he .ew 3ork "tock E1change ()cccccccc <he A.". government bond market ()dddddddd <he over-the-counter stock market ()eeeeeeee <he options markets ()ffffffff .one of the above !uestion "tatus: #revious Edition

)+1

,hich of the following are secondary markets ()gggggggg <he .ew 3ork "tock E1change ()hhhhhhhh <he A.". government bond market ()iiiiiiii <he over-the-counter stock market ()'''''''' <he options markets ()kkkkkkkk 0ll of the above !uestion "tatus: #revious Edition

)+$

0n important function of secondary markets is to ()llllllll make it easier to sell financial instruments to raise cash. ()mmmmmmmm raise funds for corporations through the sale of securities. ()nnnnnnnn create a market for bank demand deposits. ()oooooooo create a market for newly constructed houses. ()pppppppp make it easier for governments to raise ta1es. !uestion "tatus: .ew

)+&

"econdary markets make financial instruments more ()-------solid. ()rrrrrrrr fluid. ()ssssssss li-uid. ()tttttttt risky. ()uuuuuuuu vapid. !uestion "tatus: .ew

&/%rederic ". )ishkin*Economics of Money, Banking, and Financial Markets, "eventh Edition

)++

<he higher a security@s price in the secondary market ()vvvvvvvv the more funds a firm can raise by selling securities in the primary market. ()wwwwwwww the more funds a firm can raise by selling securities in the secondary market. ()11111111 the less funds a firm can raise by selling securities in the primary market. ()yyyyyyyy the less funds a firm can raise by selling securities in the secondary market. ()44444444 secondary market prices have no effect on the funds a firm can raise. !uestion "tatus: .ew

)+/

0n important financial institution that assists in the initial sale of securities in the primary market is the ()aaaaaaaaa investment bank. ()bbbbbbbbb commercial bank. ()ccccccccc stock e1change. ()ddddddddd brokerage house. !uestion "tatus: #revious Edition

)+2

0 corporation ac-uires new funds only when its securities are sold ()eeeeeeeee in the primary market by an investment bank. ()fffffffff in the primary market by a stock e1change broker. ()ggggggggg in the secondary market by a securities dealer. ()hhhhhhhhh in the secondary market by a commercial bank. !uestion "tatus: #revious Edition

)+(

0 corporation ac-uires new funds only when its securities are sold ()iiiiiiiii in the secondary market by an investment bank. ()''''''''' in the primary market by an investment bank. ()kkkkkkkkk in the secondary market by a stock e1change broker. ()lllllllll in the secondary market by a commercial bank. !uestion "tatus: #revious Edition

)+;

,hich of the following assets is traded only in an over-the-counter market ()mmmmmmmmm treasury bonds ()nnnnnnnnn stocks ()ooooooooo commodities ()ppppppppp all of the above ()--------none of the above !uestion "tatus: "tudy 7uide

=hapter $0n >verview of the %inancial "ystem&2

)+:

,hich of the following markets is sometimes organi4ed as an over-the-counter market ()rrrrrrrrr <he stock market ()sssssssss <he bond market ()ttttttttt <he foreign e1change market ()uuuuuuuuu <he federal funds market ()vvvvvvvvv Each of the above !uestion "tatus: #revious Edition

)/6

,hich of the following statements about financial markets and securities are true ()wwwwwwwww )any common stocks are traded over-the-counter9 although the largest corporations usually have their shares traded at organi4ed stock e1changes such as the .ew 3ork "tock E1change. ()111111111 0 corporation ac-uires new funds only when its securities are first sold in the primary market. ()yyyyyyyyy )oney market securities are usually more widely traded than longer-term securities and so tend to be more li-uid. ()444444444 0ll of the above are true. ()aaaaaaaaaa >nly (a) and (b) of the above are true. !uestion "tatus: #revious Edition

)/1

,hich of the following statements about financial markets and securities are true ()bbbbbbbbbb )any common stocks are traded over-the-counter9 although the largest corporations usually have their shares traded at organi4ed stock e1changes such as the .ew 3ork "tock E1change. ()cccccccccc 0s a corporation gets a share of the broker@s commission9 a corporation ac-uires new funds whenever its securities are sold. ()dddddddddd =apital market securities are usually more widely traded than shorter-term securities and so tend to be more li-uid. ()eeeeeeeeee 0ll of the above are true. !uestion "tatus: #revious Edition

)/$

,hich of the following statements about financial markets and securities are true ()ffffffffff%ew common stocks are traded over-the-counter9 although the over-the-counter markets have grown in recent years. ()gggggggggg 0 corporation ac-uires new funds only when its securities are first sold in the primary market. ()hhhhhhhhhh =apital market securities are usually more widely traded than longer-term securities and so tend to be more li-uid. ()iiiiiiiiii 0ll of the above are true. ()'''''''''' >nly (a) and (b) of the above are true. !uestion "tatus: #revious Edition

&(%rederic ". )ishkin*Economics of Money, Banking, and Financial Markets, "eventh Edition

)/&

,hich of the following statements about financial markets and securities are true ()kkkkkkkkkk )any common stocks are traded over-the-counter9 although the largest corporations usually have their shares traded at organi4ed stock e1changes such as the .ew 3ork "tock E1change. ()llllllllll 0s a corporation gets a share of the broker@s commission9 a corporation ac-uires new funds whenever its securities are sold. ()mmmmmmmmmm ?ecause of their short terms to maturity9 the prices of money market instruments tend not to fluctuate wildly. ()nnnnnnnnnn >nly (a) and (b) of the above are true. ()oooooooooo >nly (a) and (c) of the above are true. !uestion "tatus: #revious Edition

)/+

?onds that are sold in a foreign country and are denominated in the country@s currency in which they are sold are known as ()pppppppppp foreign bonds. ()---------Eurobonds. ()rrrrrrrrrre-uity bonds. ()ssssssssss country bonds. !uestion "tatus: #revious Edition

