Page 41
186.
A financial asset is:
A)
a physical asset like a car.
B)
a claim that entitles the owner to future income from the seller.
C)
the value of accumulated savings.
D)
another term for capital.
187.
A physical asset is:
A)
a tangible asset that can be used to generate income and whose owner has the right
to dispose of it at will.
B)
a paper claim that entitles the owner to future income from the seller.
C)
the value of accumulated savings.
D)
human capital.
188.
A liability is:
A)
having wronged someone and being held responsible in court.
B)
a requirement to pay in the future.
C)
the inability to perform an agreed task.
D)
the requirement that banks offer insurance to depositors.
189.
In financial markets:
A)
households sell liabilities.
B)
wealth is transformed into savings.
C)
households purchase financial assets.
D)
physical assets change hands.
190.
A bank loan is a(n) _____ to the borrower and a(n) _____ to the bank.
A)
asset; liability
B)
asset; asset
C)
liability; liability
D)
liability; asset
191.
Which item is a paper claim that entitles the buyer to future income from the seller?
I. a financial asset
II. a physical asset
III. a liability
A)
I only
B)
II only
C)
III only
D)
I, II, and III
Page 42
192.
Which item is a tangible object that can be used to generate future income?
I. a financial asset
II. a physical asset
III. a liability
A)
I only
B)
II only
C)
III only
D)
I, II, and III
193.
Which item is a requirement to pay in the future?
I. a financial asset
II. a physical asset
III. a liability
A)
I only
B)
II only
C)
III only
D)
I, II, and III
194.
Suppose that Jim just got a $20,000 loan from his credit union to buy a new car. The
loan is a _____ for Jim and a _____ for the credit union.
A)
liability; physical asset
B)
financial asset; financial asset
C)
financial asset; liability
D)
liability; financial asset
195.
The three tasks of a financial system do NOT include:
A)
reduction of transaction costs.
B)
risk management.
C)
provision of liquidity.
D)
determination of fiscal policy.
196.
Transaction costs are the:
A)
return to an entrepreneur.
B)
return to moving a product to market.
C)
expenses of producing a product.
D)
expenses of negotiating and executing a deal.
Page 43
197.
Financial markets make borrowing large amounts of money easier because they simplify
negotiation between borrowers and lenders. This example illustrates:
A)
reducing transaction costs.
B)
reducing risk.
C)
providing liquidity.
D)
acting as a lender of last resort.
198.
A risk-averse person:
A)
considers any risk unacceptable.
B)
would never buy a financial asset.
C)
is more sensitive to a loss than to a gain of an equal dollar amount.
D)
would never buy insurance.
199.
Financial markets spread the potential gains and losses of borrowing and lending
operations among many individuals, therefore decreasing the overall uncertainty. This is
an example of:
A)
reducing transaction costs.
B)
reducing risk.
C)
providing liquidity.
D)
guaranteeing rates of return.
200.
The MOST diversified portfolio in terms of risk is $100,000 worth of stock in:
A)
10 companies in the same industry.
B)
10 companies in two industries.
C)
10 companies in five industries.
D)
one company that sells 10 products.
201.
Financial markets:
A)
increase transaction costs.
B)
reduce diversification.
C)
provide liquidity.
D)
determine tax rates.
202.
A common strategy to reduce the risk of a large financial loss is to:
A)
buy and sell assets through a mutual fund since mutual funds cannot lose money.
B)
diversify financial assets so that their risks of failure are unrelated.
C)
buy financial assets from developing countries because the rates of return are very
high and safe and their national currencies are much more stable than the U.S.
dollar.
D)
buy real instead of financial assets.
Page 44
203.
The BEST way to reduce financial risk is to:
A)
buy stock only in a major company.
B)
buy bonds only in a major company.
C)
buy a variety of assets, both financial and physical.
D)
never buy stock in foreign companies.
204.
The term liquidity means that the:
A)
asset is used in a barter exchange.
