IFE S2 The Economic Role of Finance

Which of the following are functions of a financial system?

1.     The operation of a payments system

2.     Providing the means of portfolio adjustment

3.     Helping to reduce unemployment

4.     Channelling funds between lenders and borrowers

5.     Helping speculators to bet on price movements

• 2, 3 and 5

• 1, 2 and 4

• 2 to 5

• 1 and 5

Which of the following are deposit-taking institutions (DTIs)?

1.       Building societies

2.       Insurance companies

3.       Investment trust companies

4.       Retail banks

5.       Pension funds

• 1 only

• 2 and 5

• 1 and 4

• 1 and 2

Financial markets have the basic function of:

• Bringing together people with funds to lend and people who want to borrow

• Assuring that the swings in the business cycle are less pronounced

• Assuring that governments need never resort to printing money

What is the main benefit of a functioning financial system?

• It creates wealth given that large profits are possible on various financial markets.

• It helps in the conversion of precious metals to final goods.

• It provides an opportunity for individuals to get rich quickly.

• It converts liquid funds to the production factor capital.

Every financial market has the following characteristic:

• It determines the level of interest rates.

• It allows common stock to be traded.

• It allows loans to be made.

• It channels funds from lenders/savers to borrowers/spenders.

Limited liability implies that...

• the number of shares that can be issued is limited.

• the number of owners is limited.

• owners are not liable with their private wealth for losses of the business.

• shareholders can only lose a limited amount of money.

A deficit unit is one for whom:

• Saving equals investment

• Saving exceeds investment

• (consumption + investment) exceeds income

• Consumption exceeds income

A surplus unit is one for whom:

• Income exceeds consumption

• Investment exceeds saving

• Investment equals saving

• Income exceeds (consumption + Investment)

The Toronto Stock Exchange is an example of:

• a financial instrument.

• a central bank.

• a financial market.

• All of the answers are correct.

Which of the following can be described as involving direct finance?

• A bank loans money to a corporation

• An individual buys shares in a corporation

• An individual places money in a notice account

• An insurance company purchases shares in a corporation