Question 1

The term "financial system" refers to the collection of markets, individuals and institutions, laws, regulations and techniques through which securities are traded and interest rates determined.

Accepted Answer

The financial system encompasses all aspects involved in the movement of money among borrowers and lenders, including markets, institutions, laws, and regulations, which facilitate the trading of securities and the determination of interest rates.

Question 2

When credit becomes more costly and less available, total spending for goods and services generally falls.

Accepted Answer

When credit is more expensive and harder to obtain, consumers and businesses are less likely to borrow money for spending and investment, leading to a decrease in overall spending on goods and services.

Question 3

The primary task of a financial system is to move scarce loanable funds from those who save to those who borrow to buy goods and services and to make investments in new equipment and facilities so that the global economy can grow and increase the standard of living enjoyed by its citizens.

Accepted Answer

The primary task of a financial system is indeed to facilitate the transfer of funds from savers to borrowers, which helps in financing consumption, investment in new equipment and facilities, thereby contributing to economic growth and an improved standard of living.

Question 4

The money market is designed for the making of short-term loans. It is the institution through which individuals and institutions with temporary surpluses of funds meet the needs of borrowers who have temporary funds shortages (deficits).

Accepted Answer

The money market is indeed designed for short-term borrowing and lending, typically for periods of one year or less, facilitating the exchange between parties with temporary surpluses and those with temporary shortages of funds.

Question 5

A market in which prices fully reflect the latest available information is an efficient market.

Accepted Answer

In an efficient market, prices of securities quickly and fully reflect all available information, meaning that it is impossible to consistently achieve higher returns than average by using this information.

Question 6

A surplus of current revenues over current expenditures is a measure of current government saving.

Accepted Answer

A surplus of current revenues over current expenditures indicates that the government is saving money, as it is collecting more in revenues (such as taxes) than it is spending on current expenditures.

Question 7

Business investment consists of purchases of plant and equipment and purchases of inventory.

Accepted Answer

Business investment includes both the acquisition of physical assets like plant and equipment (capital investment) and changes in business inventories, which are goods that have been produced but not yet sold.

Question 8

The purchase of a new home is a form of business investment.

Accepted Answer

Purchasing a new home is primarily considered a personal investment rather than a business investment, as it involves acquiring property for personal use or to generate rental income, rather than investing capital in a business venture for profit through operations or business activities.

Question 9

The purchase of financial claims is a guaranteed form of future income.

Accepted Answer

The purchase of financial claims, such as stocks or bonds, involves risk and there is no guarantee of future income, as their value can fluctuate based on various factors.

Question 10

Spending by federal, state and local governments for public facilities is a form of government savings.

Accepted Answer

Spending by federal, state, and local governments for public facilities is considered government expenditure, not savings. Savings would imply setting aside resources for future use, whereas spending on facilities is an immediate allocation of funds for infrastructure or services.

Question 11

One of the most important contributions of the financial markets is to make possible the exchange of current income for future income.

Accepted Answer

Financial markets facilitate the transfer of funds from savers to borrowers, allowing individuals and entities to invest current income in exchange for future returns, effectively exchanging current income for future income.

Question 12

Credit represents a loan of funds in return for a promise of future payment.

Accepted Answer

Credit involves borrowing funds with an agreement to repay the borrowed amount along with interest or additional fees at a later date.

Question 13

Interest payments on debt are a tax-deductible expense for households, but not for businesses.

Accepted Answer

Interest payments on debt are generally tax-deductible for businesses, allowing them to reduce their taxable income. For most households, however, interest deductions are limited to specific types of debt, such as mortgage interest.

Question 14

A NOW account is a type of savings account rather than a type of checking account.

Accepted Answer

A NOW (Negotiable Order of Withdrawal) account is a type of checking account that earns interest, not a savings account.

Question 15

Commercial banks and retail stores, but not credit unions, may issue plastic credit cards.

Accepted Answer

Credit unions, like commercial banks and retail stores, can also issue plastic credit cards to their members.

Question 16

The financial markets offer businesses, consumers and governments protection against health, property and income risk.

Accepted Answer

The financial markets offer businesses, consumers, and governments protection against health, property, and income risk through insurance and other financial instruments.

Question 17

The term "liquidity" refers to the ability of a financial asset to be converted quickly into cash with little risk of loss.

Accepted Answer

Liquidity refers to how easily and quickly a financial asset can be converted into cash without significantly affecting its market price, thus minimizing the risk of loss.

Question 18

Money is the only perfectly liquid asset in the financial system.

Accepted Answer

Money is the most liquid asset in the financial system, meaning it can be easily converted into other assets or used to make purchases.

Question 19

The financial asset which generally earns the lowest rate of return in the financial system is securities issued by the federal government which are presumed by investors to be free of credit risk.

Accepted Answer

The answer of The financial asset which generally earns the...

Question 20

A security evidencing a loan which matures within one year is a money market instrument.

Accepted Answer

Money market instruments are short-term debt securities that typically mature in one year or less, making a security evidencing a loan which matures within one year a money market instrument.

Quiz 1: Understanding the Financial System and Its Impact on the Economy and Markets