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  1. The primary task of the financial system is to move scarce loanable funds from those who borrow for consumption and investment to those who save.
     
    a) True
    b) False
    b) False

    The primary task of the financial system is to move scarce loanable funds from those who save to those who borrow.  
  2. The financial system determines the cost of credit and how much credit will be available.
     
    a) True
    b) False
    a) True

    Interest rates - the cost of credit - are determined by the financial system as well as the amount of credit that will be available from savings and from the creation of new money.

     
  3. A market is an economic institution for allocating resources that are scarce relative to the demand for them.
     
    a) True
    b) False
    a) True

    • The market allocates scarce resources to those who are willing to pay the highest price for them.
    •  
  4. In the global economic system, the flow of payments and production can be depicted as a circular flow between producing units and consuming units.
     
    a) True
    b) False
    a) True

    • Exhibit 1-1 in the Rose Marquis text shows how the flow of payments and production in the economy can be depicted as a circular flow between producing units and consuming units.
    •  
  5. Saving and investing are two different names for the same economic activity.
     
    a) True
    b) False
    b) False

    • Investment refers to the acquisition of capital goods such as buildings or equipment and the purchase of inventories by businesses, government spending for buildings and other public facilities, and household purchases of residential housing. The definition of savings differs for businesses, households, and governments. For businesses, savings refers to the retained earnings. For governments, savings is the excess of revenues over expenditures. For households, savings is the remainder of current income after current consumption expenditures are made. Most of the funds set aside for savings flow to investments.
    •  
  6. A financial claim is a promise to the supplier of funds of a future flow of income.
     
    a) True
    b) False
    a) True

    The financial claim is a promise to the supplier of funds. The claim promises the supplier of funds a future flow of income that may consist of dividends, interest, or other returns.
  7. Money is a highly liquid financial instrument.
     
    a) True
    b) False
    a) True

    Liquidity refers to the fact that money can be spent as it is without having to convert it into some other form. Money is the only perfectly liquid asset in the financial system.
  8. Debit cards and credit cards give customers instant access to short-term credit.
     
    a) True
    b) False
    b) False

    Credit cards are part of the financial system's mechanism for making payments for goods and services. They can be used instead of cash or checks and give customers instant access to short-term credit. A debit card is merely a deduction against a consumer's balance in a depository institution.
  9. An insurance policy is a financial instrument that provides a potential financial claim against an insurance company.
     
    a) True
    b) False
    • a) True 
    •  
    • An insurance policy offers protection against risks to life, health, property, and income. It provides a financial claim against the insurance company in the event that one of the insured risks under the policy occurs.
  10. Financial markets are unimportant as a channel through which the federal government implements economic stabilization policies.
     
    a) True
    b) False
    b) False

    • Financial markets are a major channel through which the federal government carries out its economic stabilization policies.
    •  
  11. The money market is designed to finance long-term investments by businesses, governments, and households.
     
    a) True
    b) False
    b) False

    • The money market is designed for making short-term loans. The capital market is designed to finance long-term investments. Money market instruments have maturities of one year or less.
    •  
  12. The largest borrowers in the American money market are large corporations and securities dealers.
     
    a) True
    b) False
    b) False

    • The U.S. Treasury borrows several billion dollars weekly in the money market as part of its debt-management operations. It is by far the largest borrower in the money market.
    •  
  13. T-bills are the largest segment of the money market.
     
    a) True
    b) False
    b) False

    The market for CDs is larger than that for Treasury bills.

     
  14. Consumer borrowing to purchase new homes occurs in the capital market.
     
    a) True
    b) False
    a) True

    The capital market handles long-term demands for funds. When consumers borrow to finance the purchase of a home, they are using the services of the capital market.