B)
asset is used as the medium of exchange.
C)
asset is readily convertible to cash without much loss of value.
D)
market interest rate is too low.
205.
The financial system performs certain tasks to make the financial market more efficient.
These tasks do NOT include:
A)
reducing risk.
B)
reducing menu costs.
C)
reducing transaction costs.
D)
providing liquidity.
206.
Diversification in investment is achieved when:
A)
the government invests in several projects of different lengths to increase total
output.
B)
a business produces multiple unrelated products so that the firm can maximize
profit.
C)
an economy trades with multiple trading partners for maximum benefit.
D)
an individual invests in several assets with independent or unrelated risks so that
total risk from loss is reduced.
207.
Which asset is the LEAST liquid?
A)
cash
B)
checking account balance
C)
corporate bond
D)
ownership of one fourth of a privately held company
208.
Which asset is the MOST liquid?
A)
currency
B)
checking account balance
C)
stock in a publicly traded company
D)
a townhouse
Page 45
209.
An illiquid asset:
A)
cannot be sold.
B)
provides the owner no return or income.
C)
is a tangible asset.
D)
cannot quickly be converted into cash with little loss of value.
210.
Which task(s) is/are associated with the financial system?
I. reducing transactions costs
II. reducing risk
III. providing liquidity
A)
I only
B)
II only
C)
III only
D)
I, II, and III
211.
A person who is risk-averse:
A)
is more sensitive to a loss than to a gain of an equal dollar amount.
B)
is less sensitive to a loss than to a gain of an equal dollar amount.
C)
is willing to pay any price to avoid risk.
D)
enjoys taking risks, especially in financial markets.
212.
An asset that can be quickly converted to cash with relatively little loss of value is:
A)
illiquid.
B)
liquid.
C)
diversified.
D)
risk averse.
213.
Which asset is the MOST liquid?
A)
a house
B)
100 shares of Apple stock
C)
money in a checking account
D)
a life insurance policy
214.
Which asset is the LEAST liquid?
A)
a U.S. government bond
B)
100 shares of Apple stock
C)
money in a checking account
D)
a 2010 Toyota Camry
Page 46
215.
The four main types of financial assets do NOT include:
A)
real estate.
B)
bonds.
C)
bank deposits.
D)
loans.
216.
You are choosing whether to purchase a bond or stock. If you purchase the bond, you
are likely to receive a _____ return in exchange for a _____ level of risk.
A)
higher; higher
B)
lower; lower
C)
lower; higher
D)
higher; lower
217.
A loan is a:
A)
liability for the lender and an asset for the borrower.
B)
physical asset that is traded in financial markets.
C)
claim on a bank that obliges the bank to provide funds to a lender.
D)
liability for the borrower and an asset for the lender.
218.
An example that does NOT illustrate financial assets and/or liabilities is:
A)
loans.
B)
stocks and bonds.
C)
real estate.
D)
bank deposits.
219.
An example that does NOT illustrate financial assets is:
A)
bonds.
B)
stocks.
C)
bank deposits.
D)
gold coins.
220.
An important advantage of bonds as a financial asset is that they:
A)
are standardized and therefore are easier to sell than loans.
B)
offer higher rates of return than stocks.
C)
allow the owner to receive a share of the company’s profits in the form of
dividends.
D)
are guaranteed to be risk free.
Page 47
221.
When a corporation borrows money from a bank in exchange for a contract to repay it
on a schedule, the corporation is:
A)
taking out a loan.
B)
issuing bonds.
C)
issuing stocks.
D)
liquidating a bank deposit.
222.
When a corporation borrows money from lenders in exchange for a fixed rate of return
and a given maturity, the corporation is:
A)
taking out a loan.
B)
issuing bonds.
C)
issuing stocks.
D)
liquidating a bank deposit.
223.
When a corporation borrows money from lenders in exchange for a fixed share of the
firm’s assets and potential profits, the corporation is:
A)
taking out a loan.