)//

?onds that are sold in a foreign country and are denominated in a currency other than that of the country in which it is sold are known as ()tttttttttt foreign bonds. ()uuuuuuuuuu Eurobonds. ()vvvvvvvvvv e-uity bonds. ()wwwwwwwwww country bonds. !uestion "tatus: #revious Edition

)/2

<he process of indirect finance using financial intermediaries is called ()1111111111 direct lending. ()yyyyyyyyyy financial intermediation. ()4444444444 disintermediation. ()aaaaaaaaaaa financial li-uidation. ()bbbbbbbbbbb resource allocation. !uestion "tatus: .ew

)/(

In the Anited "tates loans from DDDDD are far DDDDD important for corporate finance than are securities markets. ()ccccccccccc government agenciesE more ()ddddddddddd government agenciesE less ()eeeeeeeeeee financial intermediariesE more ()fffffffffff financial intermediariesE less !uestion "tatus: #revious Edition

=hapter $0n >verview of the %inancial "ystem&;

)/;

%inancial intermediaries lower costs by spreading them over a large number of customers9 thereby taking advantage of ()ggggggggggg risk sharing. ()hhhhhhhhhhh diversification. ()iiiiiiiiiii economies of scale. ()''''''''''' asymmetric information. ()kkkkkkkkkkk transactions costs. !uestion "tatus: .ew

)/:

Economies of scale enable financial institutions to ()lllllllllll reduce transactions costs. ()mmmmmmmmmmm avoid the asymmetric information problem. ()nnnnnnnnnnn eliminate the need to diversify. ()ooooooooooo reduce moral ha4ard. ()ppppppppppp avoid adverse selection problems. !uestion "tatus: .ew

)26

0n e1ample of economies of scale in the provision of financial services is ()----------- investing in a diversified collection of assets. ()rrrrrrrrrrr providing depositors with a variety of savings certificates. ()sssssssssss spreading the cost of borrowed funds over many customers. ()ttttttttttt spreading the cost of writing a standardi4ed contract over many borrowers. ()uuuuuuuuuuu all of the above. !uestion "tatus: .ew

)21

<hat depositors earn interest on checking and savings accounts9 and yet withdraw their funds whenever necessary is possible because ()vvvvvvvvvvv government regulations mandate this policy. ()wwwwwwwwwww financial intermediaries earn such large profits. ()11111111111 financial intermediaries lower transaction costs. ()yyyyyyyyyyy financial intermediaries hold highly diversified asset portfolios. !uestion "tatus: #revious Edition

)2$

<he process where financial intermediaries create and sell low-risk assets and use the proceeds to purchase riskier assets is known as ()44444444444 risk sharing. ()aaaaaaaaaaaa risk aversion. ()bbbbbbbbbbbb risk neutrality. ()cccccccccccc risk shedding. ()dddddddddddd risk selling. !uestion "tatus: .ew

&:%rederic ". )ishkin*Economics of Money, Banking, and Financial Markets, "eventh Edition

)2&

Cisk sharing is also known as ()eeeeeeeeeeee liability discounting. ()ffffffffffff asset discounting. ()gggggggggggg liability transformation. ()hhhhhhhhhhhh asset transformation. ()iiiiiiiiiiiiasset selection. !uestion "tatus: .ew

)2+

Ceducing risk through the purchase of assets whose returns do not always move together is ()''''''''''''disintermediation. ()kkkkkkkkkkkk intermediation. ()llllllllllllintervention. ()mmmmmmmmmmmm discounting. ()nnnnnnnnnnnn diversification. !uestion "tatus: .ew

)2/

<he concept of diversification is captured by the statement ()oooooooooooo don@t look a gift horse in the mouth. ()pppppppppppp don@t put all your eggs in one basket. ()------------ it never rains9 but it pours. ()rrrrrrrrrrrr the only thing we have to fear is fear itself. ()ssssssssssss make hay while the sun shines. !uestion "tatus: .ew

)22

<he process of asset transformation refers to the conversion of ()ttttttttttttsafer assets into risky assets. ()uuuuuuuuuuuu safer assets into risky liabilities. ()vvvvvvvvvvvv risky assets into safer assets. ()wwwwwwwwwwww risky assets into risky liabilities. ()111111111111 safer assets into safer liabilities. !uestion "tatus: .ew

)2(

Cisk sharing is profitable for financial institutions due to ()yyyyyyyyyyyy low transactions costs. ()444444444444 asymmetric information. ()aaaaaaaaaaaaa adverse selection. ()bbbbbbbbbbbbb moral ha4ard. ()ccccccccccccc all of the above. !uestion "tatus: .ew

=hapter $0n >verview of the %inancial "ystem+6

)2;

<he benefit of risk sharing to customers of financial institutions is ()ddddddddddddd reduced li-uidity. ()eeeeeeeeeeeee reduced diversification. ()fffffffffffff reduced liability. ()ggggggggggggg reduced risk. ()hhhhhhhhhhhhh reduced return. !uestion "tatus: .ew

)2:

<he presence of transaction costs in financial markets e1plains9 in part9 why ()iiiiiiiiiiiii financial intermediaries and indirect finance play such an important role in financial markets. ()''''''''''''' e-uity and bond financing play such an important role in financial markets. ()kkkkkkkkkkkkk corporations get more funds through e-uity financing than they get from financial intermediaries. ()lllllllllllll direct financing is more important than indirect financing as a source of funds. !uestion "tatus: #revious Edition

)(6

%inancial intermediaries ()mmmmmmmmmmmmm e1ist because there are substantial information and transactions costs in the economy. ()nnnnnnnnnnnnn improve the lot of the small saver. ()ooooooooooooo are involved in the process of indirect finance. ()ppppppppppppp do each of the above. ()------------- do only (a) and (b) of the above. !uestion "tatus: #revious Edition

)(1

%inancial intermediaries promote economic efficiency and thereby increase people@s wealth ()rrrrrrrrrrrrr by reducing the transactions cost of linking together borrowers and lenders. ()sssssssssssss to the e1tent that they help solve the problems due to asymmetric information. ()ttttttttttttt by reducing the e1posure of investors to risk. ()uuuuuuuuuuuuu because of all of the above. ()vvvvvvvvvvvvv because of only (a) and (b) of the above. !uestion "tatus: "tudy 7uide

