Chapter: Chapter 01: Introduction

Multiple Choice

1. The term financial system refers to
a) Financial markets
b) Financial institutions
c) The payment system
d) All of the above

Ans: d

Multiple Choice

2. Households
a) Are dis-savers in their early and later years
b) Are savers during most of their working years
c) On net are surplus or saving units
d) All of the above

Ans: d

Multiple Choice

3. Businesses
a) Are deficit units because the profit-maximizing level of investment outlays exceeds their internally generated funds
b) Are deficit units because of managerial largesse
c) Are surplus units
d) None of the above

Ans: a

Multiple Choice

4. State and local governments
a) Are chronic deficit units
b) Are chronic surplus units
c) Tend to be neither surplus nor deficit units
d) Are not a basic economic unit

Ans: c

Multiple Choice

5. Commercial banks
a) Are surplus units
b) Are deficit units
c) Are not a basic economic unit
d) Are surplus units sometimes and deficit units other times

Ans: c

Multiple Choice

6. For the United States, the external sector has been for some time
a) A deficit unit, drawing funds from the United States
b) A surplus unit, adding funds because imports are greater than exports 
c) A surplus unit because exports are greater than imports
d) Neither a surplus nor deficit unit

Ans: b

Multiple Choice

7. If funds supplied by surplus units exceeded funds demanded by deficit units
a) Interest rates would fall
b) Interest rates would rise
c) A permanent disequilibrium would develop
d) Interest rates would be unaffected

Ans: a

Multiple Choice

8. Lower financing costs (interest rates)
a) Encourage businesses to invest more and demand more funds
b) Encourage surplus units to supply more funds to deficit units
c) Encourage businesses to invest less and demand fewer funds
d) All of the above

Ans: a

Multiple Choice

9. Which of the following is characteristic of the financial system?
a) Participants dislike risk and require compensation for taking on risk
b) It is forward looking
c) Sovereign yields are benchmarks for the pricing of credit
d) All of the above

Ans: d

Multiple Choice

10. In a competitive financial system
a) Surplus funds tend to get allocated to the highest valued uses through price rationing
b) Equilibrium does not ensure that surplus funds get allocated efficiently
c) The level of interest rates ensures that all projects of deficit units get funded
d) None of the above

Ans: a

Multiple Choice

11. If government spending were to increase and taxes were unchanged
a) Interest rates would increase
b) Private investment would decline
c) Saving would increase
d) All of the above

Ans: d

12. An effective financial system
a) Reallocates risk toward those most willing and able to manage it
b) Provides a variety of financial instruments that meet the objectives of heterogeneous surplus and deficit units
c) Provides a safe, reliable, and low-cost payment system
d) All of the above

Ans: d