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Chapter 2An 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.


)& %inancial markets improve economic welfare because

()' they allow funds to move from those without productive investment opportunities to those whohave 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.



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$ %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.

() 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.

()ccone 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.


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=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.


)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.


)11 ,hich of the following can be described as involving direct finance()ww 0 corporation issues new shares of stock.

() 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.


)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.


)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.

()iii0 corporation buys a short-term corporate security in a secondary market.

()'''0n insurance company buys shares of common stock in the primary markets.



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$ %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.


)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.


)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.

() 0ll of the above.

()yyy ?oth (b) and (c) of the above.


)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.".


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=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.


)$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.


)$1 ,hich of the following can be described as involving indirect finance() 0 bank buys a A.". nly (a) and (b) of the above.



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&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.

()ggggg0 pension fund manager buys a short-term security from the issuing corporation.

()hhhhh?oth (a) and (b) of the above.


)$/ ,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.

()kkkkk0 bank buys a A.".


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=hapter $ 0n >verview of the %inancial "ystem &$)$ ,hich of the following statements about the characteristics of debt and euity are true

()bbbbbb


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&& %rederic ". ishkin *Economics of Money, Banking, and Financial Markets,"eventh Edition)&+ ,hich of the following statements about the characteristics of debt and euities is true

()444444 nly (a) and (b) of the above are true.

()sssssss >nly (b) and (c) of the above are true.


)&; "ecurities are DDDDD for the person who buys them9 but are DDDDD for the individual or firm thatissues them.

()ttttttt assets liabilities

()uuuuuuu liabilities assets

()vvvvvvv negotiable nonnegotiable

()wwwwwww nonnegotiable negotiable



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=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.

() "econdary stocks

()yyyyyyy "urplus stocks

()4444444 A.". government bonds

()aaaaaaaa =ommon stocks


)+6 ,hich of the following are primary markets

()bbbbbbbb


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


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=hapter $ 0n >verview of the %inancial "ystem &2)+ ,hich of the following markets is sometimes organi4ed as an over-the-counter market

()rrrrrrrrr nly (a) and (b) of the above are true.


)/1 ,hich of the following statements about financial markets and securities are true

()bbbbbbbbbb any common stocks are traded over-the-counter9 although the largestcorporations usually have their shares traded at organi4ed stock echanges such as the ew3ork "tock Echange.

()cccccccccc 0s a corporation gets a share of the broker@s commission9 a corporation acuiresnew funds whenever its securities are sold.

()dddddddddd =apital market securities are usually more widely traded than shorter-termsecurities and so tend to be more liuid.

()eeeeeeeeee 0ll of the above are true.


)/$ ,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 marketshave grown in recent years.

()gggggggggg 0 corporation acuires new funds only when its securities are first sold in theprimary market.

()hhhhhhhhhh =apital market securities are usually more widely traded than longer-termsecurities and so tend to be more liuid.

()iiiiiiiiii 0ll of the above are true.

()'''''''''' >nly (a) and (b) of the above are true.



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& %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 largestcorporations usually have their shares traded at organi4ed stock echanges such as the ew3ork "tock Echange.

()llllllllll 0s a corporation gets a share of the broker@s commission9 a corporation acuires newfunds whenever its securities are sold.

()mmmmmmmmmm ?ecause of their short terms to maturity9 the prices of money marketinstruments 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.


)/+ ?onds that are sold in a foreign country and are denominated in the country@s currency in whichthey are sold are known as

()pppppppppp foreign bonds.

() Eurobonds.

()rrrrrrrrrreuity bonds.()ssssssssss country bonds.


)// ?onds that are sold in a foreign country and are denominated in a currency other than that of thecountry in which it is sold are known as

()tttttttttt foreign bonds.

()uuuuuuuuuu Eurobonds.

()vvvvvvvvvv euity bonds.

()wwwwwwwwww country bonds.


)/2


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=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 eample 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


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& %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/


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=hapter $ 0n >verview of the %inancial "ystem +6)2;


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+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.


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


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+& %rederic ". ishkin *Economics of Money, Banking, and Financial Markets,"eventh Edition);$ 0n eample 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

() bureaucratic behavior

!uestion "tatus: ew

);+ In the early 1;6s9 a particular bank in >klahoma developed a reputation of readily providing loansto borrowers for the purpose of eploring for oil deposits. any of these loans were never repaid9because 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 eternal funds primarily from

()dddddddddddddddd bank loans.

()eeeeeeeeeeeeeeee bonds and commercial paper issues.

()ffffffffffffffff stock issues.

()gggggggggggggggg other loans.


);2 ,hich of the following is the primary source of eternal funds used by 0merican businesses to

finance their activities()hhhhhhhhhhhhhhhh "tock

()iiiiiiiiiiiiiiii ?onds and commercial paper

()'''''''''''''''' ?ank loans

()kkkkkkkkkkkkkkkk >ther loans



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=hapter $ 0n >verview of the %inancial "ystem ++); "tudies of the ma'or developed countries show that

()llllllllllllllll eternal financing for corporations is dominated by financial intermediaries.

()mmmmmmmmmmmmmmmm eternal financing for corporations is dominated by securitiesissues.

()nnnnnnnnnnnnnnnn financial intermediaries avoid lending to corporations.

()oooooooooooooooo none of the above are consistent across countries.


);; ot surprisingly9 the Anited "tates and DDDDD9 which have the most developed securities markets inthe world9 also make the greatest use of them in financing corporations.

()pppppppppppppppp 7reat ?ritain

() =anada

()rrrrrrrrrrrrrrrr Hapan

()ssssssssssssssss 7ermany


);


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+/ %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 euities markets.

()hhhhhhhhhhhhhhhhh financial intermediaries.

()iiiiiiiiiiiiiiiii bond markets.


)& ,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


)+ ,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


)/ =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

() ife insurance companies

()yyyyyyyyyyyyyyyyy =redit unions

()44444444444444444 #ension funds

()aaaaaaaaaaaaaaaaaa "tate and local government retirement funds



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=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


); ,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


) ,hich of the following are investment intermediaries()kkkkkkkkkkkkkkkkkk ife insurance companies

()llllllllllllllllll utual funds

()mmmmmmmmmmmmmmmmmm #ension funds

()nnnnnnnnnnnnnnnnnn "tate and local government retirement funds


)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


)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



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+ %rederic ". ishkin *Economics of Money, Banking, and Financial Markets,"eventh Edition)16$ ,hich of the following are depository institutions

() utual savings banks

()yyyyyyyyyyyyyyyyyy =redit unions

()444444444444444444 utual funds

()aaaaaaaaaaaaaaaaaaa 0ll of the above

()bbbbbbbbbbbbbbbbbbb >nly (a) and (b) of the above


)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


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=hapter $ 0n >verview of the %inancial "ystem +;)16


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+ %rederic ". ishkin *Economics of Money, Banking, and Financial Markets,"eventh Edition!uestion "tatus: #revious Edition

)11&


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=hapter $ 0n >verview of the %inancial "ystem /6)11;


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/1 %rederic ". ishkin *Economics of Money, Banking, and Financial Markets,"eventh Edition)1$& ffice of the =omptroller of the =urrency.

() >ffice of nly (a) and (b) of the above


)1$2 ,hich of the following eamines the books of depository institutions

()eeeeeeeeeeeeeeeeeeeeeee ffice of the =omptroller of the =urrency

()fffffffffffffffffffffff


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=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$


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


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=hapter $ 0n >verview of the %inancial "ystem /+)1&; A.".


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// %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.".


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=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.".


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/ %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.".

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