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Sample Midterm Econ 7570

1. When real income ________, the demand curve for money shifts to the ________ and the interest rate
________, everything else held constant.
A) falls; right; rises
B) rises; right; rises
C) falls; left; rises
D) rises; left; rises

2. Which of the following statements best explains how the use of money in an economy increases
economic efficiency?
A) Money increases economic efficiency because it is costless to produce.
B) Money increases economic efficiency because it discourages specialization.
C) Money increases economic efficiency because it decreases transactions costs.
D) Money cannot have an effect on economic efficiency.

3. High interest rates might __________ the purchase of a house or a car but at the same time high
interest rates might also ____________ saving.
A. encourage; discourage
B. discourage; encourage
C. encourage; encourage
D. discourage; discourage

4) One purpose of regulation of financial markets is to ________.

A) limit the profits of financial institutions
B) increase competition among financial institutions
C) promote the provision of information to shareholders, depositors and the public
D) guarantee that the maximum rates of interest are paid on deposits

5) Financial crises ________.

A) are major disruptions in financial markets that are characterized by sharp declines in asset prices and
the failures of many financial and nonfinancial firms
B) occur when adverse selection and moral hazard problems in financial markets become less
C) frequently lead to sharp expansions in economic activity
D) are a free-rider problem

6. Debt instruments (e.g., bonds) are _________ for the issuer and _____________ for the purchaser.
A. put options; call options
B. primary assets; secondary assets
C. assets; liabilities
D. liabilities; assets


A. commercial banks
B. life insurance companies
C. money market mutual funds
D. all of the above
8. By definition, SECURITIES are financial assets
A. that have been approved for sale by the Federal Reserve Board
B. whose earnings have been underwritten (“made secure”) by some government agency
C. that have been transformed into relatively liquid marketable assets by means of various legally
enforceable guarantees provided either by the original issuer of the asset or by other parties
D. that have received at least a BBB rating in accordance with Standard & Poor’s rating system

9) The formula used the Bank of Canada in calculating the money supply is ________.
A) M = A1X1 + A2X2 + ... + AnXn

B) M =

C) M = X1 + X2 + +Xn
D) M =

10. A type of financial player that has a major role in ensuring the sale of corporate bonds in PRIMARY
markets is
A. a specialized trader on a stock exchange
B. a commercial banker
C. an investment banker
D. a Securities and Exchange Commissioner

11. Which of the following can be described as a SECONDARY market transaction:

A. You buy a share of Wells Fargo Group from the New York Stock Exchange
B. You acquire a mortgage from Scamway Bank
C. You buy a Treasury bill in a U.S. Treasury auction
D. You supply start-up funds for your uncle’s new business

12) Which of the following are short-term financial instruments?

A) A repurchase agreement
B) A share of Walt Disney Corporation stock
C) A Treasury note with a maturity of four years
D) A residential mortgage

13. By definition, instances of INDIRECT FINANCE include:

A. A money market mutual fund buys commercial paper on a secondary market
B. A pension fund uses employee contributions to purchase newly issued subprime mortgages
C. You buy stock shares on the New York Stock Exchange
D. None of the above

14) Economies of scale enable financial institutions to ________.

A) reduce transactions costs
B) avoid the asymmetric information problem
C) avoid adverse selection problems
D) reduce moral hazard
15) To reduce the incentives of financial institution managers to engage in excessive risk taking
regulators might require that bonuses be ________.
A) paid immediately
B) paid after several years
C) paid after several years only if the firm remains in good financial health
D) paid in the form of stock options

16) A financial crisis occurs when an increase in asymmetric information from a disruption in the
financial system ________.
A) causes severe adverse selection and moral hazard problems that make financial markets incapable of
channelling funds efficiently
B) allows for a more efficient use of funds
C) increases economic activity
D) reduces uncertainty in the economy and increases market efficiency

17) When financial intermediaries deleverage, firms cannot fund investment opportunities resulting in
A) a contraction of economic activity
B) an economic boom
C) an increased opportunity for growth
D) a call for government regulation

18. Is it possible to have negative yield bonds in our world?

a. Yes
b. No

19) Of the following sources of external finance for Canadian nonfinancial businesses, the least
important is ________.
A) loans from banks
B) stocks
C) bonds and commercial paper
D) loans from other financial intermediaries

20) General Electric announces that it is going to cut its dividends by $0.02 per share in the future. This,
everything else remaining the same, will cause its current stock price to ________.
A) increase
B) decrease
C) remain the same
D) fluctuate

21) The difference between money and income is that ________.

A) money is a flow and income is a stock
B) money is a stock and income is a flow
C) there is no difference—money and income are both stocks
D) there is no difference—money and income are both flows
22) Well-functioning financial markets ________.
A) cause inflation
B) eliminate the need for indirect finance
C) cause financial crises
D) produce an efficient allocation of capital

23) The bond markets are important because they are ________.
A) easily the most widely followed financial markets in Canada
B) the markets where foreign exchange rates are determined
C) where corporations and governments borrow to finance their activities
D) the markets where all borrowers get their funds

24) High interest rates might ________ purchasing a house or car but at the same time high interest rates
might ________ saving.
A) discourage; encourage
B) discourage; discourage
C) encourage; encourage
D) encourage; discourage

25) In the country of Moneyland the law allows you to repay mortgage in rocks. Thus, ________.
A) Moneyland is a poor country
B) rocks in this country are considered as money
C) money is scarce
D) Moneyland is a developing country
Solutions (Good luck)

1. B 11. A 21. B

2. C 12. A 22. D

3. B 13. B 23. C

4. C 14. A 24. A

5. A 15. C 25. B

6. D 16. A

7. D 17. A

8. C 18. A

9. C 19. B

10. C 20. B