)($

<ypically9 borrowers have superior information relative to lenders about the potential returns and risks associated with an investment pro'ect. <he difference in information is called DDDDDDDDDD9 and it creates the DDDDDDDDDD problem. ()wwwwwwwwwwwww adverse selectionE moral ha4ard ()1111111111111 asymmetric informationE risk sharing ()yyyyyyyyyyyyy asymmetric informationE adverse selection ()4444444444444 adverse selectionE risk sharing ()aaaaaaaaaaaaaa moral ha4ardE adverse selection !uestion "tatus: "tudy 7uide

+1%rederic ". )ishkin*Economics of Money, Banking, and Financial Markets, "eventh Edition

)(&

0 potential borrower usually has better information about the potential returns and risk of the investment pro'ects he plans to undertake than does the lender. <his ine-uality of information is called ()bbbbbbbbbbbbbb moral ha4ard. ()cccccccccccccc asymmetric information. ()dddddddddddddd reverse causation. ()eeeeeeeeeeeeee adverse selection. !uestion "tatus: #revious Edition

)(+

If bad credit risks are the ones who most actively seek loans and9 therefore9 receive them from financial intermediaries9 then financial intermediaries face the problem of ()ffffffffffffff moral ha4ard. ()gggggggggggggg adverse selection. ()hhhhhhhhhhhhhh free-riding. ()iiiiiiiiiiiiii costly state verification. !uestion "tatus: #revious Edition

)(/

<he problem created by asymmetric information before the transaction occurs is called DDDDD9 while the problem created after the transaction occurs is called DDDDD. ()'''''''''''''' adverse selectionE moral ha4ard ()kkkkkkkkkkkkkk moral ha4ardE adverse selection ()llllllllllllll costly state verificationE free-riding ()mmmmmmmmmmmmmm free-ridingE costly state verification !uestion "tatus: #revious Edition

)(2

<he presence of DDDDD in financial markets leads to adverse selection and moral ha4ard problems that interfere with the efficient functioning of financial markets. ()nnnnnnnnnnnnnn noncollaterali4ed risk ()oooooooooooooo free-riding ()pppppppppppppp asymmetric information ()-------------costly state verification !uestion "tatus: #revious Edition

)((

0dverse selection is a problem associated with e-uity and debt contracts arising from ()rrrrrrrrrrrrrr the lender@s relative lack of information about the borrower@s potential returns and risks of his investment activities. ()ssssssssssssss the lender@s inability to legally re-uire sufficient collateral to cover a 1668 loss if the borrower defaults. ()tttttttttttttt the borrower@s lack of incentive to seek a loan for highly risky investments. ()uuuuuuuuuuuuuu none of the above. !uestion "tatus: #revious Edition

=hapter $0n >verview of the %inancial "ystem+$

)(;

<he concept of adverse selection helps to e1plain ()vvvvvvvvvvvvvv which firms are more likely to obtain funds from banks and other financial intermediaries9 rather than from the securities markets. ()wwwwwwwwwwwwww why indirect finance is more important than direct finance as a source of business finance. ()11111111111111 why direct finance is more important than indirect finance as a source of business finance. ()yyyyyyyyyyyyyy only (a) and (b) of the above. ()44444444444444 only (a) and (c) of the above. !uestion "tatus: #revious Edition

)(:

<hat only large9 well-established corporations have access to securities markets ()aaaaaaaaaaaaaaae1plains why indirect finance is such an important source of e1ternal funds for businesses. ()bbbbbbbbbbbbbbb can be e1plained by the problem of adverse selection. ()ccccccccccccccccan be e1plained by government regulations that prohibit small firms from ac-uiring funds in securities markets. ()ddddddddddddddd can be e1plained by all of the above. ()eeeeeeeeeeeeeeecan be e1plained by only (a) and (b) of the above. !uestion "tatus: #revious Edition

);6

In financial markets9 lenders typically have inferior information about potential returns and risks associated with any investment pro'ect. <his difference in information is called ()fffffffffffffff comparative informational disadvantage. ()ggggggggggggggg asymmetric information. ()hhhhhhhhhhhhhhh variant information. ()iiiiiiiiiiiiiii caveat venditor. !uestion "tatus: #revious Edition

);1

0 professional baseball player may be contractually restricted from skiing. <he team owner includes this clause in the player@s contract to protect against ()''''''''''''''' fraud. ()kkkkkkkkkkkkkkk moral ha4ard. ()lllllllllllllll adverse selection. ()mmmmmmmmmmmmmmm regulatory circumvention. ()nnnnnnnnnnnnnnn risk sharing. !uestion "tatus: .ew

+&%rederic ". )ishkin*Economics of Money, Banking, and Financial Markets, "eventh Edition

);$

0n e1ample of the problem of DDDDDD is when a corporation that uses the funds raised from selling new shares of stock to pay for =aribbean cruises for all of its employees and their families. ()ooooooooooooooo adverse selection ()ppppppppppppppp moral ha4ard ()--------------risk sharing ()rrrrrrrrrrrrrrr credit risk ()sssssssssssssss prudential supervision !uestion "tatus: .ew

);&

0 buyer of a used car faces the DDDDDDDDDD problem that most of her choices are lemons. ()ttttttttttttttt moral ha4ard ()uuuuuuuuuuuuuuu adverse selection ()vvvvvvvvvvvvvvv diversification ()wwwwwwwwwwwwwww free rider ()111111111111111 bureaucratic behavior !uestion "tatus: .ew

);+

In the early 1:;6s9 a particular bank in >klahoma developed a reputation of readily providing loans to borrowers for the purpose of e1ploring for oil deposits. )any of these loans were never repaid9 because this bank failed to address the ()yyyyyyyyyyyyyyy adverse selection problem. ()444444444444444moral ha4ard problem. ()aaaaaaaaaaaaaaaa regulatory avoidance problem. ()bbbbbbbbbbbbbbbb risk-sharing problem. ()cccccccccccccccc free-rider problem. !uestion "tatus: .ew

