ECONOMICS 214

TUTORIAL 1
Why MONEY, BANKING, and FINANCE? & an overview of FINANCIAL MARKETS
(CHAPTERS 1 & 2)

Question 1 (MULTIPLE CHOICE)

Choose the one alternative that best completes the statement or answers the question.

1.1 An increase in interest rates might ________ saving because more can be earned in interest income. 1) _______
A) invalidate B) disallow C) discourage D) encourage

1.2 The process where financial intermediaries create and sell low-risk assets and use the proceeds to purchase riskier assets is
known as 2) _______
A) risk sharing. B) risk neutrality. C) risk selling. D) risk aversion.

1.3 Equity and debt instruments with maturities greater than one year are called ________ market instruments.
3) _______
A) benchmark B) money C) federal D) capital

1.4 An increase in stock prices ________ the size of people's wealth and may ________ their willingness to spend, everything
else held constant. 4) _______
A) decreases; decrease B) increases; increase C) decreases; increase D) increases; decrease

1.5 Increasing the amount of information available to investors helps to reduce the problems of ________ and ________ in the
financial markets. 5) _______
A) moral hazard; transactions costs B) adverse selection; economies of scale
C) adverse selection; moral hazard D) adverse selection; risk sharing

DISCUSSION QUESTIONS:

Question 2

What is a stock? How do stocks affect the economy?

Question 3

What happens to economic growth and unemployment during a business cycle recession? What is the relationship between the
money growth rate and a business cycle recession?

Question 4

Distinguish between a foreign bond and a Eurobond.

Question 5

Why is it important to understand the bond market?

Question 6

Distinguish between direct finance and indirect finance. Which of these is the most important source of funds for corporations in the
United States? What about South Africa?