1

Student: ___________________________________________________________________________

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.
True False
2. When credit becomes more costly and less available, total spending for goods and services generally
falls.
True False
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.
True False
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).
True False
5. A market in which prices fully reflect the latest available information is an efficient market.
True False
6. A surplus of current revenues over current expenditures is a measure of current government saving.
True False
7. Business investment consists of purchases of plant and equipment and purchases of inventory.
True False
8. The purchase of a new home is a form of business investment.
True False
9. The purchase of financial claims is a guaranteed form of future income.
True False
10. Spending by federal, state and local governments for public facilities is a form of government
savings.
True False
11. One of the most important contributions of the financial markets is to make possible the exchange of
current income for future income.
True False
12. Credit represents a loan of funds in return for a promise of future payment.
True False
13. Interest payments on debt are a tax-deductible expense for households, but not for businesses.
True False
14. A NOW account is a type of savings account rather than a type of checking account.
True False
15. Commercial banks and retail stores, but not credit unions, may issue plastic credit cards.
True False
16. The financial markets offer businesses, consumers and governments protection against health, property
and income risk.
True False
17. The term "liquidity" refers to the ability of a financial asset to be converted quickly into cash with little
risk of loss.
True False
18. Money is the only perfectly liquid asset in the financial system.
True False
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.
True False
20. A security evidencing a loan which matures within one year is a money market instrument.
True False
21. One of the most important functions of the capital market is to finance the working-capital needs of
corporations and to provide government with short-term funds in lieu of tax collections.
True False
22. Speculative purchases of securities and commodities are generally financed by loans from the money
market.
True False
23. The construction of office buildings, highways, schools and homes normally is financed by loans from
the capital market.
True False
24. Financial instruments traded in the capital market have original maturities of greater than one year.
True False
25. The most important institution lending funds in the money market is the commercial bank.
True False
26. The largest borrower in the U.S. money market is Citibank, the nation's largest commercial bank.
True False
27. Most loans to families and individuals would be classified as money market instruments.
True False
28. The largest market for a single security in the world is the Treasury bill market.
True False
29. A short-term IOU issued by a large well-established corporation is known as commercial paper.
True False
30. The fact that professional investors operate daily in the financial marketplace, watching for profitable
opportunities arising from unusually attractive prices and interest rates on selected financial instruments
and adjusting their portfolios accordingly is often referred to as the force of profit maximization.
True False
31. The only value of the financial system is that it determines the cost of credit.
True False
32. The financial system determines the cost of credit and how much credit is available.
True False
33. The circular flow occurs between governments and households.
True False
34. Business determines what and how many goods and services will be produced.
True False
35. One way for the economy to expand is for households to set aside savings so that they will not return to
the spending stream.
True False
36. The tax status of interest paid on debt causes most individuals to think twice before using credit.
True False
37. Generally a business firm enters the capital market if it experiences a temporary surplus or deficit of
funds.
True False
38. The money market is an excellent place for new corporations to borrow money.
True False
39. Federal funds are temporary cash surpluses held by the federal government.
True False
40. Speculators in securities are continually on the lookout for small differences in prices or interest rates
attached to different securities.
True False
41. Arbitrageurs help to maintain consistent prices between financial markets.
True False
42. The financial markets provide a means to protect businesses, consumers and governments against
risk.
True False
43. The terms open market and negotiated market are often used interchangeably to mean the same thing.
True False
44. The principal function of the primary market is to raise money for investment in buildings and
equipment.
True False
45. An example of a futures market transaction is to borrow money through a new mortgage.
True False
46. Forward markets and futures markets serve the same purpose in principle.
True False
47. The liquidity function of the financial system is designed to protect businesses, consumers and
governments against risks to people, property and income.
True False
48. The payments function of the financial system is designed to provide a means to store purchasing power
until needed at a future date for spending on goods and services.
True False
49. The financial system is rapidly evolving into a worldwide system, with increasingly intense competition
among financial institutions.
True False
50. Current savings for business firms are equal to current retained earnings less operating expenses.
True False
51. Current investment for households includes purchases of household durables by individuals and
families.
True False
52. Investment by governments includes the construction of new public facilities.
True False
53. The financial system operates to bring planned savings into balance with planned financial investment in
stocks and bonds.
True False
54. A high proportion of young adults and newly formed families in a nation's population will generate a
high level of national savings compared to countries with older populations because younger adults have
greater need to build up savings for the future.
True False
55. A nation with a relatively low savings ratio will tend to have higher interest rates and more rapid
inflation.
True False
56. Trading in financial instruments now spans the globe.
True False
57. Few companies or governments have the prestige or stature that would cause investors throughout the
world to want to trade their particular securities.
True False
58. One of the most significant barriers to worldwide trading of securities is the delay in paying for and
delivering securities to all parts of the globe.
True False
59. If there is imperfect information in a market, it is perfectly competitive.
True False
60. When savings flows fall, living standards rise because people spend more.
True False
61. The net wealth of an economic unit is determined by adding all the unit's assets to it net worth or equity
capital.
True False
62. The financial services area where protection is provided against loss due to unfavorable movements in
market prices or interest rates is known as agency services.
True False
63. The financial services area where protection is provided from loss of income or property in the event of
death, disability, negligence or other adverse developments is known as hedging services.
True False
64. The financial services area where payments accounts against which the customer can write checks or wire
funds to pay for purchases of goods and services is known as thrift services.
True False
65. Wealth holdings represent stored purchasing power that will be used in future periods to finance
purchases of goods and services and increase society's standard of living.
True False
66. A major problem faced by Japan today is too much saving by its citizens.
True False
67. Financial transactions between nations have increased faster in volume than has international trade in
goods and nonfinancial services.
True False
68. The world's standard of living increases if production increases while raising productivity.
True False
69. Current savings represents a flow of funds.
True False
70. Accumulated savings built up over time is referred to as a flow of funds.
True False
71. Personal savings are after-tax funds that are not consumed during the year.
True False
72. The term "financial system" refers to the collection of markets, individuals and institutions, laws,
regulations and techniques through which cash is traded and interest rates determined.
True False
73. The construction of office buildings, highways, schools and homes normally is financed by loans from
the money market.
True False
74. Most loans to families and individuals would be classified as capital market instruments.
True False
75. Arbitrageurs help to insure differentials between financial markets
True False
76. A major problem faced by Japan today is too little saving by its citizens.
True False
77. The financial system determines:
A. The cost of credit
B. How much credit is available
C. The prices of securities
D. The quantity of securities issued by borrowers
E. All of the above
78. According to your text, the nation's standard of living is increased through the mechanism of the financial
system by:
A. Increasing interest rates
B. Reducing the volume of spending for goods and services
C. Lowering inflation
D. Stabilizing the economy's rate of growth
E. Making funds available
79. In general, when the cost of credit declines,
A. Unemployment rises
B. Total spending decreases
C. Production is cut back
D. More jobs are created
E. The economy's rate of growth slows down
80. The role of markets in a market-oriented economy like the United States is to:
A. Allocate resources
B. Distribute income
C. Produce needed goods and services
D. All of the above
E. None of the above
81. The markets that serve the financial system may be classified in several different ways, including:
A. Money markets versus capital markets
B. Open markets versus negotiated markets
C. Primary markets versus secondary markets
D. Spot markets versus futures markets
E. All of the above
82. The financial system and financial markets are responsible for providing which of the following services?