);/

0merican businesses get their e1ternal funds primarily from ()dddddddddddddddd bank loans. ()eeeeeeeeeeeeeeee bonds and commercial paper issues. ()ffffffffffffffff stock issues. ()gggggggggggggggg other loans. !uestion "tatus: #revious Edition

);2

,hich of the following is the primary source of e1ternal funds used by 0merican businesses to finance their activities ()hhhhhhhhhhhhhhhh "tock ()iiiiiiiiiiiiiiii ?onds and commercial paper ()'''''''''''''''' ?ank loans ()kkkkkkkkkkkkkkkk >ther loans !uestion "tatus: #revious Edition

=hapter $0n >verview of the %inancial "ystem++

);(

"tudies of the ma'or developed countries show that ()llllllllllllllll e1ternal financing for corporations is dominated by financial intermediaries. ()mmmmmmmmmmmmmmmm e1ternal financing for corporations is dominated by securities issues. ()nnnnnnnnnnnnnnnn financial intermediaries avoid lending to corporations. ()oooooooooooooooo none of the above are consistent across countries. !uestion "tatus: #revious Edition

);;

.ot surprisingly9 the Anited "tates and DDDDD9 which have the most developed securities markets in the world9 also make the greatest use of them in financing corporations. ()pppppppppppppppp 7reat ?ritain ()---------------=anada ()rrrrrrrrrrrrrrrr Hapan ()ssssssssssssssss 7ermany !uestion "tatus: #revious Edition

);:

<he countries that have made the least use of securities markets are DDDDD and DDDDDE in these two countries finance from financial intermediaries has been almost ten times greater than that from securities markets. ()tttttttttttttttt 7ermanyE Hapan ()uuuuuuuuuuuuuuuu 7ermanyE 7reat ?ritain ()vvvvvvvvvvvvvvvv 7reat ?ritainE =anada ()wwwwwwwwwwwwwwww =anadaE Hapan !uestion "tatus: #revious Edition

):6

<he countries that have made the least use of securities markets are 7ermany and HapanE in these two countries finance from financial intermediaries has been almost DDDDD times greater than that from securities markets. ()1111111111111111 three ()yyyyyyyyyyyyyyyy four ()4444444444444444 five ()aaaaaaaaaaaaaaaaa ten !uestion "tatus: #revious Edition

):1

0lthough the dominance of DDDDD over DDDDD is clear in all countries9 the relative importance of bond versus stock markets differs widely. ()bbbbbbbbbbbbbbbbb financial intermediariesE securities markets ()ccccccccccccccccc financial intermediariesE government agencies ()ddddddddddddddddd government agenciesE financial intermediaries ()eeeeeeeeeeeeeeeee government agenciesE securities markets !uestion "tatus: #revious Edition

+/%rederic ". )ishkin*Economics of Money, Banking, and Financial Markets, "eventh Edition

):$

"tudies of the ma'or developed countries show that when businesses go looking for funds to finance their activities they usually obtain these funds from ()fffffffffffffffff government agencies. ()ggggggggggggggggg e-uities markets. ()hhhhhhhhhhhhhhhhh financial intermediaries. ()iiiiiiiiiiiiiiiii bond markets. !uestion "tatus: #revious Edition

):&

,hich of the following financial intermediaries is not a depository institution ()''''''''''''''''' 0 savings and loan association ()kkkkkkkkkkkkkkkkk 0 commercial bank ()lllllllllllllllll 0 credit union ()mmmmmmmmmmmmmmmmm 0 finance company ()nnnnnnnnnnnnnnnnn .one of the above !uestion "tatus: #revious Edition

):+

,hich of the following is a contractual savings institution ()ooooooooooooooooo 0 life insurance company ()ppppppppppppppppp 0 credit union ()----------------- 0 savings and loan association ()rrrrrrrrrrrrrrrrr 0 mutual fund !uestion "tatus: #revious Edition

):/

=ontractual savings institutions include ()sssssssssssssssssmutual savings banks. ()ttttttttttttttttt money market mutual funds. ()uuuuuuuuuuuuuuuuu commercial banks. ()vvvvvvvvvvvvvvvvv life insurance companies. ()wwwwwwwwwwwwwwwww all of the above. !uestion "tatus: "tudy 7uide

):2

,hich of the following are not contractual savings institutions ()11111111111111111 Iife insurance companies ()yyyyyyyyyyyyyyyyy =redit unions ()44444444444444444 #ension funds ()aaaaaaaaaaaaaaaaaa "tate and local government retirement funds !uestion "tatus: #revious Edition

=hapter $0n >verview of the %inancial "ystem+2

):(

,hich of the following financial intermediaries are not depository institutions ()bbbbbbbbbbbbbbbbbb %inance companies ()cccccccccccccccccc #ension funds ()dddddddddddddddddd "avings and loan associations ()eeeeeeeeeeeeeeeeee >nly (a) and (b) of the above ()ffffffffffffffffff >nly (b) and (c) of the above !uestion "tatus: #revious Edition

):;

,hich of the following are not contractual savings institutions ()gggggggggggggggggg 0 life insurance company ()hhhhhhhhhhhhhhhhhh 0 pension fund ()iiiiiiiiiiiiiiiiii 0 mutual fund ()'''''''''''''''''' >nly (a) and (b) of the above !uestion "tatus: #revious Edition

)::

,hich of the following are investment intermediaries ()kkkkkkkkkkkkkkkkkk Iife insurance companies ()llllllllllllllllll )utual funds ()mmmmmmmmmmmmmmmmmm #ension funds ()nnnnnnnnnnnnnnnnnn "tate and local government retirement funds !uestion "tatus: #revious Edition

