Chapter 1 B) eliminate the need for indirect finance. C) cause financial crises. Financial markets promote economic efficiency D) allow the economy to operate more efficiently. by Answer: D A) channeling funds from investors to savers. B) creating inflation. You can borrow $5000 to finance a new business C) channeling funds from savers to investors. venture. This new venture will generate annual D) reducing investment. earnings of $251. The maximum interest rate that you would pay on the borrowed funds and still Answer: C increase your income is A) 25%. Markets in which funds are transferred from B) 12.5%. those who have excess funds available to those C) 10%. who have a shortage of available funds are called D) 5%. A) commodity markets. Answer: D B) fund-available markets. C) derivative exchange markets. D) financial markets. A corporation acquires new funds only when its securities are sold in the Answer: D A) primary market by an investment bank. B) primary market by a stock exchange broker. Low stock market prices might ________ C) secondary market by a securities dealer. consumers willingness to spend and might D) secondary market by a commercial bank. ________ businesses willingness to undertake investment projects. Answer: A A) increase; increase B) increase; decrease Equity instruments are traded in the ________ C) decrease; decrease market. D) decrease; increase A) money Answer: C B) bond C) capital D) commodities It is true that inflation is a Answer: C A) continuous increase in the money supply. B) continuous fall in prices. U.S. Treasury bills are considered the safest of all C) decline in interest rates. money market instruments because there is a low D) continually rising price level. probability of Answer: D A) defeat. B) default. Chapter 2 C) desertion. D) demarcation. Well-functioning financial markets Answer: B A) cause inflation. 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. Answer: A .