B)
issuing bonds.
C)
issuing stocks.
D)
liquidating a bank deposit.
224.
A bond is:
A)
share of ownership in a company.
B)
a promise to pay interest each year and to repay the principal on a specified date.
C)
a liquid asset since it is a standardized product with a market in which the owner
can sell it.
D)
both a promise to pay interest each year and to repay the principal on a specified
date and a liquid asset since it is a standardized product with a market in which the
owner can sell it.
225.
Financial assets that carry more risk:
A)
usually have a lower rate of return.
B)
usually have a higher rate of return.
C)
are purchased by risk-averse buyers.
D)
are a hedge against the future.
Page 48
226.
Financial assets with the HIGHEST risk are:
A)
stocks.
B)
U.S. government bonds.
C)
bonds.
D)
bank deposits.
227.
Which financial assets are likely to be the MOST liquid?
A)
stocks
B)
bonds
C)
mutual funds shares
D)
bank demand deposits
228.
Transactions costs are likely to be the HIGHEST for:
A)
loans.
B)
bonds.
C)
stocks.
D)
bank deposits.
229.
A default occurs when:
A)
the borrower repays a bond or loan before its maturity date.
B)
a borrower fails to make payments as specified by the loan or bond contract.
C)
an asset can’t be converted to cash quickly with little or no loss of value.
D)
transactions costs are minimized.
230.
Bonds with a high risk of default usually:
A)
have a longer maturity than do bonds with a low risk of default.
B)
have a shorter maturity than do bonds with a low risk of default.
C)
have to pay a high rate of interest to attract investors.
D)
can pay a low rate of interest and still attract investors.
231.
One advantage of bonds over loans is that:
A)
interest rates on bonds are generally lower than are interest rates on loans.
B)
interest rates on bonds are generally higher than are interest rates on loans.
C)
each bond is specifically tailored to meet the needs of the borrower so that no two
bonds are alike.
D)
bonds are more standardized than are loans.
Page 49
232.
An asset formed by pooling individual loans and selling shares in that pool is called a:
A)
loan-backed security.
B)
mutual fund.
C)
stock.
D)
bond.
233.
Compared with individual loans, loan-backed securities provide _____diversification
and _____ liquidity than individual loans.
A)
less; less
B)
more; more
C)
less; more
D)
more; less
234.
Suppose that Ann bought a share of General Motors stock. The stock is a(n) _____ for
Ann and a(n) _____ for General Motors.
A)
asset; asset
B)
asset; liability
C)
liability; asset
D)
liability; liability
235.
Which financial assets are shares of ownership in a company?
I. bonds
II. loan-backed securities
III. stocks
A)
I only
B)
II only
C)
III only
D)
I, II, and III
236.
Which item is an advantage of stock?
I. reduction of risk for the owners of the company
II. increased welfare for investors who buy the stocks
A)
I only
B)
II only
C)
both I and II
D)
neither I nor II
Page 50
237.
Compared with bonds, stocks generally provide a _____ return and carry a _____
financial risk.
A)
lower; lower
B)
lower; higher
C)
higher; lower
D)
higher; higher
238.
Over the past 100 years, the rate of return on stocks has averaged about _____, and the
return on bonds has averaged approximately _____.
A)
20%; 25%
B)
1%; 2%
C)
–10%; 5%
D)
7%; 2%
239.
One reason financial institutions become very large is to:
A)
decrease transaction costs.
B)
enjoy the power of having a large corporation.
C)
increase transaction costs.
D)
avoid the risks of diversification.
240.
A financial intermediary that sets up a diversified portfolio of stocks and then resells
that portfolio to individual investors is known as a:
A)
life insurance company.
B)
mutual fund.
C)
brokerage company.
D)
credit card company
241.
Financial intermediaries that manage a stock portfolio and sell shares of the portfolio to
individual investors are:
A)
mutual funds.
B)
pension funds.