)166 ,hich of the following financial intermediaries are depository institutions ()oooooooooooooooooo 0 savings and loan association ()pppppppppppppppppp 0 commercial bank ()------------------ 0 money market mutual fund ()rrrrrrrrrrrrrrrrrr 0ll of the above ()ssssssssssssssssss >nly (a) and (b) of the above !uestion "tatus: #revious Edition )161 ,hich of the following is a depository institution ()tttttttttttttttttt 0 life insurance company ()uuuuuuuuuuuuuuuuuu 0 credit union ()vvvvvvvvvvvvvvvvvv 0 pension fund ()wwwwwwwwwwwwwwwwww 0 mutual fund !uestion "tatus: #revious Edition

+(%rederic ". )ishkin*Economics of Money, Banking, and Financial Markets, "eventh Edition

)16$ ,hich of the following are depository institutions ()111111111111111111 )utual savings banks ()yyyyyyyyyyyyyyyyyy =redit unions ()444444444444444444 )utual funds ()aaaaaaaaaaaaaaaaaaa 0ll of the above ()bbbbbbbbbbbbbbbbbbb >nly (a) and (b) of the above !uestion "tatus: #revious Edition )16& ,hich of the following is a depository institution ()ccccccccccccccccccc 0 life insurance company ()ddddddddddddddddddd 0 mutual savings bank ()eeeeeeeeeeeeeeeeeee 0 pension fund ()fffffffffffffffffff 0 finance company ()ggggggggggggggggggg <he stock e1change !uestion "tatus: "tudy 7uide )16+ ,hich of the following is not a contractual savings institution ()hhhhhhhhhhhhhhhhhhh 0 life insurance company ()iiiiiiiiiiiiiiiiiii 0 pension fund ()''''''''''''''''''' 0 savings and loan association ()kkkkkkkkkkkkkkkkkkk 0 fire and casualty insurance company !uestion "tatus: #revious Edition )16/ ,hich of the following are not investment intermediaries ()lllllllllllllllllll 0 life insurance company ()mmmmmmmmmmmmmmmmmmm 0 pension fund ()nnnnnnnnnnnnnnnnnnn 0 mutual fund ()ooooooooooooooooooo >nly (a) and (b) of the above !uestion "tatus: #revious Edition )162 ,hich of the following are investment intermediaries ()ppppppppppppppppppp %inance companies ()------------------- )utual funds ()rrrrrrrrrrrrrrrrrrr #ension funds ()sssssssssssssssssss 0ll of the above ()ttttttttttttttttttt >nly (a) and (b) of the above !uestion "tatus: #revious Edition

=hapter $0n >verview of the %inancial "ystem+;

)16( <he primary assets of a mutual savings bank are ()uuuuuuuuuuuuuuuuuuu bonds. ()vvvvvvvvvvvvvvvvvvv mortgages. ()wwwwwwwwwwwwwwwwwww stocks. ()1111111111111111111 deposits. ()yyyyyyyyyyyyyyyyyyy commercial loans. !uestion "tatus: "tudy 7uide )16; <he primary liabilities of a credit union are ()4444444444444444444 bonds. ()aaaaaaaaaaaaaaaaaaaa mortgages. ()bbbbbbbbbbbbbbbbbbbb stocks. ()cccccccccccccccccccc commercial loans. ()dddddddddddddddddddd deposits. !uestion "tatus: "tudy 7uide )16: <he primary assets of a pension fund are ()eeeeeeeeeeeeeeeeeeee money market instruments. ()ffffffffffffffffffff corporate bonds and stock. ()gggggggggggggggggggg consumer and business loans. ()hhhhhhhhhhhhhhhhhhhh mortgages. !uestion "tatus: #revious Edition )116 <he primary assets of a savings and loan association are ()iiiiiiiiiiiiiiiiiiii money market instruments. ()'''''''''''''''''''' corporate bonds and stock. ()kkkkkkkkkkkkkkkkkkkk consumer and business loans. ()llllllllllllllllllll mortgages. !uestion "tatus: #revious Edition )111 <he primary assets of credit unions are ()mmmmmmmmmmmmmmmmmmmm municipal bonds. ()nnnnnnnnnnnnnnnnnnnn business loans. ()oooooooooooooooooooo consumer loans. ()pppppppppppppppppppp mortgages. !uestion "tatus: #revious Edition )11$ <he primary assets of a finance company are ()-------------------municipal bonds. ()rrrrrrrrrrrrrrrrrrrr corporate stocks and bonds. ()ssssssssssssssssssss consumer and business loans. ()tttttttttttttttttttt mortgages.

+:%rederic ". )ishkin*Economics of Money, Banking, and Financial Markets, "eventh Edition

!uestion "tatus: #revious Edition )11& <he primary assets of commercial banks include ()uuuuuuuuuuuuuuuuuuuu mortgages. ()vvvvvvvvvvvvvvvvvvvv consumer and business loans. ()wwwwwwwwwwwwwwwwwwww A.". government securities. ()11111111111111111111 all of the above. ()yyyyyyyyyyyyyyyyyyyy only (a) and (b) of the above. !uestion "tatus: #revious Edition )11+ <he primary assets of fire and casualty insurance companies include ()44444444444444444444 municipal bonds. ()aaaaaaaaaaaaaaaaaaaaa corporate stocks and bonds. ()bbbbbbbbbbbbbbbbbbbbb consumer and business loans. ()ccccccccccccccccccccc all of the above. ()ddddddddddddddddddddd only (a) and (b) of the above. !uestion "tatus: #revious Edition )11/ <he primary source of funds of fire and casualty insurance companies include ()eeeeeeeeeeeeeeeeeeeee commercial paper9 stocks9 and bonds. ()fffffffffffffffffffff premiums from policies. ()ggggggggggggggggggggg savings deposits. ()hhhhhhhhhhhhhhhhhhhhh all of the above. !uestion "tatus: Cevised )112 <he primary liabilities of a commercial bank are ()iiiiiiiiiiiiiiiiiiiii bonds. ()''''''''''''''''''''' mortgages. ()kkkkkkkkkkkkkkkkkkkkk deposits. ()lllllllllllllllllllll commercial paper. !uestion "tatus: #revious Edition )11( <he primary liabilities of depository institutions are ()mmmmmmmmmmmmmmmmmmmmm premiums from policies. ()nnnnnnnnnnnnnnnnnnnnn shares. ()ooooooooooooooooooooo stocks. ()ppppppppppppppppppppp bonds. ()--------------------deposits. !uestion "tatus: .ew

