Question 1

A net capital inflow occurs in open economies where investment is _______ national savings.

Accepted Answer

A)   higher than
B)   lower than
C)   equal to
D)   either higher or lower thanE) All of the above
F) A) and B)

Question 2

If Howard takes out a one-year loan of $400 with a 5 percent annual interest rate, he will pay back a total of:

Accepted Answer

A)   $400.
B)   $440.
C)   $420.
D)   $20.E) A) and B)
F) A) and C)

Question 3

Investment decisions are based on the trade-off between which two factors?

Accepted Answer

A)   The potential profit that could be generated by investment and the cost of borrowing money to finance the investment
B)   The interest rate that savers will earn and the interest rate that borrowers will have to pay
C)   The future value of the loan and the present value of the loan
D)   The potential profit that could be generated and the willingness of a lender to make the loanE) All of the above
F) A) and B)

Question 4

Bonds are a _______ liquid asset than other loans because they are _______.

Accepted Answer

A)   more; standardized
B)   more; guaranteed from default by the government
C)   less; standardized
D)   less; guaranteed from default by the governmentE) A) and D)
F) B) and C)

Question 5

The risk-free rate is usually approximated by interest rates on U.S. government debt, because the U.S. government:

Accepted Answer

A)   is considered extremely unlikely to default.
B)   sets all policy concerning interest rates.
C)   has all loans protected by the Federal Reserve.
D)   is the largest source of loanable funds in the economy.E) All of the above
F) A) and B)

Question 6

In the market for loanable funds, borrowing is like:

Accepted Answer

A)   selling the right to use your money for a time.
B)   buying the right to use someone else's money.
C)   selling the right to use someone else's money.
D)   buying the right to use your money for a time.E) A) and D)
F) B) and C)

Question 7

Miguel takes out a one-year loan of $5,000 with a 10 percent annual interest rate. What is the principal?

Accepted Answer

A)   $5,000
B)   $5,500
C)   $500
D)   $1,000E) A) and B)
F) B) and D)

Question 8

Which of the following does not support the efficient-market hypothesis?

Accepted Answer

A)   Index funds
B)   Mutual funds
C)   Bonds
D)   Asset price bubblesE) All of the above
F) C) and D)

Question 9

The buyer of a derivative is typically _______ comfortable assuming risk compared to the seller.

Accepted Answer

A)   more
B)   less
C)   equally
D)   None of these are true.E) A) and D)
F) A) and C)

Question 10

In 2006, before the Great Recession, the economy was booming and consumer demand was high. The good economic conditions caused the _______ for loanable funds to _______.

Accepted Answer

A)   demand; increase
B)   demand; decrease
C)   supply; increase
D)   supply; decreaseE) A) and D)
F) None of the above

Question 11

An asset whose value is based on the value of another asset is called a:

Accepted Answer

A)   derivative.
B)   dividend.
C)   stock.
D)   bond.E) A) and C)
F) All of the above

Question 12

The institutions that bring together savers, borrowers, investors, and insurers in a set of interconnected markets where people trade financial products make up the:

Accepted Answer

A)   financial system.
B)   money system.
C)   money market.
D)   market for loanable funds.E) C) and D)
F) B) and D)

Question 13

Securitization:

Accepted Answer

A)   turns many loans into a single, larger asset.
B)   is an agreement in which a lender gives money to a borrower in exchange for a promise to repay the amount loaned plus an agreed-upon amount of interest.
C)   is a promise by a bond issuer to repay a loan at a specified maturity date and to pay periodic interest at a specific percentage rate.
D)   turns many loans into a risk-free, secure asset.E) None of the above
F) C) and D)

Question 14

Moral hazard describes a scenario in which people behave:

Accepted Answer

A)   morally and a negative consequence occurs.
B)   in a riskier fashion or renege on agreements when they do not face the full consequences of their actions.
C)   in a riskier fashion when they don't understand the consequences of their actions.
D)   behave morally but end up in a dangerous situation.E) None of the above
F) A) and C)

Question 15

One way to predict the future profitability of a company is through:

Accepted Answer

A)   technical analysis.
B)   fundamental analysis.
C)   the idea of market efficiency.
D)   All of these are ways to predict a company's worth.E) A) and C)
F) B) and C)

Question 16

The process of bringing together buyers and sellers in a market is called:

Accepted Answer

A)   intermediation.
B)   supply and demand.
C)   the invisible hand.
D)   equilibrium.E) C) and D)
F) A) and B)

Question 17

When people expect their income to fall in the future, they will be:

Accepted Answer

A)   more inclined to save.
B)   less inclined to save.
C)   unaffected in their present choices.
D)   Any of these could occur when income is expected to fall.E) A) and B)
F) None of the above

Question 18

When shopping for a used car on the internet, Jonathan is faced with:

Accepted Answer

A)   moral hazard.
B)   adverse selection.
C)   poor credit.
D)   financial intermediaries.E) A) and B)
F) C) and D)

Question 19

Bonds are often referred to as fixed-income securities because they:

Accepted Answer

A)   have a set interest rate.
B)   are more commonly held by retirees.
C)   adjust interest payments with the inflation rate.
D)   have a fixed price.E) A) and C)
F) A) and D)

Question 20

In an economy without government or trade, it must be true that:

Accepted Answer

A)   savings equals investment.
B)   consumption equals savings plus investment.
C)   consumption plus savings equals investment.
D)   consumption plus investment equals national savings.E) All of the above
F) B) and C)

Exam 14: Thebasics of Finance

In the market for loanable funds, borrowing is like:

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The buyer of a derivative is typically _______ comfortable assuming risk compared to the seller.

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An asset whose value is based on the value of another asset is called a:

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In 2006, before the Great Recession, the economy was booming and consumer demand was high. The good economic conditions caused the _______ for loanable funds to _______.

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The risk-free rate is usually approximated by interest rates on U.S. government debt, because the U.S. government:

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Bonds are a _______ liquid asset than other loans because they are _______.

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When shopping for a used car on the internet, Jonathan is faced with:

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Miguel takes out a one-year loan of $5,000 with a 10 percent annual interest rate. What is the principal?

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In an economy without government or trade, it must be true that:

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A net capital inflow occurs in open economies where investment is _______ national savings.

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When people expect their income to fall in the future, they will be:

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One way to predict the future profitability of a company is through:

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Moral hazard describes a scenario in which people behave:

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Investment decisions are based on the trade-off between which two factors?

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If Howard takes out a one-year loan of $400 with a 5 percent annual interest rate, he will pay back a total of:

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Which of the following does not support the efficient-market hypothesis?

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The process of bringing together buyers and sellers in a market is called:

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Securitization:

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Bonds are often referred to as fixed-income securities because they:

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The institutions that bring together savers, borrowers, investors, and insurers in a set of interconnected markets where people trade financial products make up the:

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In 2006, before the Great Recession, the economy was booming and consumer demand was high. The good economic conditions caused the _ for loanable funds to _.

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Bonds are a _ liquid asset than other loans because they are _.

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