A. Credit services
B. Payment services
C. Liquidity
D. Facilitating the flow of savings
E. All of the above
83. According to the text, several different financial assets and instruments have served as a medium of
exchange or means of making payments in recent years. Which instrument listed below is not considered
a means of making payments or a medium of exchange?
A. Checking accounts
B. NOW accounts
C. Negotiable certificates of deposit
D. Debit cards
E. Credit cards
84. The ______ is designed for the making of short-term loans where individuals and institutions with
temporary surpluses of funds meet borrowers who have temporary cash shortages.
A. Money market
B. Capital market
C. Open market
D. Negotiated market
E. Primary market
85. The ______ is designed to finance long-term investments, making possible the construction of factories,
office buildings, highways, bridges, schools, homes and apartments.
A. Money market
B. Capital market
C. Secondary market
D. Negotiated market
E. Primary market
86. One of the financial markets listed below is not part of the nation's capital market. Which one is not?
A. Mortgage market
B. Corporate bond market
C. Municipal bond market
D. Commercial paper market
E. Stock market
87. One of the financial markets listed below is not part of the money market. Which one is not?
A. U.S. Treasury bill market
B. Market for negotiable CDs of $100,000 or more
C. Market for federal funds
D. Market for Eurodollar deposits
E. Market for consumer installment loans
88. The financial markets that provide for the immediate delivery of securities are known as:
A. Spot markets
B. Futures markets
C. Forward markets
D. Option markets
E. None of the above
89. The market for trading newly issued securities is known as the:
A. Money market
B. Cash market
C. Spot market
D. Primary market
E. Open market
90. Trading in securities previously issued takes place in the:
A. Open market
B. Secondary market
C. Primary market
D. Negotiated market
E. Capital market
91. According to your text, the basic commodity being traded in all the financial markets is:
A. Securities
B. Capital
C. Forward markets
D. Credit
E. None of the above
92. The circular flow of funds includes which of the following:
A. Consumer units
B. Households
C. Government
D. All of the above
E. None of the above
93. Which type of market is not part of the circular flow?
A. Factor market
B. Information market
C. Financial market
D. Product market
E. All of the above
94. If households set aside funds that are not returned to the spending stream the economy will:
A. Expand
B. Contract
C. Operate at a normal level
D. Do nothing
E. None of the above
95. The financial system provides all the following services except:
A. Furnish credit
B. Payment services
C. Equitably distribute wealth
D. Provide liquidity
E. Risk protection
96. The largest borrower in the money market is:
A. Businesses
B. Government
C. Households
D. Commercial banks
E. None of the above
97. To gain access to the money market an institution must:
A. Have an excellent credit rating
B. Be well known
C. Be large
D. All of the above
E. None of the above
98. The largest market in the world for a single security is:
A. The capital market
B. The money market
C. The treasury bill market
D. The federal funds market
E. None of the above
99. Arbitrage occurs when:
A. A new security is issued
B. A company is in need of funds
C. A large institution faces default
D. Interest rates in a sector of the financial market rise relative to other sectors
E. None of the above
100.The function of the financial system that consists of providing a channel through which the government
can promote the goals of high employment and low inflation is called the:
A. Savings function
B. Wealth function
C. Credit function
D. Liquidity function
E. None of the above
101.The function of the financial system that consists of providing a means of raising funds by converting
securities and other assets into cash balances is called the:
A. Savings function
B. Wealth function
C. Credit function
D. Liquidity function
E. None of the above
102.The market for delivery of securities usually within one or two business days is known as a the spot
market
A. The spot market
B. The forward market
C. The futures market
D. The primary market
E. None of the above
103.According to the text speculators perform an important function in the financial markets. They:
A. Create underpricing of certain securities, generating more attractive investment opportunities
B. Cause some securities to be overpriced which tends to drive out those securities
C. Level out the prices of securities
D. Help to prevent security fraud
E. None of the above
104.According to your text, a key trend in the financial system is:
A. Increasing competition
B. Greater risk
C. Growth of technology
D. Growth of debt
E. All of the above are key trends for the financial system
105.The U.S. savings rate is one of the lowest among major industrial nations because of the:
A. High proportion of young adults in the U.S. population
B. Large government budget deficits
C. Tax structure which favors consumption and borrowing over savings
D. All of the above
E. None of the above
106.Current savings for a business firm is measured by:
A. Total business sales receipts less business operating expenses (including business taxes)
B. Current budget receipts less current budgetary expenditures
C. Purchases of plant and equipment and inventory and residential construction
D. Construction of new public facilities
E. None of the above
107.Current savings for a household is measured by:
A. Current consumption spending (including personal taxes) subtracted from personal income
B. Current budget receipts less current budgetary expenditures
C. Current retained earnings and noncash expenses
D. Purchases of household durable goods
E. None of the above
108.The most significant barriers to 24-hour worldwide trading of securities include:
A. Lack of adequate prestige or stature by most companies and governments
B. Lack of common operating rules and regulations among different exchanges and nations
C. Delays in payment for and delivery of securities
D. Lack of open access to membership on all exchanges
E. All of the above
109.A market in which competition among buyers and sellers sets the terms of trade is a:
A. Primary market
B. Forward market
C. Efficient market
D. Perfect market
E. None of the above
110.A(n) _____ market exists if the market is fully competitive and the same information is available to all
participants.
A. Primary
B. Secondary
C. Perfect
D. Imperfect
E. Neutral
111._____ risk refers to the risk that you will not receive securities that you have purchased or that you will
not receive payment for securities you have sold.
A. Hedging
B. Clearing
C. Global
D. Settlement
E. Liquidity
112.A bank certificate of deposit is a ______ market instrument. Commercial paper is a ______ market
instrument.
A. Money, capital
B. Money, futures
C. Capital, capital
D. Futures, capital
E. Money, money
113.Net wealth for an economic unit equals:
A. Total assets plus equity capital
B. Total assets less real (nonfinancial) assets
C. Total assets minus total liabilities
D. Total savings plus holding of financial assets
E. None of the above
114.The financial service supplied by the money and capital markets in which financial instruments are
created to attract savings for future financial needs is called:
A. Agency services
B. Credit services
C. Payments services
D. Thrift services
E. None of the above
115.Acting as an agent for a customer in managing retirement funds or other property represents what
financial service area?
A. Hedging services
B. Credit services
C. Thrift services
D. Insurance
E. None of the above
116.Providing loanable funds to supplement current income in order to sustain current living standards
represents what financial service area?
A. Payments services
B. Thrift services
C. Agency services
D. Credit services
E. None of the above
117.For a household, according to US accounting procedures, which of the following is considered an
investment?
A. Jewelry
B. Home
C. Garage
D. Pickup truck
E. Boat
118.In early 2006, more than $55 trillion in securities, deposits and other financial assets were held by
domestic nonfinancial businesses, households and governments in the United States and represents their
financial wealth. After subtracting the total debt owed by these groups, it leaves us with the net financial
wealth of:
A. $12 trillion
B. $15 trillion
C. $20 trillion
D. $30 trillion
E. $75 trillion
119.In early 2006 it appeared that the annual US gross domestic product (GDP) would be around $11.5
trillion. What percentage of the GDP is saved?
A. 5%
B. 12%
C. 17%
D. 22%
E. 25%
120.A household which consumes assets or increases debt during the year is a condition sometimes referred to
as:
A. Poor
B. Negative income
C. Negative savings
D. Asset consumption
E. None of the above
121.Projections for 2006 indicated that personal savings for the year would be:
A. $400 billion
B. -$215 billion
C. $45 billion
D. -$45 billion
E. $32 billion
122.On annualized basis US corporations will earn approximately $1.1 trillion, of which ________ will be set
aside for possible future business needs. Choose the answer for the blank.
A. $500 billion
B. $200 billion
C. $700 billion
D. $50 billion
E. $150 billion
123.Two areas that are major sources of funding for loans are:
A. Personal savings and taxes
B. Business savings and taxes
C. Taxes and net profit
D. Profits and bonds
E. Personal savings and business earnings
124.Investing in stocks, bonds or other financial instruments is a good idea because:
A. They do not wear out
B. Usually generate income
C. Risk of loss is lower than other forms of stored to wealth
D. Are negotiable
E. All of the above
125.For any business, individual or government, wealth is:
A. Assets we have managed to accumulate and hold up to the present
B. The sum of the value of all assets we hold at any given time
C. Cash held
D. A and C
E. A, B, & C
126.At the end of last year the wealth was $48,000, with a return on the accumulated wealth was 2% during
this year and $1700 was saved this year. At the end of this year the accumulated wealth is:
A. $49,700
B. $50,660
C. $46,300
D. $2660
E. None of the above
127.Wealth created income results in:
A. Loss of assets
B. New savings
C. Debt
D. Increased consumption
E. B & D
128.Every year the volume of financial wealth is growing in the United States. In 2006 the total securities,
deposits and other financial assets held by domestic nonfinancial businesses, households, the US
government and foreign investors was
A. $55 trillion
B. $66 trillion
C. $11 trillion
D. $50 trillion
E. None of the above
129.Perfect liquidity is a trait held by the following:
A. Bonds
B. Stocks
C. Money
D. 30 year U.S. Treasury bonds
E. None of the above
130.When a purchaser is issued a bill online and can make payments online, this is referred to as:
A. Stored value cards
B. Contactless payment devices
C. Electronic bill presentment
D. ATM card
E. Credit card
131.In the financial marketplace, secondary markets provide:
A. Similar returns to the primary market
B. Support for new investment
C. Liquidity
D. Debt for businesses
E. A & C
132.Lower savings rates in the United States could be due to:
A. Low unemployment
B. Long periods of prosperity
C. No direct experience of the Great Depression
D. Value of homes has risen substantially
E. All of the above
133.Choose the definition or descriptive phrase on the right that best describes the term on the left.
1. Investme Definitions or Descriptive Phrases _
nt __
_
2. NOWS Collection of markets, institutions, laws and methods _
through which securities are traded and interest rates__
determined. _
3. Rate of Cost of Credit. _
Interest __
_
4. Product Allocates scarce material resources to produce goods and _
Market services __
_
5. Wealth Input in the economic system. _
__
_
6. Economi Payments and production _
c System __
_
7. Factor Channel for buyers and sellers to exchange goods and _
Market services __
_
8. Saving Consuming units sell skills and resources to producing _
units. __
_
9. Credit Income flows to the purchase of goods and services. _
__
_
10. Capital Determines volume of credit _
Equipment __
_
11. Circular Difference between current income and current _
Flow consumption. __
_
12. Liquidit Medium or exchange _
y __
_
13. Financi Loan of funds in return for a promise of future payment. _
al Market __
_
14. Financi Medium or exchange _
al System __
_
15. Debit Transfer funds from a buyer's deposit account to the seller's _
Cards account __
_
16. Terms Ability to raise cash quickly with little risk of loss. _
__
_
17. Market All assets held by an economic unit minus the debts it _
owes. __
_
134.Choose the definition or descriptive phrase on the right which best describes the term on the left.
1. Money Definitions or Descriptive Phrases ___
Market _
2. Forward Market for loans maturing in one year or less. ___
Market _
3. Wealth Possesses perfect liquidity. ___
_
4. Negotiated Market for loans with maturities longer than one year. ___
Market _
5. Capital Securities Traded for immediate delivery. ___
Market _
6. Open Market Trading of contracts calling for the future delivery of ___
financial instruments _
7. Credit Securities sold to highest bidder. ___
_
8. Personal Securities sold to one or a few buyers under private ___
savings contract. _
9. Human Market for newly issued securities. ___
capital _
10. Money Market for existing securities. ___
_
11. Financial Transfer of funds between markets in response to ___
wealth attractive prices and rates. _
12. Liquidity stored purchasing power. ___
_
13. Secondary readily spendable assets. ___
Market _
14. Primary after-tax income not consumed ___
Market _
15. Terms stocks, bonds, financial instruments . ___
_
16. Arbitrage marketable skills ___
_
17. Spot opposite of savings ___
Market _
135.C. Responding to a rise in the price of Texaco common stock, you have just purchased 100 shares of that
company's stock through a phone call to your broker who is linked to a major stock exchange. Capital;
secondary; open; spot.
B. You purchase a new U.S. Treasury bill through the Federal Reserve bank in a neighboring city for
delivery today. Money; primary; open; spot.
Please classify the following financial transactions as to whether they fit in (a) the money market or the
capital market; (b) the primary or secondary market; (c) the open or negotiated market; and (d) the spot or
futures/forward market. (Note: The transactions below may fit in more than one of the above categories
of markets. Be sure to include all the appropriate types of markets that each transaction fits.)
a. You visit a local bank today and secure a three-year loan to finance the purchase of a new car and some
furniture. Capital; primary; negotiated; spot.
136.C. Responding to a rise in the price of Texaco common stock, you have just purchased 100 shares of that
company's stock through a phone call to your broker who is linked to a major stock exchange.
Capital; secondary; open; spot.
B. You purchase a new U.S. Treasury bill through the Federal Reserve bank in a neighboring city for
delivery today. Money; primary; open; spot.
Please classify the following financial transactions as to whether they fit in (a) the money market or the
capital market; (b) the primary or secondary market; (c) the open or negotiated market; and (d) the spot or
futures/forward market. (Note: The transactions below may fit in more than one of the above categories
of markets. Be sure to include all the appropriate types of markets that each transaction fits.)
a. You visit a local bank today and secure a three-year loan to finance the purchase of a new car and some
furniture. Capital; primary; negotiated; spot.