C)
life insurance companies.
D)
banks.
242.
A mutual fund:
A)
always includes a base year.
B)
owns a diversified portfolio.
C)
always earns a profit.
D)
offers a lower rate of return for any given level of risk.
Page 51
243.
Banks are financial intermediaries that:
A)
have customer deposits as the primary asset and loans to borrowers as the primary
liability.
B)
provide liquid assets to lenders and long-term financing to borrowers.
C)
are types of mutual funds.
D)
have customer deposits as the primary asset and that provide liquid assets to
lenders.
244.
Financial intermediaries do NOT include:
A)
mutual funds.
B)
pension funds.
C)
insurance companies.
D)
the New York Stock Exchange.
245.
Which item is NOT a financial intermediary?
A)
pension funds
B)
mutual funds
C)
a life insurance company
D)
a credit card company
246.
Which function is performed by financial intermediaries?
A)
transforming funds from many individuals to financial assets
B)
transforming funds from many individuals to physical assets
C)
helping individuals and businesses determine their tax liabilities
D)
conducting fiscal policy
247.
A _____ is a nonprofit institution that collects the savings of its members and invests
those funds in a diversified portfolio to provide income to members when they retire.
A)
life insurance company
B)
pension fund
C)
commercial bank
D)
investment bank
248.
A _____ sells policies to savers and guarantees a payment to the policyholder’s
beneficiaries when the policyholder dies.
A)
commercial bank
B)
mutual fund
C)
life insurance company
D)
pension fund
Page 52
249.
The financial slump that began in the United States in the summer of 2007 was a result
of:
A)
falling energy prices.
B)
massive tax increases necessary to balance the federal budget.
C)
a crisis in the foreign exchange market.
D)
a sharp fall in housing prices.
250.
Shares of stock are:
A)
shares of ownership in the issuing company.
B)
a tax liability for the issuing company.
C)
a tax deduction for the investor.
D)
a debt of the issuing company to the investors who purchase the stock.
251.
Which index is NOT one that is associated with the stock market?
A)
the Dow Jones Industrial Average
B)
the producer price index
C)
the S&P 500
D)
the NASDAQ
252.
Which index tracks the 30 leading companies, such as Microsoft, Walmart, and General
Electric?
A)
the Dow Jones Industrial Average
B)
the producer price index
C)
the S&P 500
D)
the NASDAQ
253.
Which index includes the most companies and provides the broadest measure of stock
market performance?
A)
the Dow Jones Industrial Average
B)
the producer price index
C)
the S&P 500
D)
the NASDAQ
254.
Which index includes smaller companies, many in the technology sector?
A)
the Dow Jones Industrial Average
B)
the producer price index
C)
the S&P 500
D)
the NASDAQ
Page 53
255.
If the NASDAQ is down and the Dow Jones Industrial Average is higher on a particular
day, which statement is likely to be TRUE?
A)
Investors are optimistic about the technology sector and pessimistic about the
old-economy sector.
B)
Investors are pessimistic about the technology sector and optimistic about the
old-economy sector.
C)
Investors prefer bonds to stocks.
D)
Investors prefer stocks to bonds.
256.
Owners of stock may receive income in the form of:
A)
interest.
B)
dividends and profit from selling the stock for more than its purchase price.
C)
transfer payments.
D)
rent.
257.
If interest rates increase, making bonds more attractive, the demand for stock will _____
and the price of stock will _____.
A)
increase; increase
B)
increase; decrease
C)
decrease; increase
D)
decrease; decrease
258.
If interest rates decrease, making bonds less attractive, the demand for stock will _____
and the price of stock will _____.
A)
increase; increase
B)
increase; decrease
C)
decrease; increase
D)
decrease; decrease
259.
If the price of an asset is expected to rise in the future:
A)
asset owners will be more willing to sell it now.
B)
it will be more in demand today.
C)
the price of the asset will fall today.
D)
the market is irrational.
260.
