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  1. Money is a financial asset.

    a) True
    b) False
    a) True

    Money is classified as one of the four types of financial assets; the other three are equities, debt securities, and derivatives
  2. A negotiable debt security is one that can easily be transferred from holder to holder.

    a) True
    b) False
    a) True

    Negotiable or marketable securities can be transferred to another owner.
  3. A household whose balance sheet contains no liabilities is engaged only in external financing.

    a) True
    b) False
    b) False

    A household whose balance sheet contains no liabilities is engaged only in internal financing, the use of current income and accumulated savings to acquire assets.
  4. For the entire global financial system, the sum of all real assets must equal the total of all liabilities.

    a) True
    b) False
    b) False

    The sum of all financial assets must equal the sum of all liabilities. Real assets, on the other hand, are not necessarily matched by liabilities somewhere in the financial system.
  5. The economic functions of saving and investing in modern economies are usually carried out by different groups.

    a) True
    b) False
    a) True

    Households are traditionally net savers; business firms account for most investments in productive real assets.
  6. For any given period of time, individual units of the economy (businesses, households, governments) must belong to one of these groups: a deficit-budget unit, a surplus-budget unit, or a balanced-budget unit.

    a) True
    b) False
    a) True

    Individual units in the economy are either net borrowers, net lenders, or a balanced-budget unit at any given time.
  7. One of the major limitations of the financial system is that it does not permit economic units to adjust their financial position readily from that of net borrower to net lender and back again.

    a) True
    b) False
    b) False

    One of the most important contributions of the financial system is that of permitting businesses, households, and governments to adjust their financial position from that of net borrower (DBU) to net lender (SBU) and back again, smoothly and efficiently.
  8. Money serves as a standard of value for all goods and services.

    a) True
    b) False
    a) True

    The use of money avoids having to express the value of each good in terms of exchange ratios with every other available good and service.
  9. If the consumer price index (cost-of-living index) increases from 100 to 150, the purchasing power of the dollar falls to 50 percent of its previous value.

    a) True
    b) False
    b) False

    The purchasing power of the dollar = 1 ------------------- x 100 cost-living-index 1 ------ x 100 = .67 150 the dollar's purchasing power is about 67 percent of what it was at the start of the period. The purchasing power of the dollar declined by about 33 percent over the period.
  10. Both securities brokers and securities dealers are involved in semidirect finance.

    a) True
    b) False
    a) True

    Both securities dealers and brokers bring together surplus- and deficit-budget units, thus performing what is referred to as a semidirect finance function by matching the needs and wants of borrowers and lenders.
  11. In indirect finance, financial intermediaries issue securities of their own to ultimate lenders and, at the same time, accept IOUs from borrowers in the form of primary securities.

    a) True
    b) False
    a) True  

    Institutions engaged in indirect finance include banks and insurance companies. They issue secondary securities of their own--deposits and life insurance policies-to ultimate lenders and accept primary securities, such as bonds or stocks, from ultimate borrowers and users of funds.
  12. Secondary securities issued by financial intermediaries generally carry a high risk of default.

    a) True
    b) False
    b) False

    Secondary securities issued by financial intermediaries generally carry a low risk of default. For example, most deposits in banks, credit unions, and savings and loan associations are insured by an agency of the federal government.
  13. Insurance companies are an example of contractual financial institutions.

    a) True
    b) False
    a) True

    Contractual institutions attract funds by offering legal contracts to protect the client against risks.
  14. Depository financial institutions derive the bulk of their loanable funds by offering legal contracts to protect savers against risk.

    a) True
    b) False
    b) False

    Depository institutions derive most of their funds from deposit accounts sold to the public. Contractual institutions offer legal contracts to protect savers against risk.
  15. Credit unions and savings and loan associations are examples of investment-type institutions.

    a) True
    b) False
    b) False

    Credit unions and savings and loan institutions are examples of depository-type institutions. Money market mutual funds are examples of investment-type institutions.
  16. The hedging principle in portfolio-management decisions by financial intermediaries involves matching as closely as possible the maturities of assets held with the maturities of liabilities assumed.

    a) True
    b) False
    a) True

    The hedging principle allows certain financial institutions, such as pension funds, to invest in long-term financial assets since their need for liquidity is low.
  17. Disintermediation involves the shifting of funds from direct finance to indirect and semidirect finance.

    a) True
    b) False
    b) False  

    In disintermediation, funds initially invested indirectly through an intermediary (such as a bank, a mutual fund, or a life insurance company) are withdrawn and shifted to either direct or semidirect forms of financing.
  18. During periods of disintermediation the total flow of credit through the financial system is reduced.

    a) True
    b) False
    b) False

    Though intermediaries are forced to be more liquid and their credit-granting activities are reduced, there is no evidence that the total flow of credit through the system is necessarily reduced.
  19. Which of the following statements correctly describes an economic function of money?

    A) Money is an extremely effective store of value during periods of inflation.   
    B) People accept money because of its high value as a commodity.   
    C) To function effectively, money requires that there be a coincidence of wants between the buyer and the seller of a particular product.
    D) Money is the only perfectly liquid asset in the financial system.   
    D) Money is the only perfectly liquid asset in the financial system.   

    Money loses some of its purchasing power during periods of infla¬tion. Money usually has little or no value as a commodity.

    With a medium of exchange, buyers and sellers no longer need to have an exact coincidence of wants as they must in a barter economy.
    (this multiple choice question has been scrambled)
  20. X buys a $10,000 Treasury bill from a securities dealer. This transaction represents which of the following types of finance?

    A) direct finance   
    B) semidirect finance   
    C) indirect finance   
    D) primary finance
    B) semidirect finance   

    In semidirect finances, the ultimate buyer acquires, through the medium of a broker or dealer, the securities of the ultimate borrower (here, the federal government).
     
    (this multiple choice question has been scrambled)
  21. Financial assets include which of the following? I. certificates of deposit II. life insurance policies

    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)
  22. Y lends $12,000 to X to purchase an automobile in exchange for a promissory note signed by X. In this situation, which of the following statements is (are) correct?

    I. By purchasing the automobile with the loan proceeds, X will increase his or her personal net worth by $12,000.

    II. By making the loan, Y will acquire one financial asset in exchange for another financial asset.Answer   

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

    I is incorrect because the transaction has no effect on X's net worth. His or her assets increase by $12,000 (the automobile), and his or her liabilities also increase by $12,000 (the note).
    (this multiple choice question has been scrambled)
  23. Which of the following equations is (are) correct for the economy and the financial system as a whole? I. Total volume of financial assets created equals total volume of liabilities issued by borrowers. II. Total real assets equal total net worth.   

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

    Because total real assets plus total financial assets equal total liabilities plus total net worth, and because total financial assets equal total liabilities by definition, it follows that total real assets equal total net worth.
    (this multiple choice question has been scrambled)
  24. All the following statements correctly describe most financial assets EXCEPT

    A) They can be converted quickly into cash.
    B) They have a high transport and storage cost.
    C) They are fungible.
    D) They have little or no value as a commodity.
    B) They have a high transport and storage cost.

    The cost of transport and storage of financial assets is generally quite low.
     
    (this multiple choice question has been scrambled)
  25. All the following are secondary securities issued by financial intermediaries EXCEPT

    A) mutual fund shares   
    B) U.S. government Series EE bonds   
    C) life insurance policies   
    D) bank certificates of deposit
    B) U.S. government Series EE bonds   

    Series EE bonds are not secondary securities. They are primary securities issued by the federal government.
     
    (this multiple choice question has been scrambled)

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