137.C. Fearing a slowdown in the rate of economic growth and increased joblessness, the Federal Reserve
System and the Bank of England move to lower interest rates. Policy.
B. Sharon MacArthur uses her credit card to purchase wallpaper for a home remodeling project.
Payments; credit.
What functions of the financial system do the following transactions illustrate or represent? (Note: Some
transactions may involve more than one function. Be sure to identify all the financial system functions
involved in each transaction.)
a. James Rhodes purchases health and accident insurance policies through the company where he works.
Risk protection; payments.
138.What functions of the financial system do the following transactions illustrate or represent? (Note: Some
transactions may involve more than one function. Be sure to identify all the financial system functions
involved in each transaction.)
a. Dynamic Corporation places some of its current earnings in a bank CD, anticipating a need for funds in
about a year in order to build a new warehouse. Savings; wealth
B. The Italian government sells new bonds in the open market to cover a large budget deficit. Credit;
policy
C. Cal and Jane Lewis hope to put their three young children through college someday. Accordingly, they
begin buying U.S. savings bonds. Savings; wealth; liquidity, risk protection
D. Needing immediate spending power, Hillcrest Corporation sells its holdings of Denton County bonds
through a security broker.
Liquidity.

139.a. Current savings for households = Total personal income - personal tax and nontax payments - personal
consumption expenditures = $4677.7 b - $709.0 b - $3697.6 b = $271.1 billion.
Current business savings = Undistributed business profits + capital consumption on business plant and
equipment = $42.1 b + $500.0 b = $542.1 billion.
Current government savings = Current budgetary receipts - current budgetary outlays = federal, state and
local government net budget surplus (+) or deficit (-) = - $143.0 b + $39.2 b = - $103.8 billion.
Current savings for all households, businesses and governments = $271.1 b + $542.1 b - $103.8 b =
$709.4 billion.
b. Current household investment = Purchase of durable goods + residential construction = $481.9 b +
$218.2 b = $700.1 billion.
Current business investment = Change in business inventories + expenditures on nonresidential plant and
equipment = $9.6 b + $532.4 b = $542.0 billion.
Current investment for households and businesses = $700.1 b + $542.0 b = $1,242.1 billion.
From the information presented below on the U.S. economy, please calculate (a) the volume of current
savings for all U.S. households, business firms and governments; and (b) the volume of current
investment for households and businesses. (Hint: Not all of the information below needs to be used to
answer this question; decide what is and is not needed.)
140.In a recent year the following amounts of money market and capital market instruments – loans and
securities – were issued and outstanding in the United States. Based on the discussion in this chapter
classify each of the instruments as to whether they usually qualify as (a) a money market instrument or
(b) a capital market instrument. If the listed instruments represent all U. S. money and capital market
instruments outstanding, what was the total dollar size of the U.S. money market? The total size of the
U.S. capital market?

