IFE S3 The Value of the Financial System

Securities are _____ for the person who buys them but are _____ for the individual or firm that issues them.

• assets; liabilities

• liabilities; assets

• negotiable; non-negotiable

• non-negotiable; negotiable

The presence of transaction costs in financial markets explains, in part, why… 

• 1. financial intermediaries and indirect finance play such an important role in financial markets.

• 1. equity and bond financing play such an important role in financial markets.

• 1. corporations get more funds through equity financing than they get from financial intermediaries.

• 1. direct financing is more important than indirect financing as a source of funds.

Economists group commercial banks, savings and loan associations, credit unions, mutual funds, mutual savings banks, insurance companies, pension funds, and finance companies together under the heading financial intermediaries. 

 

Financial intermediaries…

• 1. act as middlemen, borrowing funds from those who have saved and lending these funds to others.

• 1. produce nothing of value and are therefore a drain on society's resources.

• 1. help promote a more efficient and dynamic economy.

• 1. Both (a) and (c) are correct.

Financial instruments are...

• 1. used to transfer resources from savers to investors.

• 1. used to transfer risk.

• 1. sold in financial markets.

• 1. All the answers are correct.

The act of financial intermediation consists of...

• 1. transforming equity shares into debt instruments such as bonds.

• 1. converting gold into paper currency.

• 1. transforming liabilities into assets.

• 1. safekeeping other people's funds.

Which one is not a function of intermediation?

• 1. It facilitates the acquisition of payment for goods and services.

• 1. It facilitates the creation of a portfolio.

• 1. It eases the liquidity constraints of households and firms.

• 1. It provides a safekeeping service for those with excess funds.

Which category of financial institution is, relatively speaking, the most important?

• 1. deposit-taking intermediaries.

• 1. non-deposit taking intermediaries.

• 1. insurance companies.

• 1. investment funds.

Which is NOT a benefit shares (stocks) provide to the economy?

• Shares introduce a democratisation to the business world thus allowing a fair participation of workers and pundits.

• Shares allow investors to mitigate risk.

• Shares help companies to raise long-term funds for investment.

• Shares make investing in successful companies more accessible to the public.

Which of the following statements is the best definition of the surplus unit?

• Surplus units are companies that make profits.

• Surplus units are all companies and individuals who have a positive net wealth.

• Surplus units are individuals, households, firms, and organisations that their income exceeds their consumption plus investments.

• None of the above are an accurate description of surplus units.

Which of the following statements is the best definition of the deficit unit?

• Deficit units are all individuals, households, firms, and organisations that have negative net wealth.

• Deficit units are market participants that take a loan.

• Deficit units are all market participants that do not have any savings.

• Deficit units are individuals, households, firms, and organisations that their income is less than their consumption plus investments.