     
  15. Federal funds are reserve balances of commercial banks held at the Federal Reserve and at other commercial banks.
     
    a) True
    b) False
    a) True

    • Federal funds represent immediately transferable money and are traded daily in large volume to settle accounts.
    •  
  16. An individual who seeks an auto loan at a local bank is participating in the open market for such a loan.
     
    a) True
    b) False
    b) False

    • An auto loan from a bank is an example of a transaction in the negotiated market. Negotiated markets are usually between one or a few buyers under private contract.
    •  
  17. The principal function of the primary market is the raising of capital to support new investment.
     
    a) True
    b) False
    a) True

    • In the primary market, the trading of new securities never before issued takes place. Its function is to raise capital to support new investment in buildings, equipment, and inventories.
    •  
  18. The volume of trading of securities in the primary market is far larger than that in the secondary market.
     
    a) True
    b) False
    b) False

    • The volume of trading in securities is larger in the secondary market.
    •  
  19. A spot market is designed for trading of contracts calling for the future delivery of financial instruments.
     
    a) True
    b) False
    b) False

    • A spot market is one in which financial instruments are traded for immediate delivery (normally one or two business days). A futures or forward market is designed for trading contracts that call for future delivery of financial instruments.
    •  
  20. Which of the following statements correctly describes the liquidity function of the financial system?

    A) The financial system provides a way to protect businesses, consumers, and governments from risks to people, income, and property.
    B) The financial system provides a mechanism for making payments in order to buy goods and services.
    C) The financial system provides a means of converting financial instruments into cash with little risk of loss.
    D) The financial system provides a channel for government policy to pursue economic goals such as high employment and low inflation.
    C) The financial system provides a means of converting financial instruments into cash with little risk of loss.

    The risk function of the financial system provides a way to protect businesses, consumers, and governments from risks to people, income, and property. The others are incorrect because they describe the financial system's policy function and payments functions, respectively.
    (this multiple choice question has been scrambled)
  21. Which of the following statements concerning the capital market is (are) correct? I. One reason for its existence is to finance long-term investment. II. U.S. Treasury securities comprise the largest segment of the market.

    A) I only   
    B) II only   
    C) Both I and II
    D) Neither I nor II
    • A) I only  
    •  
    • II is incorrect. U.S. Treasury securities account for less than 10 percent of the capital market.
  22. Which of the following statements concerning the ways in which financial markets contribute to the economic system is (are) correct? I. They help channel financial resources from savers to borrowers. II. They help determine the price or cost of loanable funds.

    A) Neither I nor II
    B) Both I and II   
    C) I only   
    D) II only   
    B) Both I and II
    (this multiple choice question has been scrambled)
  23. When a securities broker sells some listed common stock for a customer, which of the following types of financial markets is (are) being used? I. a primary market II. a futures market

    A) I only   
    B) II only   
    C) Both I and II   
    D) Neither I nor II
    • D) Neither I nor II
    •  

    I is incorrect because this transaction took place in a secondary market designed for trading securities, not in a primary market.

    II is incorrect because this transaction occurred in a spot market, in which delivery is to be made immediately, not in a futures market.
  24. Economic functions performed by markets include which of the following? I. Markets help determine what goods will be produced and in what quantity. II. Markets help determine the distribution of income.

    A) Both I and II   
    B) I only   
    C) II only   
    D) Neither I nor II
    A) Both I and II   
    (this multiple choice question has been scrambled)
  25. All the following are functions performed by the money market EXCEPT

    A) providing real estate mortgages to households
    B) providing governments with temporary funds in advance of tax collections
    C) financing the working capital needs of corporations
    D) making short term loans to individuals
    A) providing real estate mortgages to households

    The money market is designed for the making of short term loans, usually one year or less in duration. Real estate mortgages are capital market financial investments.
    (this multiple choice question has been scrambled)
  26. All the following statements concerning the economic system in the United States are correct EXCEPT

    A) The principal consuming units receive a flow of income in exchange for providing a flow of productive services. 
    B) The principal consuming units are businesses.
    C) The principal producing units are governments and businesses.
    D) The principal producing units receive a flow of expenditures in exchange for producing a flow of goods and services. .
    B) The principal consuming units are businesses.

    This is an incorrect statement because the principal consuming units in an economic system such as that of the United States are households.
     
    (this multiple choice question has been scrambled)

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