141.What roles of the global financial system are being described in the items listed below?
a. Exxon Corporation issues new shares of stock to finance its expansion into foreign markets. Savings,
wealth, credit functions
B. The Wiliams' family withdraws its bank deposit in order to purchase new furniture for their new home.
Savings, wealth, liquidity functions
C. Robert Enlow plans to purchase a new home in three years, but in the interim, he makes a loan to a
friend who needs ready cash for a down payment on an automobile. Credit function.
142.What roles of the global financial system are being described in the items listed below?
a. Exxon Corporation issues new shares of stock to finance its expansion into foreign markets. Savings,
wealth, credit functions
B. The Wiliams' family withdraws its bank deposit in order to purchase new furniture for their new home.
Savings, wealth, liquidity functions
C. Robert Enlow plans to purchase a new home in three years, but in the interim, he makes a loan to a
friend who needs ready cash for a down payment on an automobile. Credit function.

143.What roles of the global financial system are being described in the items listed below?
a. Deutsche Bank develops and offers to its customers a new savings plan that combines traditional bank
deposits with the availability of shares in a growth-oriented mutual fund. Savings, liquidity and wealth
functions
B. Randy Bose plans to retire in 18 months but elects to loan a portion of his long-term savings to his son
Robert who is starting a new business and has recently married. Credit function
C. The Greater Asia Insurance Corporation has managed to attract $100 million in annuity investments
from savers over the past six months and plans to make a loan to Eastman Hotel Corporation,which
is beginning construction on a series of luxury resorts in Honolulu and Singapore. Savings and credit
functions.

144.What concept, institution or instrument is described by each of the phrases or sentences listed below?
a. Trading of loans and securities in which any individual or institution can participate. Open market
B. Mechanisms set up by society to trade newly issued loans and securities. Primary market
C. Set up to channel temporary cash surpluses into temporary loans. Money market
D. Immediately spendable cash. Liquidity
E. Assets minus liabilities held by an economic unit. Net financial wealth.
145.What concept, institution or instrument is described by each of the phrases or sentences listed below?
a. Expenditures on capital goods or raw materials. Investment expenditures
B. Current earnings retained in a business. Business savings
C. Funds left over out of current income after deducting current consumption expenditures. Household
savings
D. An institutional mechanism for trading goods and services. Market
E. Collection of markets, individuals, institutions, laws and regulations through which financial services
are produced and delivered. Financial system

146.Herman Gleep has built up total assets at the end of last year of $520,000. It consisted off a home valued
at $350,000 and financial assets valued at $170,000. During this year his home appreciated by a -4%
because of the contracting housing market, but his financial assets achieved a return of 6.5%. What is
Herman's overall rate of return this year and what are his total assets worth?
Home $350,000 X (1-.04) + Financial Assets $170,000 X (1+.065) = Total Asset Value
$336,000 + $181,050 = $517,050
Percent Return
[(Ending value - Starting Value)/starting value] X 100
[($517,050 - $520,000)/$520,000] X 100
[$2,950/$520,000] X 100 = -.57%

