Chapter 2

Question 1

What is the primary function of the financial system?

Answer 1

To facilitate the allocation of resources and the transfer of funds.

Question 2

True or False: Interest rates are determined solely by the central bank.

Answer 2

False

Question 3

Fill in the blank: The _____ is a key component of the financial system that involves the buying and selling of financial instruments.

Answer 3

financial market

Question 4

What are the two main types of financial markets?

Answer 4

Capital markets and money markets.

Question 5

Which of the following is NOT a type of financial instrument? (A) Stocks (B) Bonds (C) Real Estate (D) Derivatives

Answer 5

C) Real Estate

Question 6

What is the relationship between interest rates and the level of investment?

Answer 6

Generally, lower interest rates encourage higher levels of investment.

Question 7

True or False: Higher interest rates typically lead to lower consumer spending.

Answer 7

True

Question 8

What is the role of the central bank in the financial system?

Answer 8

To regulate the money supply and manage interest rates.

Question 9

Fill in the blank: The _____ rate is the interest rate at which banks lend to each other overnight.

Answer 9

federal funds

Question 10

What is a primary factor that influences interest rates?

Answer 10

Inflation expectations.

Question 11

Multiple Choice: Which of the following factors can lead to an increase in interest rates? (A) Decreased demand for loans (B) Increased government borrowing (C) Lower inflation (D) Increased savings

Answer 11

B) Increased government borrowing

Question 12

What does the term ‘yield curve’ refer to?

Answer 12

A graph that shows the relationship between interest rates and the maturity of debt securities.

Question 13

True or False: A flat yield curve indicates that investors expect stable economic growth.

Answer 13

True

Question 14

What effect does a steep yield curve typically indicate?

Answer 14

Expectations of rising interest rates and economic growth.

Question 15

Fill in the blank: The _____ market is where short-term borrowing and lending occurs.

Answer 15

money

Question 16

What is the purpose of financial intermediaries?

Answer 16

To facilitate the flow of funds between savers and borrowers.

Question 17

Multiple Choice: Which institution is considered a financial intermediary? (A) A stock exchange (B) A commercial bank (C) A government agency (D) A mutual fund

Answer 17

B) A commercial bank

Question 18

What is ‘monetary policy’?

Answer 18

Actions taken by a central bank to influence the money supply and interest rates.

Question 19

True or False: Expansionary monetary policy typically results in lower interest rates.

Answer 19

True

Question 20

What is the impact of high interest rates on consumers?

Answer 20

It generally leads to reduced borrowing and spending.

Question 21

Fill in the blank: The _____ rate is the interest rate set by the central bank for lending to commercial banks.

Answer 21

discount

Question 22

What is the definition of ‘liquidity’?

Answer 22

The ease with which an asset can be converted to cash.

Question 23

Multiple Choice: Which type of financial instrument is considered the most liquid? (A) Real estate (B) Stocks (C) Cash (D) Bonds

Answer 23

C) Cash

Question 24

What is a major consequence of inflation on interest rates?

Answer 24

It tends to increase nominal interest rates.

Question 25

True or False: Nominal interest rates are adjusted for inflation.

Answer 25

False

Question 26

What is 'crowding out' in the context of government borrowing?

Answer 26

When increased government borrowing leads to higher interest rates, which reduces private investment.

Question 27

Fill in the blank: A _____ is an agreement between two parties to exchange cash flows at a future date.

Answer 27

derivative

Question 28

What is an 'investment bank'?

Answer 28

A financial institution that assists in raising capital by underwriting and issuing securities.

Question 29

Multiple Choice: Which of the following is a function of investment banks? (A) Accepting deposits (B) Providing loans (C) Underwriting new debt and equity securities (D) Offering checking accounts

Answer 29

C) Underwriting new debt and equity securities

Question 30

What is the difference between nominal and real interest rates?

Answer 30

Nominal rates are not adjusted for inflation, while real rates are.

Question 31

True or False: The Fisher effect describes the relationship between nominal interest rates and expected inflation rates.

Answer 31

True

Question 32

What does a 'default risk' refer to?

Answer 32

The risk that a borrower will not be able to make required payments on their debt.

Question 33

Fill in the blank: The _____ rate is the return expected from an investment, accounting for risk and inflation.

Answer 33

real interest

Question 34

What is 'systematic risk'?

Answer 34

The risk inherent to the entire market or market segment.

Question 35

Multiple Choice: Which of the following is an example of systematic risk? (A) Company-specific news (B) Changes in interest rates (C) A natural disaster (D) A management scandal

Answer 35

B) Changes in interest rates

Question 36

What is the primary goal of monetary policy?

Answer 36

To promote maximum employment, stable prices, and moderate long-term interest rates.

Question 37

True or False: Expansionary monetary policy can lead to inflation if pursued for too long.

Answer 37

True

Question 38

What is considered a 'tight' monetary policy?

Answer 38

A policy that increases interest rates to reduce inflation.

Question 39

Fill in the blank: The _____ effect refers to the impact of interest rates on consumer and business spending.

Answer 39

interest rate

Question 40

What are 'open market operations'?

Answer 40

The buying and selling of government securities by the central bank to influence the money supply.

Question 41

Multiple Choice: Which of the following is a tool of monetary policy? (A) Tax cuts (B) Open market operations (C) Government spending (D) Fiscal policy

Answer 41

B) Open market operations