The demand for stocks:
A)
is largely a guessing game.
B)
mostly depends on their price.
C)
is mostly a function of buyers’ beliefs about their future prices.
D)
comes from companies who want to borrow money.
Page 54
261.
If Congress passed a law last year that will increase corporate taxes this year, holding
other things constant, stock prices will _____ this year.
A)
increase
B)
decrease
C)
not change
D)
It is impossible to say how stock prices will change.
262.
If all retail stores announce unexpectedly high sales volumes, holding other things
constant, stock prices in the retail sector will:
A)
increase.
B)
decrease.
C)
not change.
D)
It is impossible to say how stock prices will change.
263.
If interest rates on bonds rise, holding other things constant, stock prices will:
A)
increase.
B)
decrease.
C)
not change.
D)
It is impossible to say how stock prices will change.
264.
When a bond becomes more attractive as an asset because of a rise in the interest rate:
A)
the price of stock, a substitute asset, will rise.
B)
the price of stock, a substitute asset, will fall.
C)
the future price of bonds will fall.
D)
people will stop buying bonds and buy other assets.
265.
Income to the owners of commercial real estate is in the form of:
A)
interest.
B)
dividends.
C)
transfer payments.
D)
rent and profit from selling the property at a price higher than its purchase price.
266.
When interest rates increase, the demand for commercial and residential real estate will
_____ and the price of real estate will _____.
A)
increase; increase
B)
increase; decrease
C)
decrease; increase
D)
decrease; decrease
Page 55
267.
When interest rates decrease, the demand for commercial and residential real estate will
_____ and the price of real estate will _____.
A)
increase; increase
B)
increase; decrease
C)
decrease; increase
D)
decrease; decrease
268.
A random walk occurs when an asset price:
A)
moves in a predicable direction but with random error.
B)
makes unpredictable movements.
C)
moves in a predictable way with no error.
D)
moves slowly but predictably.
269.
According to the efficient markets hypothesis, if you are trying to find out what a stock
is really worth, you should:
A)
look up the current stock price.
B)
study past trends in the stock price.
C)
study the underlying determinants of the company’s future profits.
D)
examine its recent price changes.
270.
Which statement describes a serious challenge to the efficient markets hypothesis?
A)
Stock prices fluctuate more than can be explained by news about fundamentals.
B)
Individual investors behave in systematically irrational ways.
C)
Stock prices follow a random walk.
D)
Stock prices fluctuate more than can be explained by news about fundamentals,
and individual investors behave in systematically irrational ways.
271.
A random walk is:
A)
the unpredictable movement over time of a variable.
B)
the predicted fluctuations of a known variable.
C)
the movement of GDP growth per capita in the long run.
D)
a description of the economic fluctuations in the short run.
272.
The efficient markets hypothesis states that:
A)
stock prices fluctuate following the path of business cycles.
B)
at any time, stock prices are fairly valued, reflecting all available information.
C)
stock prices move irrationally and rather unpredictably.
D)
stock prices are easily manipulated by irrational exuberance.
Page 56
273.
The theory that assets embody all publicly available information about their
fundamentals is the:
A)
efficient markets hypothesis.
B)
multiplier theory.
C)
accelerator theory
D)
Fisher effect.
274.
According to the efficient markets hypothesis:
A)
stocks are often overpriced.
B)
stocks are often underpriced.
C)
stocks are neither overpriced nor underpriced.
D)
the random fluctuations in the value of stocks is unexplainable.
275.
If stock prices follow a random walk, it means that stock prices are:
A)
unpredictable.
B)
increasing.
C)
decreasing
D)
constant.
276.
Between 2000 and 2006, there was a housing bubble in the United States. A bubble is:
A)
a fluctuation in asset prices that leads to inherent instability.
B)
an increase in asset prices driven by unrealistic expectations about future prices.
C)
individuals reselling assets rapidly to make quick profit.
D)
speculation by unscrupulous investors.
277.
