Part (1) Money

Page | 0 to reserve online revision contact: 01066754347 Facebook group: Public Economics study group
Page | 1 to reserve online revision contact: 01066754347 Facebook group: Public Economics study group
 1

❖ These are markets where funds are transferred from people and firms
who have an excess of available funds to people and firms who have
Financial markets can`t work without financial institutions (intermediaries)
a need of funds (shortage of funds) ✓ Financial intermediary’s institutions borrow funds from people who have savings and
❖ Financial markets are very important as: it increase economic in turn make loans to other people (example: banks)
efficiency and increase investment by channeling funds from savers to ✓ Banks accept deposits and make loans
investors ✓ Other financial institutions: insurance companies, pension funds, mutual funds, and
investment banks
Examples of financial markets:
✓ Financial innovation: The new financial products Can make the financial system to
1) Bond market 2) Stock market 3) Foreign exchange market
work more efficient example: ATMs, online banking and visa.

 A security (financial instrument) is a claim on the Evidence suggests that money plays an important role in generating business cycles.
issuer`s future income or assets (recession and boom)
 A bond is a debt security that promises to make  Monetary theory ties changes in the money supply to changes in aggregate economic
payments periodically for a specified period of time activity and the price level.
 An interest rate is the cost of borrowing, or the price  The aggregate price level is the average price of goods and services in an economy
paid for renting the funds.  inflation is a continual rise in the price level affects all economic players
 Interest rate is determined in the bond market.
E) Fiscal policy & Monetary policy
Fiscal policy Monetary policy
 Common stock represents a share of ownership in corporation Conducted by minister of finance Conducted by the central bank
 A share of stock is a claim on the residual earning ‫ االرباح المتبقية‬and assetsUses: taxes and gov. expenditures Uses: interest rate, money supply
of the corporation Expansionary fiscal policy Expansionary monetary policy
 The main problem of stockholders is that they are residual claimants In recession In recession
➢ Increase expenditures ➢ Increase money supply
 The foreign exchange market where funds are ➢ decrease taxes ➢ decrease interest rate & RRR
converted from one currency into another currency Contractionary fiscal policy Contractionary monetary policy
3) foreign  The foreign exchange rate is the price of one currency In expansion or boom In expansion or boom
Page 0
exchange in terms
| to reserve online of contact:
revision another01066754347
currency ➢ Decrease
Facebook group: Public Economics study expenditures
group ➢ decrease money supply
 The foreign exchange market determines the foreign ➢ increase taxes ➢ increase interest rate & RRR
exchange rate
 2

Financial markets channels funds from persons or business who have

excess of fund (lenders) (surplus economic units) to people or firms that have
From lenders to From lenders to
shortage of fund or in need for fund (borrowers) (deficit economic unit)
borrowers borrowers
without financial with financial
intermediary intermediary 1) type of market according to type of finance
Examples: Examples: Debt Market Equity Market
• you borrowed money • you take a loan from bank Debt instrument is an agreement ➢ Stocks is a piece of ownership in a
from your friend • You make a deposit in a according to which borrower will pay corporation. (stocks are Claim to
• You make a loan to bank or pension fund or regular payments (interest) and share in net income & assets)
your neighbor. insurance company principal at maturity.
• People buy stock in the • You buy shares in mutual Example: bonds, treasury bills and Examples: stocks
primary markets. fund commercial papers and mortgage loans
Has maturity Has no maturity (long term security)
Lecture notes Bonds pay interest dividends
Stocks pay
1) The Principle lender-saver is household sector Maturity is the number of years until Advantages of stocks
2) The principle borrower-investor is business firms the instrument is expired. 1) The stockholder has the right to
vote on the issues of the firm and
Debt instrument may be : elect its director.
Main Functions of financial markets 2) raising the profitability of the
1) the main (basic) function is transferring funds from
➢ short term (maturity less
firm raise both the dividend of
savers to borrowers (intermediation) (middleman) than one year) the stock & its market price.
2) Increase the productivity of business sector through an ➢ intermediate (between one Disadvantage of stocks:
efficient allocation of funds (by screening them) and ten years) 1) Stock prices are more volatile
(promote the economic efficiency) ➢ long term (maturity more 2) The stockholder is a residual
3) raising the income for savers (get return) than 10 years) claimant because the firm must
4) Increase the well-being of households pay all debts first before it pays
anything to stockholders.
Page | 1 to reserve online revision contact: 01066754347 Facebook group: Public Economics study group
 2) Type of Market according to issuance
Primary market Secondary market
new securities (stock or bond) are sold to initial Securities previously issued are bought and sold in the
buyers in primary market (first sale) (first hand) secondary market. (Second hand) (old securities)

Primary market not known to the public (selling Examples: the NYSE and Nasdaq , Foreign exchange market,
new securities are done behind closed doors.) Futures market , options markets.
It involves an investment bank which help the firm It involves both brokers (agent of investor) and dealers
in the initial sale and underwrites securities. which link buyers and sellers