147.What concept, device or instrument is described by each of the phrases or sentences listed below?
a. On payday, many workers are receiving this negotiable item instead of a traditional paycheck. Stored
value cards
b. Fund's that are transferred electronically from the payor's account to the account of the payee. Direct
deposit
c. Provides the holder access to cash, the ability to transfer funds and the ability to check balances. ATM
Card medium
d. Transfers information and money in using radio frequencies with no direct contact. Contactless
payment devices
 1 Key
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.
TRUE
Difficulty: Medium
Rose - Chapter 01 #1
2. When credit becomes more costly and less available, total spending for goods and services generally
falls.
TRUE
Difficulty: Hard
Rose - Chapter 01 #2
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.
TRUE
Difficulty: Easy
Rose - Chapter 01 #3
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).
TRUE
Difficulty: Easy
Rose - Chapter 01 #4
5. A market in which prices fully reflect the latest available information is an efficient market.
TRUE
Difficulty: Medium
Rose - Chapter 01 #5
6. A surplus of current revenues over current expenditures is a measure of current government
saving.
TRUE
Difficulty: Medium
Rose - Chapter 01 #6
7. Business investment consists of purchases of plant and equipment and purchases of inventory.
TRUE
Difficulty: Medium
Rose - Chapter 01 #7
8. The purchase of a new home is a form of business investment.
FALSE
Difficulty: Easy
Rose - Chapter 01 #8
9. The purchase of financial claims is a guaranteed form of future income.
FALSE
Difficulty: Medium
Rose - Chapter 01 #9
10. Spending by federal, state and local governments for public facilities is a form of government
savings.
FALSE
Difficulty: Easy
Rose - Chapter 01 #10
11. One of the most important contributions of the financial markets is to make possible the exchange of
current income for future income.
TRUE
Difficulty: Easy
Rose - Chapter 01 #11
12. Credit represents a loan of funds in return for a promise of future payment.
TRUE
Difficulty: Easy
Rose - Chapter 01 #12
13. Interest payments on debt are a tax-deductible expense for households, but not for businesses.
FALSE
Difficulty: Easy
Rose - Chapter 01 #13
14. A NOW account is a type of savings account rather than a type of checking account.
FALSE
Difficulty: Easy
Rose - Chapter 01 #14
15. Commercial banks and retail stores, but not credit unions, may issue plastic credit cards.
FALSE
Difficulty: Medium
Rose - Chapter 01 #15
16. The financial markets offer businesses, consumers and governments protection against health,
property and income risk.
TRUE
Difficulty: Medium
Rose - Chapter 01 #16
17. The term "liquidity" refers to the ability of a financial asset to be converted quickly into cash with
little risk of loss.
TRUE
Difficulty: Easy
Rose - Chapter 01 #17
18. Money is the only perfectly liquid asset in the financial system.
TRUE
Difficulty: Medium
Rose - Chapter 01 #18
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.
FALSE
Difficulty: Medium
Rose - Chapter 01 #19
20. A security evidencing a loan which matures within one year is a money market instrument.
TRUE
Difficulty: Easy
Rose - Chapter 01 #20
21. One of the most important functions of the capital market is to finance the working-capital needs of
corporations and to provide government with short-term funds in lieu of tax collections.
FALSE
Difficulty: Easy
Rose - Chapter 01 #21
22. Speculative purchases of securities and commodities are generally financed by loans from the money
market.
TRUE
Difficulty: Hard
Rose - Chapter 01 #22
23. The construction of office buildings, highways, schools and homes normally is financed by loans from
the capital market.
TRUE
Difficulty: Medium
Rose - Chapter 01 #23
24. Financial instruments traded in the capital market have original maturities of greater than one
year.
TRUE
Difficulty: Easy
Rose - Chapter 01 #24
25. The most important institution lending funds in the money market is the commercial bank.
TRUE
Difficulty: Easy
Rose - Chapter 01 #25
26. The largest borrower in the U.S. money market is Citibank, the nation's largest commercial bank.
FALSE
Difficulty: Medium
Rose - Chapter 01 #26
27. Most loans to families and individuals would be classified as money market instruments.
FALSE
Difficulty: Medium
Rose - Chapter 01 #27
28. The largest market for a single security in the world is the Treasury bill market.
TRUE
Difficulty: Medium
Rose - Chapter 01 #28
29. A short-term IOU issued by a large well-established corporation is known as commercial paper.
TRUE
Difficulty: Easy
Rose - Chapter 01 #29
30. The fact that professional investors operate daily in the financial marketplace, watching for profitable
opportunities arising from unusually attractive prices and interest rates on selected financial
instruments and adjusting their portfolios accordingly is often referred to as the force of profit
maximization.
FALSE
Difficulty: Hard
Rose - Chapter 01 #30
31. The only value of the financial system is that it determines the cost of credit.
FALSE
Difficulty: Medium
Rose - Chapter 01 #31
32. The financial system determines the cost of credit and how much credit is available.
TRUE
Difficulty: Medium
Rose - Chapter 01 #32
33. The circular flow occurs between governments and households.
FALSE
Difficulty: Medium
Rose - Chapter 01 #33
34. Business determines what and how many goods and services will be produced.
FALSE
Difficulty: Easy
Rose - Chapter 01 #34
35. One way for the economy to expand is for households to set aside savings so that they will not return
to the spending stream.
FALSE
Difficulty: Medium
Rose - Chapter 01 #35
36. The tax status of interest paid on debt causes most individuals to think twice before using credit.
FALSE
Difficulty: Hard
Rose - Chapter 01 #36
37. Generally a business firm enters the capital market if it experiences a temporary surplus or deficit of
funds.
FALSE
Difficulty: Hard
Rose - Chapter 01 #37
38. The money market is an excellent place for new corporations to borrow money.
FALSE
Difficulty: Medium
Rose - Chapter 01 #38
39. Federal funds are temporary cash surpluses held by the federal government.
FALSE
Difficulty: Easy
Rose - Chapter 01 #39
40. Speculators in securities are continually on the lookout for small differences in prices or interest rates
attached to different securities.
TRUE
Difficulty: Medium
Rose - Chapter 01 #40
41. Arbitrageurs help to maintain consistent prices between financial markets.
TRUE
Difficulty: Easy
Rose - Chapter 01 #41
42. The financial markets provide a means to protect businesses, consumers and governments against
risk.
TRUE
Difficulty: Easy
Rose - Chapter 01 #42
43. The terms open market and negotiated market are often used interchangeably to mean the same
thing.
FALSE
Difficulty: Medium
Rose - Chapter 01 #43
44. The principal function of the primary market is to raise money for investment in buildings and
equipment.
TRUE
Difficulty: Medium
Rose - Chapter 01 #44
45. An example of a futures market transaction is to borrow money through a new mortgage.
FALSE
Difficulty: Medium
Rose - Chapter 01 #45
46. Forward markets and futures markets serve the same purpose in principle.
TRUE
Difficulty: Medium
Rose - Chapter 01 #46
47. The liquidity function of the financial system is designed to protect businesses, consumers and
governments against risks to people, property and income.
FALSE
Difficulty: Hard
Rose - Chapter 01 #47
48. The payments function of the financial system is designed to provide a means to store purchasing
power until needed at a future date for spending on goods and services.
FALSE
Difficulty: Hard
Rose - Chapter 01 #48
49. The financial system is rapidly evolving into a worldwide system, with increasingly intense
competition among financial institutions.
TRUE
Difficulty: Easy
Rose - Chapter 01 #49
50. Current savings for business firms are equal to current retained earnings less operating expenses.
FALSE
Difficulty: Hard
Rose - Chapter 01 #50
51. Current investment for households includes purchases of household durables by individuals and
families.
TRUE
Difficulty: Medium
Rose - Chapter 01 #51
52. Investment by governments includes the construction of new public facilities.
TRUE
Difficulty: Medium
Rose - Chapter 01 #52
53. The financial system operates to bring planned savings into balance with planned financial investment
in stocks and bonds.
FALSE
Difficulty: Easy
Rose - Chapter 01 #53
54. A high proportion of young adults and newly formed families in a nation's population will generate a
high level of national savings compared to countries with older populations because younger adults
have greater need to build up savings for the future.
FALSE
Difficulty: Medium
Rose - Chapter 01 #54
55. A nation with a relatively low savings ratio will tend to have higher interest rates and more rapid
inflation.
TRUE
Difficulty: Hard
Rose - Chapter 01 #55
56. Trading in financial instruments now spans the globe.
TRUE
Difficulty: Easy
Rose - Chapter 01 #56
57. Few companies or governments have the prestige or stature that would cause investors throughout the
world to want to trade their particular securities.
TRUE
Difficulty: Easy
Rose - Chapter 01 #57
58. One of the most significant barriers to worldwide trading of securities is the delay in paying for and
delivering securities to all parts of the globe.
TRUE
Difficulty: Medium
Rose - Chapter 01 #58
59. If there is imperfect information in a market, it is perfectly competitive.
FALSE
Difficulty: Easy
Rose - Chapter 01 #59
60. When savings flows fall, living standards rise because people spend more.
FALSE
Difficulty: Easy
Rose - Chapter 01 #60
61. The net wealth of an economic unit is determined by adding all the unit's assets to it net worth or
equity capital.
FALSE
Difficulty: Medium
Rose - Chapter 01 #61
62. The financial services area where protection is provided against loss due to unfavorable movements in
market prices or interest rates is known as agency services.
FALSE
Difficulty: Hard
Rose - Chapter 01 #62
63. The financial services area where protection is provided from loss of income or property in the event
of death, disability, negligence or other adverse developments is known as hedging services.
FALSE
Difficulty: Medium
Rose - Chapter 01 #63
64. The financial services area where payments accounts against which the customer can write checks or
wire funds to pay for purchases of goods and services is known as thrift services.
FALSE
Difficulty: Easy
Rose - Chapter 01 #64
65. Wealth holdings represent stored purchasing power that will be used in future periods to finance
purchases of goods and services and increase society's standard of living.
TRUE
Difficulty: Easy
Rose - Chapter 01 #65
66. A major problem faced by Japan today is too much saving by its citizens.
TRUE
Difficulty: Easy
Rose - Chapter 01 #66
67. Financial transactions between nations have increased faster in volume than has international trade in
goods and nonfinancial services.
TRUE
Difficulty: Medium
Rose - Chapter 01 #67
68. The world's standard of living increases if production increases while raising productivity.
TRUE
Difficulty: Hard
Rose - Chapter 01 #68
69. Current savings represents a flow of funds.
TRUE
Difficulty: Easy
Rose - Chapter 01 #69
70. Accumulated savings built up over time is referred to as a flow of funds.
FALSE
Difficulty: Medium
Rose - Chapter 01 #70
71. Personal savings are after-tax funds that are not consumed during the year.
TRUE
Difficulty: Hard
Rose - Chapter 01 #71
72. The term "financial system" refers to the collection of markets, individuals and institutions, laws,
regulations and techniques through which cash is traded and interest rates determined.
FALSE
Difficulty: Medium
Rose - Chapter 01 #72
73. The construction of office buildings, highways, schools and homes normally is financed by loans from
the money market.
FALSE
Difficulty: Medium
Rose - Chapter 01 #73
74. Most loans to families and individuals would be classified as capital market instruments.
TRUE
Difficulty: Medium
Rose - Chapter 01 #74
75. Arbitrageurs help to insure differentials between financial markets
FALSE
Difficulty: Medium
Rose - Chapter 01 #75
76. A major problem faced by Japan today is too little saving by its citizens.
FALSE
Difficulty: Medium
Rose - Chapter 01 #76
77. The financial system determines:
A. The cost of credit
B. How much credit is available
C. The prices of securities
D. The quantity of securities issued by borrowers
E. All of the above
Difficulty: Medium
Rose - Chapter 01 #77
78. According to your text, the nation's standard of living is increased through the mechanism of the
financial system by:
A. Increasing interest rates
B. Reducing the volume of spending for goods and services
C. Lowering inflation
D. Stabilizing the economy's rate of growth
E. Making funds available
Difficulty: Medium
Rose - Chapter 01 #78
79. In general, when the cost of credit declines,
A. Unemployment rises
B. Total spending decreases
C. Production is cut back
D. More jobs are created
E. The economy's rate of growth slows down
Difficulty: Hard
Rose - Chapter 01 #79
80. The role of markets in a market-oriented economy like the United States is to:
A. Allocate resources
B. Distribute income
C. Produce needed goods and services
D. All of the above
E. None of the above
Difficulty: Easy
Rose - Chapter 01 #80
81. The markets that serve the financial system may be classified in several different ways, including:
A. Money markets versus capital markets
B. Open markets versus negotiated markets
C. Primary markets versus secondary markets
D. Spot markets versus futures markets
E. All of the above
Difficulty: Easy
Rose - Chapter 01 #81
82. The financial system and financial markets are responsible for providing which of the following
services?
A. Credit services
B. Payment services
C. Liquidity
D. Facilitating the flow of savings
E. All of the above
Difficulty: Easy
Rose - Chapter 01 #82
83. According to the text, several different financial assets and instruments have served as a medium
of exchange or means of making payments in recent years. Which instrument listed below is not
considered a means of making payments or a medium of exchange?
A. Checking accounts
B. NOW accounts
C. Negotiable certificates of deposit
D. Debit cards
E. Credit cards
Difficulty: Medium
Rose - Chapter 01 #83
84. The ______ is designed for the making of short-term loans where individuals and institutions with
temporary surpluses of funds meet borrowers who have temporary cash shortages.
A. Money market
B. Capital market
C. Open market
D. Negotiated market
E. Primary market
Difficulty: Easy
Rose - Chapter 01 #84
85. The ______ is designed to finance long-term investments, making possible the construction of
factories, office buildings, highways, bridges, schools, homes and apartments.
A. Money market
B. Capital market
C. Secondary market
D. Negotiated market
E. Primary market
Difficulty: Easy
Rose - Chapter 01 #85
86. One of the financial markets listed below is not part of the nation's capital market. Which one is not?