=hapter $0n >verview of the %inancial "ystem/6

)11; <he primary assets of money market mutual funds are ()rrrrrrrrrrrrrrrrrrrrr stocks. ()sssssssssssssssssssss bonds. ()ttttttttttttttttttttt money market instruments. ()uuuuuuuuuuuuuuuuuuuuu municipal bonds. ()vvvvvvvvvvvvvvvvvvvvv deposits. !uestion "tatus: .ew )11: )oney market mutual fund shares function like ()wwwwwwwwwwwwwwwwwwwww checking accounts that pay interest. ()111111111111111111111 bonds. ()yyyyyyyyyyyyyyyyyyyyy stocks. ()444444444444444444444 currency. ()aaaaaaaaaaaaaaaaaaaaaa municipal bonds. !uestion "tatus: .ew )1$6 0n important feature of money market mutual fund shares is ()bbbbbbbbbbbbbbbbbbbbbb deposit insurance. ()cccccccccccccccccccccc the ability to write checks against shareholdings. ()dddddddddddddddddddddd the ability to borrow against shareholdings. ()eeeeeeeeeeeeeeeeeeeeee claims on shares of corporate stock. ()ffffffffffffffffffffff all of the above. !uestion "tatus: .ew )1$1 <hrift institutions include ()gggggggggggggggggggggg banks9 mutual funds9 and insurance companies. ()hhhhhhhhhhhhhhhhhhhhhh life insurance companies9 fire and casualty companies9 and pension funds. ()iiiiiiiiiiiiiiiiiiiiii finance companies9 mutual funds9 and money market funds. ()'''''''''''''''''''''' pension funds9 mutual funds9 and banks. ()kkkkkkkkkkkkkkkkkkkkkk savings and loan associations9 mutual savings banks9 and credit unions. !uestion "tatus: .ew )1$$ ,hich of the following is not a goal of financial regulation ()llllllllllllllllllllll Ensuring the soundness of the financial system ()mmmmmmmmmmmmmmmmmmmmmm Ceducing moral ha4ard ()nnnnnnnnnnnnnnnnnnnnnn Ceducing adverse selection ()oooooooooooooooooooooo Ensuring that investors never suffer losses !uestion "tatus: #revious Edition

/1%rederic ". )ishkin*Economics of Money, Banking, and Financial Markets, "eventh Edition

)1$& <he %ederal Beposit Insurance =orporation (%BI=) regulates ()pppppppppppppppppppppp savings and loan associations. ()---------------------mutual savings banks. ()rrrrrrrrrrrrrrrrrrrrrr credit unions. ()ssssssssssssssssssssss all of the above. ()tttttttttttttttttttttt only (a) and (b) of the above. !uestion "tatus: #revious Edition )1$+ "avings and loan associations are regulated by the ()uuuuuuuuuuuuuuuuuuuuuu %ederal Ceserve "ystem. ()vvvvvvvvvvvvvvvvvvvvvv "ecurities and E1change =ommission. ()wwwwwwwwwwwwwwwwwwwwww >ffice of the =omptroller of the =urrency. ()1111111111111111111111 >ffice of <hrift "upervision. ()yyyyyyyyyyyyyyyyyyyyyy Bepartment of Hustice. !uestion "tatus: "tudy 7uide )1$/ ,hich of the following regulates at least some commercial banks ()4444444444444444444444 <he >ffice of the =omptroller of the =urrency ()aaaaaaaaaaaaaaaaaaaaaaa <he %ederal Beposit Insurance =orporation (%BI=) ()bbbbbbbbbbbbbbbbbbbbbbb <he %ederal Ceserve "ystem ()ccccccccccccccccccccccc Each of the above ()ddddddddddddddddddddddd >nly (a) and (b) of the above !uestion "tatus: #revious Edition )1$2 ,hich of the following e1amines the books of depository institutions ()eeeeeeeeeeeeeeeeeeeeeee <he >ffice of the =omptroller of the =urrency ()fffffffffffffffffffffff <he %ederal Ceserve "ystem ()ggggggggggggggggggggggg <he .ational =redit Anion 0dministration ()hhhhhhhhhhhhhhhhhhhhhhh "tate banking and insurance commissions ()iiiiiiiiiiiiiiiiiiiiiii Each of the above !uestion "tatus: #revious Edition )1$( ,hich of the following do not provide charters ()''''''''''''''''''''''' <he >ffice of the =omptroller of the =urrency ()kkkkkkkkkkkkkkkkkkkkkkk <he %ederal Ceserve "ystem ()lllllllllllllllllllllll <he .ational =redit Anion 0dministration ()mmmmmmmmmmmmmmmmmmmmmmm "tate banking and insurance commissions !uestion "tatus: #revious Edition

