Question 1

Adverse selection occurs when:

Accepted Answer

A)   one participant in a transaction has more information than another, resulting in a bargaining dispute.
B)   one participant in a negotiation selects the wrong strategy, resulting in an unfavourable outcome.
C)   one participant in a transaction has more information than another, resulting in less frequent transactions.
D)   neither participant in a transaction is willing to make an agreement because they don't have enough information.E) A) and D)
F) A) and B)

Question 2

Banks act as:

Accepted Answer

A)   organizers among firms in a specific market.
B)   intermediaries between borrowers and savers.
C)   informants to various buyers about prices and contracts.
D)   negotiators for buyers.E) B) and C)
F) A) and B)

Question 3

The principal of a loan is the:

Accepted Answer

A)   original amount of the loan.
B)   set of rules and conditions borrowers agree to when taking out a loan.
C)   set of rules and conditions savers agree to when agreeing to let someone borrow their money.
D)   initial credit check conducted by the lender.E) None of the above
F) A) and B)

Question 4

A booming economy can make investors _______, shifting the _______ curve for loanable funds to the _______.

Accepted Answer

A)   eager to borrow money; demand; right
B)   eager to borrow money; supply; right
C)   wary of future downturns; demand; left
D)   wary of future downturns; supply; leftE) A) and B)
F) A) and C)

Question 5

Arpita decides to take up mountain biking after securing health insurance. Her choice is an example of:

Accepted Answer

A)   moral hazard.
B)   adverse selection.
C)   adverse decisions.
D)   moral consequence.E) None of the above
F) A) and C)

Question 6

When you have equity in a company, it means you:

Accepted Answer

A)   own part of the company and share in its profits.
B)   have diversified the company's risk.
C)   have diversified your risk by investing with the company.
D)   own a portion of the debt obligations of the company.E) A) and B)
F) A) and C)

Question 7

A default happens when a:

Accepted Answer

A)   borrower fails to pay back a loan according to the agreed-upon terms.
B)   lender fails to earn a high-enough return on their investment.
C)   bank fails to have enough cash on hand to give all depositors their money.
D)   borrower pays back a loan early.E) C) and D)
F) A) and D)

Question 8

Net capital outflow measures how many capital goods are:

Accepted Answer

A)   exported from a country.
B)   exported from a country, minus how many are imported into the country.
C)   imported into a country.
D)   imported into a country, minus how many are exported from the country.E) C) and D)
F) None of the above

Question 9

Because a bank has a very large pool of buyers and savers, it can:

Accepted Answer

A)   act as an intermediary between firms and government.
B)   provide liquidity to some individuals that deposit funds.
C)   diversify the risk of saving and borrowing for individuals.
D)   act in the best interest of society by ensuring there is enough money for everyone.E) C) and D)
F) None of the above

Question 10

Which of the following exemplifies a seller in a financial market?

Accepted Answer

A)   An entrepreneur starting a new venture
B)   A government financing public spending
C)   An individual who has a savings account
D)   A family buying a new minivanE) C) and D)
F) All of the above

Question 11

An asset used to secure a loan is called.

Accepted Answer

A)   collateral.
B)   a retainer.
C)   a down payment.
D)   an investment.E) B) and C)
F) A) and D)

Question 12

Which of the following is the most liquid?

Accepted Answer

A)   An antique bicycle
B)   A checking account
C)   Home-baked cookies
D)   A gold watchE) A) and B)
F) None of the above

Question 13

Which type of financial asset is most likely to have a higher amount of risk?

Accepted Answer

A)   Stocks
B)   Bonds
C)   Mutual funds
D)   Savings accountsE) A) and B)
F) A) and C)

Question 14

Studies show that _______ households tend to save more of their income and that ____________ households save more out of tax cuts than others do.

Accepted Answer

A)   richer; poorer
B)   richer; richer
C)   poorer; richer
D)   poorer; poorerE) A) and B)
F) All of the above

Question 15

Which of the following is not considered to be a major player in the financial system?

Accepted Answer

A)   Banks
B)   Savers
C)   Businesses
D)   Labor unionsE) A) and C)
F) A) and B)

Question 16

As interest rates rise, there are fewer potential investments that will generate returns high enough to make the cost of paying back a loan worthwhile. This relationship is represented by the _______ in the market for loanable funds.

Accepted Answer

A)   upward-sloping supply curve
B)   downward-sloping supply curve
C)   upward-sloping demand curve
D)   downward-sloping demand curveE) All of the above
F) B) and C)

Question 17

The quantity of savings that people are willing to supply depends on:

Accepted Answer

A)   the price they will receive.
B)   the amount they have left over after consumption.
C)   their disposable income.
D)   their age, since people tend to stop saving once they retire.E) B) and D)
F) C) and D)

Question 18

Idiosyncratic risk:

Accepted Answer

A)   cannot be eliminated through diversification.
B)   is unique to a company or asset.
C)   is only present in index funds.
D)   All of these are true.E) None of the above
F) A) and B)

Question 19

Which of the following is a liquidity provider?

Accepted Answer

A)   A used car buyer
B)   An eBay seller
C)   A grocery store cashier
D)   All of these are liquidity providers.E) A) and B)
F) B) and C)

Question 20

In general, entrepreneurs prefer:

Accepted Answer

A)   more diversification.
B)   less diversification.
C)   to maximize risk, regardless of diversification.
D)   to concentrate investments in just a few sectors.E) A) and D)
F) C) and D)

Exam 14: Thebasics of Finance

Because a bank has a very large pool of buyers and savers, it can:

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Which of the following is a liquidity provider?

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Which of the following is not considered to be a major player in the financial system?

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As interest rates rise, there are fewer potential investments that will generate returns high enough to make the cost of paying back a loan worthwhile. This relationship is represented by the _______ in the market for loanable funds.

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Which of the following exemplifies a seller in a financial market?

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Net capital outflow measures how many capital goods are:

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Studies show that _______ households tend to save more of their income and that ____________ households save more out of tax cuts than others do.

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A booming economy can make investors _______, shifting the _______ curve for loanable funds to the _______.

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Banks act as:

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An asset used to secure a loan is called.

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In general, entrepreneurs prefer:

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When you have equity in a company, it means you:

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The quantity of savings that people are willing to supply depends on:

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Which of the following is the most liquid?

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Which type of financial asset is most likely to have a higher amount of risk?

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Adverse selection occurs when:

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The principal of a loan is the:

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Arpita decides to take up mountain biking after securing health insurance. Her choice is an example of:

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A default happens when a:

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Idiosyncratic risk:

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Studies show that _ households tend to save more of their income and that ______ households save more out of tax cuts than others do.

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A booming economy can make investors ___, shifting the _ curve for loanable funds to the _____.

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