A. Mortgage market
B. Corporate bond market
C. Municipal bond market
D. Commercial paper market
E. Stock market
Difficulty: Medium
Rose - Chapter 01 #86
87. One of the financial markets listed below is not part of the money market. Which one is not?
A. U.S. Treasury bill market
B. Market for negotiable CDs of $100,000 or more
C. Market for federal funds
D. Market for Eurodollar deposits
E. Market for consumer installment loans
Difficulty: Medium
Rose - Chapter 01 #87
88. The financial markets that provide for the immediate delivery of securities are known as:
A. Spot markets
B. Futures markets
C. Forward markets
D. Option markets
E. None of the above
Difficulty: Medium
Rose - Chapter 01 #88
89. The market for trading newly issued securities is known as the:
A. Money market
B. Cash market
C. Spot market
D. Primary market
E. Open market
Difficulty: Easy
Rose - Chapter 01 #89
90. Trading in securities previously issued takes place in the:
A. Open market
B. Secondary market
C. Primary market
D. Negotiated market
E. Capital market
Difficulty: Easy
Rose - Chapter 01 #90
91. According to your text, the basic commodity being traded in all the financial markets is:
A. Securities
B. Capital
C. Forward markets
D. Credit
E. None of the above
Difficulty: Medium
Rose - Chapter 01 #91
92. The circular flow of funds includes which of the following:
A. Consumer units
B. Households
C. Government
D. All of the above
E. None of the above
Difficulty: Easy
Rose - Chapter 01 #92
93. Which type of market is not part of the circular flow?
A. Factor market
B. Information market
C. Financial market
D. Product market
E. All of the above
Difficulty: Medium
Rose - Chapter 01 #93
94. If households set aside funds that are not returned to the spending stream the economy will:
A. Expand
B. Contract
C. Operate at a normal level
D. Do nothing
E. None of the above
Difficulty: Hard
Rose - Chapter 01 #94
95. The financial system provides all the following services except:
A. Furnish credit
B. Payment services
C. Equitably distribute wealth
D. Provide liquidity
E. Risk protection
Difficulty: Medium
Rose - Chapter 01 #95
96. The largest borrower in the money market is:
A. Businesses
B. Government
C. Households
D. Commercial banks
E. None of the above
Difficulty: Medium
Rose - Chapter 01 #96
97. To gain access to the money market an institution must:
A. Have an excellent credit rating
B. Be well known
C. Be large
D. All of the above
E. None of the above
Difficulty: Medium
Rose - Chapter 01 #97
98. The largest market in the world for a single security is:
A. The capital market
B. The money market
C. The treasury bill market
D. The federal funds market
E. None of the above
Difficulty: Medium
Rose - Chapter 01 #98
99. Arbitrage occurs when:
A. A new security is issued
B. A company is in need of funds
C. A large institution faces default
D. Interest rates in a sector of the financial market rise relative to other sectors
E. None of the above
Difficulty: Hard
Rose - Chapter 01 #99
100. The function of the financial system that consists of providing a channel through which the
government can promote the goals of high employment and low inflation is called the:
A. Savings function
B. Wealth function
C. Credit function
D. Liquidity function
E. None of the above
Difficulty: Hard
Rose - Chapter 01 #100
101. The function of the financial system that consists of providing a means of raising funds by converting
securities and other assets into cash balances is called the:
A. Savings function
B. Wealth function
C. Credit function
D. Liquidity function
E. None of the above
Difficulty: Hard
Rose - Chapter 01 #101
102. The market for delivery of securities usually within one or two business days is known as a the spot
market
A. The spot market
B. The forward market
C. The futures market
D. The primary market
E. None of the above
Difficulty: Medium
Rose - Chapter 01 #102
103. According to the text speculators perform an important function in the financial markets. They:
A. Create underpricing of certain securities, generating more attractive investment opportunities
B. Cause some securities to be overpriced which tends to drive out those securities
C. Level out the prices of securities
D. Help to prevent security fraud
E. None of the above
Difficulty: Medium
Rose - Chapter 01 #103
104. According to your text, a key trend in the financial system is:
A. Increasing competition
B. Greater risk
C. Growth of technology
D. Growth of debt
E. All of the above are key trends for the financial system
Difficulty: Medium
Rose - Chapter 01 #104
105. The U.S. savings rate is one of the lowest among major industrial nations because of the:
A. High proportion of young adults in the U.S. population
B. Large government budget deficits
C. Tax structure which favors consumption and borrowing over savings
D. All of the above
E. None of the above
Difficulty: Hard
Rose - Chapter 01 #105
106. Current savings for a business firm is measured by:
A. Total business sales receipts less business operating expenses (including business taxes)
B. Current budget receipts less current budgetary expenditures
C. Purchases of plant and equipment and inventory and residential construction
D. Construction of new public facilities
E. None of the above
Difficulty: Hard
Rose - Chapter 01 #106
107. Current savings for a household is measured by:
A. Current consumption spending (including personal taxes) subtracted from personal income
B. Current budget receipts less current budgetary expenditures
C. Current retained earnings and noncash expenses
D. Purchases of household durable goods
E. None of the above
Difficulty: Hard
Rose - Chapter 01 #107
108. The most significant barriers to 24-hour worldwide trading of securities include:
A. Lack of adequate prestige or stature by most companies and governments
B. Lack of common operating rules and regulations among different exchanges and nations
C. Delays in payment for and delivery of securities
D. Lack of open access to membership on all exchanges
E. All of the above
Difficulty: Medium
Rose - Chapter 01 #108
109. A market in which competition among buyers and sellers sets the terms of trade is a:
A. Primary market
B. Forward market
C. Efficient market
D. Perfect market
E. None of the above
Difficulty: Medium
Rose - Chapter 01 #109
110. A(n) _____ market exists if the market is fully competitive and the same information is available to all
participants.
A. Primary
B. Secondary
C. Perfect
D. Imperfect
E. Neutral
Difficulty: Easy
Rose - Chapter 01 #110
111. _____ risk refers to the risk that you will not receive securities that you have purchased or that you
will not receive payment for securities you have sold.
A. Hedging
B. Clearing
C. Global
D. Settlement
E. Liquidity
Difficulty: Medium
Rose - Chapter 01 #111
112. A bank certificate of deposit is a ______ market instrument. Commercial paper is a ______ market
instrument.
A. Money, capital
B. Money, futures
C. Capital, capital
D. Futures, capital
E. Money, money
Difficulty: Medium
Rose - Chapter 01 #112
113. Net wealth for an economic unit equals:
A. Total assets plus equity capital
B. Total assets less real (nonfinancial) assets
C. Total assets minus total liabilities
D. Total savings plus holding of financial assets
E. None of the above
Difficulty: Medium
Rose - Chapter 01 #113
114. The financial service supplied by the money and capital markets in which financial instruments are
created to attract savings for future financial needs is called:
A. Agency services
B. Credit services
C. Payments services
D. Thrift services
E. None of the above
Difficulty: Easy
Rose - Chapter 01 #114
115. Acting as an agent for a customer in managing retirement funds or other property represents what
financial service area?
A. Hedging services
B. Credit services
C. Thrift services
D. Insurance
E. None of the above
Difficulty: Medium
Rose - Chapter 01 #115
