Financial Markets and Money: Key Concepts and Practice

Financial Markets and Money Practice Questions

1. Which of the following assigns widely-followed bond ratings? — C) Moody's
2. The Federal Reserve issues a report indicating that future inflation will be higher than had previously seemed likely. As a result — E) none
3. Which of the following makes up the largest share of M2? — C) M1
4. The risk premium of corporate bonds typically increases — A) during a recession.
5. The demand curve for bonds would be increased by — D) a decrease in expected returns on other assets.
6. If the government decreases taxes while increasing expenditures — C) the bond supply curve will shift to the right and the equilibrium interest rate will rise.
7. When a company whose ability to repay its obligations in full is uncertain — C) it must offer investors higher yields to compensate them for the risk they take in buying their bonds or making loans.
8. The role of the financial system is to — D) channel funds from households and other savers to businesses and other borrowers.
9. Money as a medium of exchange refers only to — B) anything that is generally accepted as payment for goods and services.
10. Which of the following is an example of a barter transaction? — D) An individual provides three light bulbs to her neighbor in exchange for two gallons of milk.
11. Nominal interest rates are higher than real interest rates as long as — A) expected inflation is positive.
12. If you purchase a Treasury bond, the Treasury bond is — C) an asset to you, but a liability to the U.S. government.
13. Which of the following is NOT a key financial service provided by the financial system? — A) profitability
14. During the financial crisis of 2007–09, the prices of U.S. Treasury securities — D) rose and the price of corporate bonds declined.
15. The Federal Reserve System — A) is the central bank of the United States.
16. Money market mutual fund shares are included in — B) only M2.
17. In the bond market, the issuer is considered to be — C) the borrower.
18. According to the WSJ article, why were investors worried about the debt ceiling? — D) Failure to raise the debt ceiling would have caused the U.S. government to miss interest on its debt.
19. The default risk premium is — B) the additional yield a saver requires for holding a bond with some default risk.
20. According to the WSJ article, what was the risk to El Salvador after issuing bitcoin-backed bonds? — B) Falling value of bitcoin will make it harder to repay the borrowed dollars.
21. Which of the following is a short-term financial asset? — B) Treasury Bill
22. Bonds issued by state and local governments are called ______ bonds. — A) municipal
23. Consider the bonds below. Which is subject to the smallest interest-rate risk? — B) A Treasury bill
24. A flight to quality refers to a shift by savers from — A) low-quality bonds and into high-quality bonds.
25. Which of the following is included in M2, but not in M1? — A) small time deposits
26. If an individual moves money from a checking deposit to a savings deposit — A) M1 decreases and M2 stays the same.
27. When money prices are used to facilitate comparisons of value, money is said to function as a — A) unit of account.
28. President Trump lowered the top federal income tax bracket. Supply and demand analysis predicts the impact was ______ yields of municipal bonds and ______ yields on Treasury bonds. — D) higher; lower
29. Holding everything else constant, if interest rates are expected to decrease, the demand for bonds today ______ and yields ______. — B) increases; decrease
30. If a bond’s rating worsens it should cause the bond’s price — C) to decrease and its yield to increase, all other factors constant.
31. Money eliminates the need for — D) barter trade.
32. If the expected gains on stocks fall, while the expected returns on bonds do NOT change, then — B) the equilibrium bond yields will fall.
33. If you buy a bond issued by Intel, the bond is a(n) — D) liability to Intel and an asset to you.
34. Which of the following would NOT cause the demand curve for bonds to shift? — A) a change in the government borrowing needs
35. A short-term debt instrument issued by well-known corporations is called — D) commercial paper.
36. A “primary market” is a market — B) in which newly issued securities are sold to buyers by borrowers.
37. According to the WSJ video, what is one key difference between US savings bonds and Treasury securities? — C) US savings bonds are not tradable whereas Treasury securities are bought and sold on secondary markets.
38. In a bond market, the seller is considered to be — B) the lender.