=hapter $0n >verview of the %inancial "ystem/$

)1$; Cegulations that protect against financial panics include ()nnnnnnnnnnnnnnnnnnnnnnn restrictions on entry. ()ooooooooooooooooooooooo disclosure. ()ppppppppppppppppppppppp deposit insurance. ()----------------------restrictions on assets and activities. ()rrrrrrrrrrrrrrrrrrrrrrr all of the above. !uestion "tatus: .ew )1$: <he agency that was created to protect depositors after the banking panics of 1:&6J1:&& is the ()sssssssssssssssssssssss %ederal Ceserve "ystem. ()ttttttttttttttttttttttt %ederal Beposit Insurance =orporation. ()uuuuuuuuuuuuuuuuuuuuuuu <reasury Bepartment. ()vvvvvvvvvvvvvvvvvvvvvvv >ffice of the =omptroller of the =urrency. ()wwwwwwwwwwwwwwwwwwwwwww all of the above. !uestion "tatus: .ew )1&6 0n important restriction on bank activities that was repealed in 1::: was ()11111111111111111111111 the prohibition of the payment of interest on checking deposits. ()yyyyyyyyyyyyyyyyyyyyyyy restrictions on credit terms. ()44444444444444444444444 minimum down payments on loans to purchase securities. ()aaaaaaaaaaaaaaaaaaaaaaaa separation of commercial banking from the securities industries. ()bbbbbbbbbbbbbbbbbbbbbbbb prohibition on ownership of municipal bonds. !uestion "tatus: .ew )1&1 0 goal of the "ecurities and E1change =ommission is to reduce problems arising from ()cccccccccccccccccccccccc competition. ()dddddddddddddddddddddddd banking panics. ()eeeeeeeeeeeeeeeeeeeeeeee risk. ()ffffffffffffffffffffffff asymmetric information. ()gggggggggggggggggggggggg all of the above. !uestion "tatus: .ew )1&$ 0symmetric information is a universal problem. <his would suggest that ()hhhhhhhhhhhhhhhhhhhhhhhh financial regulation e1ists only in the Anited "tates. ()iiiiiiiiiiiiiiiiiiiiiiii financial regulations differ significantly around the world. ()'''''''''''''''''''''''' financial regulations in industriali4ed nations are similar. ()kkkkkkkkkkkkkkkkkkkkkkkk financial regulations are unnecessary. ()llllllllllllllllllllllll financial regulations in industrial countries are an un-ualified failure. !uestion "tatus: .ew

/&%rederic ". )ishkin*Economics of Money, Banking, and Financial Markets, "eventh Edition

)1&& <he purpose of the disclosure re-uirements of the "ecurities and E1change =ommission is to ()mmmmmmmmmmmmmmmmmmmmmmmm increase the information available to investors. ()nnnnnnnnnnnnnnnnnnnnnnnn prevent bank panics. ()oooooooooooooooooooooooo improve monetary control. ()pppppppppppppppppppppppp protect investors against financial losses. ()------------------------ all of the above. !uestion "tatus: .ew )1&+ <he primary purpose of deposit insurance is to ()rrrrrrrrrrrrrrrrrrrrrrrr improve the flow of information to investors. ()ssssssssssssssssssssssss prevent banking panics. ()tttttttttttttttttttttttt protect bank shareholders against losses. ()uuuuuuuuuuuuuuuuuuuuuuuu protect bank employees from unemployment. ()vvvvvvvvvvvvvvvvvvvvvvvv all of the above. !uestion "tatus: .ew )1&/ In order to reduce risk and increase the safety of financial institution9 commercial banks and other financial institutions are prohibited from ()wwwwwwwwwwwwwwwwwwwwwwww owning municipal bonds. ()111111111111111111111111 making real estate loans. ()yyyyyyyyyyyyyyyyyyyyyyyy making personal loans. ()444444444444444444444444 owning common stock. ()aaaaaaaaaaaaaaaaaaaaaaaaa all of the above. !uestion "tatus: .ew

Questions for Web Appendix to Chapter 2


)1&2 A.". <reasury bills ()bbbbbbbbbbbbbbbbbbbbbbbbb are the safest of all money market instruments. ()ccccccccccccccccccccccccc sell at a discount because they have no interest payments. ()ddddddddddddddddddddddddd are the most li-uid of the money market securities. ()eeeeeeeeeeeeeeeeeeeeeeeee are all of the above. ()fffffffffffffffffffffffff are only (b) and (c) of the above. !uestion "tatus: #revious Edition )1&( A.". <reasury bills are issued in ()ggggggggggggggggggggggggg three-9 si1-9 nine-9 and twelve-month maturities. ()hhhhhhhhhhhhhhhhhhhhhhhhh three-9 nine-9 and twelve-month maturities. ()iiiiiiiiiiiiiiiiiiiiiiiii three-9 si1-9 and twelve-month maturities. ()''''''''''''''''''''''''' three-9 and si1-month maturities. !uestion "tatus: #revious Edition

=hapter $0n >verview of the %inancial "ystem/+

)1&; A.". <reasury bills ()kkkkkkkkkkkkkkkkkkkkkkkkk are issued in three-9 si1-9 nine-9 and twelve-month maturities. ()lllllllllllllllllllllllll sell at a discount because they have no interest payments. ()mmmmmmmmmmmmmmmmmmmmmmmmm are the most li-uid of the money market securities. ()nnnnnnnnnnnnnnnnnnnnnnnnn are all of the above. ()ooooooooooooooooooooooooo are only (b) and (c) of the above. !uestion "tatus: #revious Edition )1&: A.". <reasury bills ()ppppppppppppppppppppppppp are issued in three-9 si1-9 and twelve-month maturities. ()------------------------- sell at a discount because they have no interest payments. ()rrrrrrrrrrrrrrrrrrrrrrrrr are the most li-uid of the money market securities. ()sssssssssssssssssssssssss are all of the above. ()ttttttttttttttttttttttttt are only (b) and (c) of the above. !uestion "tatus: #revious Edition )1+6 0 debt instrument sold by a bank to its depositors that pays annual interest of a given amount and at maturity pays back the original purchase price is called ()uuuuuuuuuuuuuuuuuuuuuuuuu commercial paper. ()vvvvvvvvvvvvvvvvvvvvvvvvv a negotiable certificate of deposit. ()wwwwwwwwwwwwwwwwwwwwwwwww a banker@ acceptance. ()1111111111111111111111111 federal funds. !uestion "tatus: #revious Edition )1+1 %ederal funds are ()yyyyyyyyyyyyyyyyyyyyyyyyy funds raised by the federal government in the bond market. ()4444444444444444444444444 loans made by the %ederal Ceserve "ystem to banks. ()aaaaaaaaaaaaaaaaaaaaaaaaaa loans made by banks to the %ederal Ceserve "ystem. ()bbbbbbbbbbbbbbbbbbbbbbbbbb loans made by banks to each other. ()cccccccccccccccccccccccccc none of the above. !uestion "tatus: #revious Edition )1+$ ,hich of the following are short-term financial instruments ()dddddddddddddddddddddddddd 0 negotiable certificate of deposit ()eeeeeeeeeeeeeeeeeeeeeeeeee 0 bankers acceptance ()ffffffffffffffffffffffffff 0 si1-month loan ()gggggggggggggggggggggggggg 0 A.". <reasury bill ()hhhhhhhhhhhhhhhhhhhhhhhhhh 0ll of the above !uestion "tatus: #revious Edition