Amazon’s primary type of investment spending is the purchase of warehouses and
server farms handling data.
A)
True
B)
False
278.
Most of Amazon’s investment spending is for scholarships for its employees to study the
latest thinking in how to distribute goods quickly to consumers.
A)
True
B)
False
279.
The financial system contributes to long-run economic growth by channeling funds
from savers to businesses for investment spending.
A)
True
B)
False
Page 57
280.
Most human capital is provided by private spending for private education.
A)
True
B)
False
281.
Most human capital is provided by government through public education.
A)
True
B)
False
282.
Most physical capital, except infrastructure, is financed by private investment spending
by people and corporations.
A)
True
B)
False
283.
Investment spending contributes to economic growth.
A)
True
B)
False
284.
Investment spending in a closed economy must equal GDP minus consumption minus
government spending.
A)
True
B)
False
285.
The government saves when it runs a budget deficit.
A)
True
B)
False
286.
A budget deficit occurs when tax revenue is higher than government spending plus
government transfers.
A)
True
B)
False
287.
The savings–investment spending identity says that savings and investment spending are
always equal for the economy as a whole.
A)
True
B)
False
Page 58
288.
If a country’s capital inflow exceeds outflow, then foreigners are contributing to the
domestic country’s investment spending.
A)
True
B)
False
289.
Since money from both domestic and foreign savers must eventually be repaid with
interest, capital inflow has the same effect on the national economy as national savings.
A)
True
B)
False
290.
According to the savings-investment spending identity, savings and investment
spending are the most important components of GDP.
A)
True
B)
False
291.
The present value of $1 to be paid 10 years in the future will increase with the interest
rate.
A)
True
B)
False
292.
Your grandmother has promised you $1,000 when you graduate in one year. At a 6%
annual interest rate, you can borrow $943.40 and pay it back with your grandmother’s
gift at graduation.
A)
True
B)
False
293.
The loanable funds market examines the market outcome of the demand for funds from
savers and the supply of funds from borrowers.
A)
True
B)
False
294.
If a project costs $100,000 and is expected to return $105,000 in a year and if the
interest rate is 6%, then the company will want to take out a loan to undertake the
project.
A)
True
B)
False
Page 59
295.
Firms want to undertake projects whose rate of return is greater than the interest rate.
A)
True
B)
False
296.
If interest rates are high, people are willing to forgo consumption and save more, all else
equal.
A)
True
B)
False
297.
An increase in the interest rate causes a decrease in investment by shifting the loanable
funds demand curve to the left.
A)
True
B)
False
298.
Expectations of an improving economy will generally cause an increase in investment
by shifting the loanable funds demand curve to the right.
A)
True
B)
False
299.
Higher interest rates will lead to increased investment spending.
A)
True
B)
False
300.
Lower interest rates will lead to less investment spending.
A)
True
B)
False
301.
There is a negative relationship between the quantity of investment spending and the
interest rate.
A)
True
B)
False
302.
Higher interest rates encourage investment spending.
A)
True
B)
False
Page 60
303.
An increase in the level of business opportunities will not change investment spending.
A)
True
B)
False
304.
The crowding-out effect is the negative effect of government budget deficits on private
investment spending.
A)
True
B)
False
305.
When expected inflation was high during the 1970s, interest rates were low.
A)
True
B)
False
306.
Interest rates decreased during the 1980s because expectations of future inflation were
lower.
A)
True
B)
False
307.
When the demand for housing increased during the early 2000s, the demand for
loanable funds decreased and caused the interest rate to decrease.
A)
True
B)
False
308.
When the housing market collapsed in 2007, the demand for loanable funds decreased
and caused interest rates to decrease.
A)
True
B)
False
309.
If you borrow money from a bank to buy a house, the mortgage (loan) is a financial
asset for you and a liability for the bank.
A)
True
B)
False
310.
A household’s wealth is always equal to its income in the current year.
A)
True
B)
False