Chapter 2 An Overview of the Financial System

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.

2) Financial
markets have the basic function of
A) getting
people with funds to lend together with people who want to borrow funds.
B) assuring that
the swings in the business cycle are less pronounced.
C) assuring that
governments need never resort to printing money.
D) providing a
risk-free repository of spending power.

3) Financial
markets improve economic welfare because
A) they channel
funds from investors to savers.
B) they allow
consumers to time their purchase better.
C) they weed out
inefficient firms.
D) eliminate the
need for indirect finance.

4)
Well-functioning financial markets
A) cause
inflation.
B) eliminate the
need for indirect finance.
C) cause
financial crises.
D) produce an
efficient allocation of capital.

5) A breakdown
of financial markets can result in
A) financial
stability.
B) rapid
economic growth.
C) political
instability.
D) stable
prices.
6)
The principal lender-savers are
A)
governments.
B)
businesses.
C)
households.
D)
foreigners.

7) Which of the
following can be described as direct finance?
A) You take out
a mortgage from your local bank.
B) You borrow
$2500 from a friend.
C) You buy
shares of common stock in the secondary market.
D) You buy
shares in a mutual fund.

8) Assume that
you borrow $2000 at 10% annual interest to finance a new business project. For
this loan to be profitable, the minimum amount this project must generate in
annual earnings is
A) $400.
B) $201.
C) $200.
D) $199.

9) You can
borrow $5000 to finance a new business venture. This new venture will generate
annual earnings of $251. The maximum interest rate that you would pay on the
borrowed funds and still increase your income is
A) 25%.
B) 12.5%.
C) 10%.
D) 5%.