//%rederic ". )ishkin*Economics of Money, Banking, and Financial Markets, "eventh Edition

)1+& ,hich of the following are short-term financial instruments ()iiiiiiiiiiiiiiiiiiiiiiiiii 0 negotiable certificate of deposit ()'''''''''''''''''''''''''' 0 bankers acceptance ()kkkkkkkkkkkkkkkkkkkkkkkkkk 0 A.". <reasury bond ()llllllllllllllllllllllllll ?oth (a) and (b) of the above ()mmmmmmmmmmmmmmmmmmmmmmmmmm ?oth (b) and (c) of the above !uestion "tatus: #revious Edition )1++ ,hich of the following are short-term financial instruments ()nnnnnnnnnnnnnnnnnnnnnnnnnn 0 banker@s acceptance ()oooooooooooooooooooooooooo 0 share of ,alt Bisney =orporation stock ()pppppppppppppppppppppppppp 0 <reasury note with a maturity of four years ()-------------------------- Each of the above !uestion "tatus: #revious Edition )1+/ ,hich of the following instruments are traded in a money market ()rrrrrrrrrrrrrrrrrrrrrrrrrr "tate and local government bonds ()ssssssssssssssssssssssssss A.". <reasury bills ()tttttttttttttttttttttttttt =orporate bonds ()uuuuuuuuuuuuuuuuuuuuuuuuuu 0ll of the above !uestion "tatus: #revious Edition )1+2 ,hich of the following instruments are traded in a money market ()vvvvvvvvvvvvvvvvvvvvvvvvvv ?ank commercial loans ()wwwwwwwwwwwwwwwwwwwwwwwwww ?anker@s acceptances ()11111111111111111111111111 "tate and local government bonds ()yyyyyyyyyyyyyyyyyyyyyyyyyy Cesidential mortgages. !uestion "tatus: #revious Edition )1+( ,hich of the following instruments is not traded in a money market ()44444444444444444444444444 ?anker@s acceptances ()aaaaaaaaaaaaaaaaaaaaaaaaaaa A.". <reasury ?ills ()bbbbbbbbbbbbbbbbbbbbbbbbbbb Eurodollars ()ccccccccccccccccccccccccccc =ommercial paper ()ddddddddddddddddddddddddddd .one of the above !uestion "tatus: #revious Edition

=hapter $0n >verview of the %inancial "ystem/2

)1+; ,hich of the following instruments is not traded in a money market ()eeeeeeeeeeeeeeeeeeeeeeeeeee ?anker@s acceptances ()fffffffffffffffffffffffffff A.". <reasury ?ills ()ggggggggggggggggggggggggggg Eurodollars ()hhhhhhhhhhhhhhhhhhhhhhhhhhh =ommercial paper ()iiiiiiiiiiiiiiiiiiiiiiiiiii Cesidential mortgages !uestion "tatus: #revious Edition )1+: ,hich of the following are long-term financial instruments ()''''''''''''''''''''''''''' 0 negotiable certificate of deposit ()kkkkkkkkkkkkkkkkkkkkkkkkkkk 0 bankers acceptance ()lllllllllllllllllllllllllll 0 si1-month loan ()mmmmmmmmmmmmmmmmmmmmmmmmmmm 0 A.". <reasury bill ()nnnnnnnnnnnnnnnnnnnnnnnnnnn .one of the above !uestion "tatus: #revious Edition )1/6 ,hich of the following are long-term financial instruments ()ooooooooooooooooooooooooooo 0 negotiable certificate of deposit ()ppppppppppppppppppppppppppp 0 banker@s acceptance ()--------------------------0 A.". <reasury bond ()rrrrrrrrrrrrrrrrrrrrrrrrrrr 0 A.". <reasury bill !uestion "tatus: #revious Edition )1/1 ,hich of the following instruments are traded in a capital market ()sssssssssssssssssssssssssss A.". 7overnment agency securities ()ttttttttttttttttttttttttttt .egotiable bank =Bs ()uuuuuuuuuuuuuuuuuuuuuuuuuuu Cepurchase agreements ()vvvvvvvvvvvvvvvvvvvvvvvvvvv ?anker@s acceptances ()wwwwwwwwwwwwwwwwwwwwwwwwwww .one of the above !uestion "tatus: #revious Edition )1/$ ,hich of the following instruments are traded in a capital market ()111111111111111111111111111 A.". 7overnment agency securities ()yyyyyyyyyyyyyyyyyyyyyyyyyyy "tate and local government bonds ()444444444444444444444444444 Cepurchase agreements ()aaaaaaaaaaaaaaaaaaaaaaaaaaaa 0ll of the above ()bbbbbbbbbbbbbbbbbbbbbbbbbbbb ?oth (a) and (b) of the above !uestion "tatus: #revious Edition

/(%rederic ". )ishkin*Economics of Money, Banking, and Financial Markets, "eventh Edition

)1/& ,hich of the following instruments are traded in a capital market ()cccccccccccccccccccccccccccc =orporate bonds ()dddddddddddddddddddddddddddd A.". <reasury bills ()eeeeeeeeeeeeeeeeeeeeeeeeeeee ?anker@s acceptances ()ffffffffffffffffffffffffffff Cepurchase agreements !uestion "tatus: #revious Edition

Essay Questions
)1 E1plain the difference between direct and indirect finance. ,hat role do financial intermediaries and financial markets play in this process E1plain whether direct or indirect finance is a more important source of finds and why this is the case. E1plain the concepts of asymmetric information9 adverse selection9 and moral ha4ard. ,hen do adverse selection and moral ha4ard become relevant to the lending process Kow has the financial system developed to deal with these problems 0nswer: ,hy does the government regulate the financial system Kow does regulation reduce the problems of adverse selection and moral ha4ard ,hat regulations are or have been used to protect the public from panics 0nswer:

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