116. Providing loanable funds to supplement current income in order to sustain current living standards
represents what financial service area?
A. Payments services
B. Thrift services
C. Agency services
D. Credit services
E. None of the above
Difficulty: Easy
Rose - Chapter 01 #116
117. For a household, according to US accounting procedures, which of the following is considered an
investment?
A. Jewelry
B. Home
C. Garage
D. Pickup truck
E. Boat
Difficulty: Easy
Rose - Chapter 01 #117
118. In early 2006, more than $55 trillion in securities, deposits and other financial assets were held by
domestic nonfinancial businesses, households and governments in the United States and represents
their financial wealth. After subtracting the total debt owed by these groups, it leaves us with the net
financial wealth of:
A. $12 trillion
B. $15 trillion
C. $20 trillion
D. $30 trillion
E. $75 trillion
Difficulty: Medium
Rose - Chapter 01 #118
119. In early 2006 it appeared that the annual US gross domestic product (GDP) would be around $11.5
trillion. What percentage of the GDP is saved?
A. 5%
B. 12%
C. 17%
D. 22%
E. 25%
Difficulty: Hard
Rose - Chapter 01 #119
120. A household which consumes assets or increases debt during the year is a condition sometimes
referred to as:
A. Poor
B. Negative income
C. Negative savings
D. Asset consumption
E. None of the above
Difficulty: Medium
Rose - Chapter 01 #120
121. Projections for 2006 indicated that personal savings for the year would be:
A. $400 billion
B. -$215 billion
C. $45 billion
D. -$45 billion
E. $32 billion
Difficulty: Medium
Rose - Chapter 01 #121
122. On annualized basis US corporations will earn approximately $1.1 trillion, of which ________ will be
set aside for possible future business needs. Choose the answer for the blank.
A. $500 billion
B. $200 billion
C. $700 billion
D. $50 billion
E. $150 billion
Difficulty: Medium
Rose - Chapter 01 #122
123. Two areas that are major sources of funding for loans are:
A. Personal savings and taxes
B. Business savings and taxes
C. Taxes and net profit
D. Profits and bonds
E. Personal savings and business earnings
Difficulty: Hard
Rose - Chapter 01 #123
124. Investing in stocks, bonds or other financial instruments is a good idea because:
A. They do not wear out
B. Usually generate income
C. Risk of loss is lower than other forms of stored to wealth
D. Are negotiable
E. All of the above
Difficulty: Hard
Rose - Chapter 01 #124
125. For any business, individual or government, wealth is:
A. Assets we have managed to accumulate and hold up to the present
B. The sum of the value of all assets we hold at any given time
C. Cash held
D. A and C
E. A, B, & C
Difficulty: Hard
Rose - Chapter 01 #125
126. At the end of last year the wealth was $48,000, with a return on the accumulated wealth was 2%
during this year and $1700 was saved this year. At the end of this year the accumulated wealth is:
A. $49,700
B. $50,660
C. $46,300
D. $2660
E. None of the above
Difficulty: Medium
Rose - Chapter 01 #126
127. Wealth created income results in:
A. Loss of assets
B. New savings
C. Debt
D. Increased consumption
E. B & D
Difficulty: Hard
Rose - Chapter 01 #127
128. Every year the volume of financial wealth is growing in the United States. In 2006 the total securities,
deposits and other financial assets held by domestic nonfinancial businesses, households, the US
government and foreign investors was
A. $55 trillion
B. $66 trillion
C. $11 trillion
D. $50 trillion
E. None of the above
Difficulty: Hard
Rose - Chapter 01 #128
129. Perfect liquidity is a trait held by the following:
A. Bonds
B. Stocks
C. Money
D. 30 year U.S. Treasury bonds
E. None of the above
Difficulty: Easy
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130. When a purchaser is issued a bill online and can make payments online, this is referred to as:
A. Stored value cards
B. Contactless payment devices
C. Electronic bill presentment
D. ATM card
E. Credit card
Difficulty: Medium
Rose - Chapter 01 #130
131. In the financial marketplace, secondary markets provide:
A. Similar returns to the primary market
B. Support for new investment
C. Liquidity
D. Debt for businesses
E. A & C
Difficulty: Hard
Rose - Chapter 01 #131
132. Lower savings rates in the United States could be due to:
A. Low unemployment
B. Long periods of prosperity
C. No direct experience of the Great Depression
D. Value of homes has risen substantially
E. All of the above
Difficulty: Hard
Rose - Chapter 01 #132
133. Choose the definition or descriptive phrase on the right that best describes the term on the left.
1. Investme Definitions or Descriptive Phrases
nt 1
6
2. NOWS Collection of markets, institutions, laws and methods
through which securities are traded and interest rates1
determined. 4
3. Rate of Cost of Credit.
Interest 3
4. Product Allocates scarce material resources to produce goods and
Market services 6
5. Wealth Input in the economic system.
1
0
6. Economi Payments and production
c System 1
1
7. Factor Channel for buyers and sellers to exchange goods and
Market services 1
7
8. Saving Consuming units sell skills and resources to producing
units. 7
9. Credit Income flows to the purchase of goods and services.
4
10. Capital Determines volume of credit
Equipment 1
3
11. Circula Difference between current income and current
r Flow consumption. 8
12. Liquidit Medium or exchange
y 1
13. Financi Loan of funds in return for a promise of future payment.
al Market 9
14. Financi Medium or exchange
al System 2
15. Debit Transfer funds from a buyer's deposit account to the seller's
Cards account 1
5
16. Terms Ability to raise cash quickly with little risk of loss.
1
2
17. Market All assets held by an economic unit minus the debts it
owes. 5
Difficulty: Medium
Rose - Chapter 01 #133
134. Choose the definition or descriptive phrase on the right which best describes the term on the left.
1. Money Definitions or Descriptive Phrases 1
Market 5
2. Forward Market for loans maturing in one year or less. 1
Market 0
3. Wealth Possesses perfect liquidity. 1
4. Negotiated Market for loans with maturities longer than one 5
Market year.
5. Capital Securities Traded for immediate delivery. 1
Market 7
6. Open Market Trading of contracts calling for the future delivery of 2
financial instruments
7. Credit Securities sold to highest bidder. 6
8. Personal Securities sold to one or a few buyers under private 4
savings contract.
9. Human Market for newly issued securities. 1
capital 4
10. Money Market for existing securities. 1
3
11. Financial Transfer of funds between markets in response to 1
wealth attractive prices and rates. 6
12. Liquidity stored purchasing power. 3
13. Secondary readily spendable assets. 1
Market 2
14. Primary after-tax income not consumed 8
Market
15. Terms stocks, bonds, financial instruments . 1
1
16. Arbitrage marketable skills 9
17. Spot opposite of savings 7
Market
Difficulty: Medium
Rose - Chapter 01 #134
135. C. Responding to a rise in the price of Texaco common stock, you have just purchased 100 shares of
that company's stock through a phone call to your broker who is linked to a major stock exchange.
Capital; secondary; open; spot.
B. You purchase a new U.S. Treasury bill through the Federal Reserve bank in a neighboring city for
delivery today. Money; primary; open; spot.
Please classify the following financial transactions as to whether they fit in (a) the money market or
the capital market; (b) the primary or secondary market; (c) the open or negotiated market; and (d) the
spot or futures/forward market. (Note: The transactions below may fit in more than one of the above
categories of markets. Be sure to include all the appropriate types of markets that each transaction
fits.)
a. You visit a local bank today and secure a three-year loan to finance the purchase of a new car and
some furniture. Capital; primary; negotiated; spot.

