The Economics of Money, Banking, and Financial Markets, 9e (Mishkin)Chapter 2 An Overview of the Financial System2.1 Function of Financial Markets1) 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.Answer: DQues Status: Previous Edition2) Financial markets have the basic function ofA) 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.Answer: AQues Status: Previous Edition3) Financial markets improve economic welfare becauseA) 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.Answer: BQues Status: Previous Edition4) Well-functioning financial marketsA) cause inflation.B) eliminate the need for indirect finance.C) cause financial crises.D) produce an efficient allocation of capital.Answer: DQues Status: Previous Edition5) A breakdown of financial markets can result inA) financial stability.B) rapid economic growth.C) political instability.D) stable prices.Answer: CQues Status: Previous Edition6) The principal lender-savers areA) governments.B) businesses.C) households.D) foreigners.Answer: CQues Status: New7) 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.Answer: BQues Status: Previous Edition8) 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 isA) $400.B) $201.C) $200.D) $199.Answer: BQues Status: Previous Edition9) 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 isA) 25%.B) 12.5%.C) 10%.D) 5%.Answer: DQues Status: Previous Edition10) Which of the following can be described as involving direct finance?A) A corporation issues new shares of stock.B) People buy shares in a mutual fund.C) A pension fund manager buys a short-term corporate security in the secondary market.D) An insurance company buys shares of common stock in the over-the-counter markets.Answer: AQues Status: Previous Edition11) Which of the following can be described as involving direct finance?A) A corporation takes out loans from a bank.B) People buy shares in a mutual fund.C) A corporation buys a short-term corporate security in a secondary market.D) People buy shares of common stock in the primary markets.Answer: DQues Status: Previous Edition12) Which of the following can be described as involving indirect finance?A) You make a loan to your neighbor.B) A corporation buys a share of common stock issued by another corporation in the primary market.C) You buy a U.S. Treasury bill from the U.S. Treasury.D) You make a deposit at a bank.Answer: DQues Status: Previous Edition13) Which of the following can be described as involving indirect finance?A) You make a loan to your neighbor.B) You buy shares in a mutual fund.C) You buy a U.S. Treasury bill from the U.S. Treasury.D) A corporation buys a short-term security issued by another corporation in the primary market.Answer: BQues Status: Previous Edition14) Securities are _ for the person who buys them, but are _ for the individual or firm that issues them.A) assets; liabilitiesB) liabilities; assetsC) negotiable; nonnegotiableD) nonnegotiable; negotiableAnswer: AQues Status: Previous Edition15) With _ finance, borrowers obtain funds from lenders by selling them securities in the financial markets.A) activeB) determinedC) indirectD) directAnswer: DQues Status: Previous Edition16) With direct finance funds are channeled through the financial market from the _ directly to the _.A) savers, spendersB) spenders, investorsC) borrowers, saversD) investors, saversAnswer: AQues Status: Previous Edition17) Distinguish between direct finance and indirect finance. Which of these is the most important source of funds for corporations in the United States?Answer: With direct finance, funds flow directly from the lender/saver to the borrower. With indirect finance, funds flow from the lender