Rose - Chapter 01 #135

136. C. Responding to a rise in the price of Texaco common stock, you have just purchased 100 shares of
that company's stock through a phone call to your broker who is linked to a major stock exchange.
Capital; secondary; open; spot.
B. You purchase a new U.S. Treasury bill through the Federal Reserve bank in a neighboring city for
delivery today. Money; primary; open; spot.
Please classify the following financial transactions as to whether they fit in (a) the money market or
the capital market; (b) the primary or secondary market; (c) the open or negotiated market; and (d) the
spot or futures/forward market. (Note: The transactions below may fit in more than one of the above
categories of markets. Be sure to include all the appropriate types of markets that each transaction
fits.)
a. You visit a local bank today and secure a three-year loan to finance the purchase of a new car and
some furniture. Capital; primary; negotiated; spot.

Rose - Chapter 01 #136

137. C. Fearing a slowdown in the rate of economic growth and increased joblessness, the Federal Reserve
System and the Bank of England move to lower interest rates. Policy.
B. Sharon MacArthur uses her credit card to purchase wallpaper for a home remodeling project.
Payments; credit.
What functions of the financial system do the following transactions illustrate or represent? (Note:
Some transactions may involve more than one function. Be sure to identify all the financial system
functions involved in each transaction.)
a. James Rhodes purchases health and accident insurance policies through the company where he
works. Risk protection; payments.

Rose - Chapter 01 #137

138. What functions of the financial system do the following transactions illustrate or represent? (Note:
Some transactions may involve more than one function. Be sure to identify all the financial system
functions involved in each transaction.)
a. Dynamic Corporation places some of its current earnings in a bank CD, anticipating a need for
funds in about a year in order to build a new warehouse. Savings; wealth
B. The Italian government sells new bonds in the open market to cover a large budget deficit. Credit;
policy
C. Cal and Jane Lewis hope to put their three young children through college someday. Accordingly,
they begin buying U.S. savings bonds. Savings; wealth; liquidity, risk protection
D. Needing immediate spending power, Hillcrest Corporation sells its holdings of Denton County
bonds through a security broker.
Liquidity.
Rose - Chapter 01 #138
139. a. Current savings for households = Total personal income - personal tax and nontax payments -
personal consumption expenditures = $4677.7 b - $709.0 b - $3697.6 b = $271.1 billion.
Current business savings = Undistributed business profits + capital consumption on business plant and
equipment = $42.1 b + $500.0 b = $542.1 billion.
Current government savings = Current budgetary receipts - current budgetary outlays = federal, state
and local government net budget surplus (+) or deficit (-) = - $143.0 b + $39.2 b = - $103.8 billion.
Current savings for all households, businesses and governments = $271.1 b + $542.1 b - $103.8 b =
$709.4 billion.
b. Current household investment = Purchase of durable goods + residential construction = $481.9 b +
$218.2 b = $700.1 billion.
Current business investment = Change in business inventories + expenditures on nonresidential plant
and equipment = $9.6 b + $532.4 b = $542.0 billion.
Current investment for households and businesses = $700.1 b + $542.0 b = $1,242.1 billion.
From the information presented below on the U.S. economy, please calculate (a) the volume of current
savings for all U.S. households, business firms and governments; and (b) the volume of current
investment for households and businesses. (Hint: Not all of the information below needs to be used to
answer this question; decide what is and is not needed.)

Rose - Chapter 01 #139

140. In a recent year the following amounts of money market and capital market instruments – loans and
securities – were issued and outstanding in the United States. Based on the discussion in this chapter
classify each of the instruments as to whether they usually qualify as (a) a money market instrument or
(b) a capital market instrument. If the listed instruments represent all U. S. money and capital market
instruments outstanding, what was the total dollar size of the U.S. money market? The total size of the
U.S. capital market?

Rose - Chapter 01 #140

141. What roles of the global financial system are being described in the items listed below?
a. Exxon Corporation issues new shares of stock to finance its expansion into foreign markets.
Savings, wealth, credit functions
B. The Wiliams' family withdraws its bank deposit in order to purchase new furniture for their new
home. Savings, wealth, liquidity functions
C. Robert Enlow plans to purchase a new home in three years, but in the interim, he makes a loan to a
friend who needs ready cash for a down payment on an automobile. Credit function.
Rose - Chapter 01 #141
142. What roles of the global financial system are being described in the items listed below?
a. Exxon Corporation issues new shares of stock to finance its expansion into foreign markets.
Savings, wealth, credit functions
B. The Wiliams' family withdraws its bank deposit in order to purchase new furniture for their new
home. Savings, wealth, liquidity functions
C. Robert Enlow plans to purchase a new home in three years, but in the interim, he makes a loan to a
friend who needs ready cash for a down payment on an automobile. Credit function.
Rose - Chapter 01 #142
143. What roles of the global financial system are being described in the items listed below?
a. Deutsche Bank develops and offers to its customers a new savings plan that combines traditional
bank deposits with the availability of shares in a growth-oriented mutual fund. Savings, liquidity and
wealth functions
B. Randy Bose plans to retire in 18 months but elects to loan a portion of his long-term savings to his
son Robert who is starting a new business and has recently married. Credit function
C. The Greater Asia Insurance Corporation has managed to attract $100 million in annuity
investments from savers over the past six months and plans to make a loan to Eastman Hotel
Corporation,which is beginning construction on a series of luxury resorts in Honolulu and Singapore.
Savings and credit functions.
Rose - Chapter 01 #143
144. What concept, institution or instrument is described by each of the phrases or sentences listed below?
a. Trading of loans and securities in which any individual or institution can participate. Open market
B. Mechanisms set up by society to trade newly issued loans and securities. Primary market
C. Set up to channel temporary cash surpluses into temporary loans. Money market
D. Immediately spendable cash. Liquidity
E. Assets minus liabilities held by an economic unit. Net financial wealth.
Rose - Chapter 01 #144
145. What concept, institution or instrument is described by each of the phrases or sentences listed below?
a. Expenditures on capital goods or raw materials. Investment expenditures
B. Current earnings retained in a business. Business savings
C. Funds left over out of current income after deducting current consumption expenditures. Household
savings
D. An institutional mechanism for trading goods and services. Market
E. Collection of markets, individuals, institutions, laws and regulations through which financial
services are produced and delivered. Financial system
Rose - Chapter 01 #145
146. Herman Gleep has built up total assets at the end of last year of $520,000. It consisted off a home
valued at $350,000 and financial assets valued at $170,000. During this year his home appreciated by
a -4% because of the contracting housing market, but his financial assets achieved a return of 6.5%.
What is Herman's overall rate of return this year and what are his total assets worth?
Home $350,000 X (1-.04) + Financial Assets $170,000 X (1+.065) = Total Asset Value
$336,000 + $181,050 = $517,050
Percent Return
[(Ending value - Starting Value)/starting value] X 100
[($517,050 - $520,000)/$520,000] X 100
[$2,950/$520,000] X 100 = -.57%
Rose - Chapter 01 #146
147. What concept, device or instrument is described by each of the phrases or sentences listed below?
a. On payday, many workers are receiving this negotiable item instead of a traditional paycheck.
Stored value cards
b. Fund's that are transferred electronically from the payor's account to the account of the payee.
Direct deposit
c. Provides the holder access to cash, the ability to transfer funds and the ability to check balances.
ATM Card medium
d. Transfers information and money in using radio frequencies with no direct contact. Contactless
payment devices
Rose - Chapter 01 #147
 1 Summary
Category # of Questions
Difficulty: Easy 41
Difficulty: Hard 28
Difficulty: Medium 65
Rose - Chapter 01 147