3) type of market according to Maturity

The Importance of the secondary markets: Money Market Capital Market
1) it makes selling securities easy and quicker, then increasing their liquidity in which Short-Term (less in which long-term bonds
and their attractiveness. Which help in increasing the demand on securities than one year) debt (maturity > 1 year) and equity
2) secondary markets Determine the price of the security in the primary instruments are trade. (stocks) are traded
market. These instruments more liquid Less liquid and more
• investors who buy securities in the primary market will not pay more than and have smaller price fluctuations in prices.
the price of bond in secondary market fluctuations, safer and
• the higher the price of a bond in the secondary market the higher the widely traded
price of the bond in the primary market. Corporations and banks invest Insurance companies and
in money market. pension funds
Examples: commercial papers Examples: bonds and stocks
treasury bills, CD, REPO,FED Mortgages
1) Lower transaction costs (time & money spent to make the transaction done)
2) Reduce the exposure of investors to risk. Through (diversifications) and
3) Reduce the asymmetric information problems:
Types of Secondary Market
 Adverse Selection (before the transaction):
Exchange Over the counter (OTC)
 It is a central location  Market where buyers and
try to avoid selecting the risky borrower by gathering information about them
where buyers and sellers sellers are traded online
occurs when a borrower (bad credit risk) produces an undesirable outcome meet to conduct trades. via computer,
 Moral Hazard (after the transaction):  EX. New York Stock  a lot of locations and
ensure borrower will not engage in activities that prevents repayment of loan. Exchange, Chicago Board hundreds of financial
Occurs when borrowers engage in activities that are undesirable (immoral) from of Trade for commodities. institutions involved.
lender`s point of view Highly organized Over the Counter is a
competitive market. dealers
Page | 2 to reserve online revision contact: 01066754347 Facebook group: Public Economics study group
contact 24/7
 3

 Money is anything that is First: Medium of Exchange The most important function
generally accepted as a
medium of exchange.
 money used to pay for goods and services.
 It includes (currency & coins &
 This function promotes economic efficiency by minimizing the time
demand deposits)
 Money has a legal tender. and effort spent in exchange ( reducing transaction cost).
 Transaction cost is: The time and effort spent to exchange G&S
• Imagine yourself in a barter economy.
➢ In a barter economy goods and services are exchanged directly for
Both money and wealth are considered other goods and services.
stock variable Because they have a ➢ In a barter economy, transaction costs are high because people have
certain value at certain point of time to satisfy “double coincidence of wants”
Which means that you need what I have and I need what you have.
wealth; is the total collection of pieces
of property that serve to store the value Second: Unit of Account Money promotes economic efficiency
1) Eliminating the problem of double
Income; is a flow variable (flow of  It means Money Is used to measure coincidence of wants.
earnings per unit of time) value of goods & services 2) Lowering transaction costs
 Reduces transaction costs how? by 3) Encouraging specialization and
Main features of money: reducing the number of prices division of labor
1. be easily standardized  Number of prices in a barter economy
2. be widely accepted 𝒏(𝒏−𝟏) Problems of Barter Economy:
= 1) double coincidence of wants
3. be divisible 𝟐
4. be easy to carry  The barter system is not economically 2) multiple number of prices
5. not deteriorate quickly efficient as it needs to know large 3) lack of value measurement
number of prices 4) no store of value
Page | 3 to reserve online revision contact: 01066754347 Facebook group: Public Economics study group 5) difficulty of divisibility
 Evolution of Money Third: Store of Value
1) Commodity Money : ❖ money is used to accumulate the purchasing power over time.
 precious metals used as a medium of ❖ money is not unique (good) to store value, but other assets also serve this function. Other
exchange (Gold & silver) assets can serve all functions of money except first function (medium of exchange)
 Negative side: difficult to carry & transfer Value of money = 1 ÷ general price level
2) Fiat Money (paper currency) If prices doubled the value of money will decrease to half
 it was firstly convertible to precious metals, What is the advantage and disadvantage of money OR
then it evolved to be non-convertible and compare between money and other assets as a store of value
derived its legality from government decisions Money Other assets
(legal tender)
 The positive side: it is lighter than metals. Advantages of money Advantage of other assets
➢ Money is considered is the most liquid asset ➢ Generate income(interest, dividends)
 The negative side: it is easy to steal
➢ Money doesn’t need time and effort to be ➢ Its value increase during inflation
3) Checks: converted to cash or to buy goods and services ➢ Other assets are preferred than
 An instruction from the bank to transfer
➢ Money has no transaction cost money during inflation
money from someone`s account to another one
Disadvantage of money Disadvantage of other assets:
account
➢ It losses its value during inflation ➢ Less liquid (high transaction cost)
 The positive side: it prevents theft, ability to ➢ It gives no interest ➢ Losses its value during deflation
transfer large amount of money with no cost, (decrease in prices)
reduced transaction cost and improver
economic efficiency
4) E-Money 3) Measuring The Money Supply
 It is the money that exists in electronic
form to be used in carrying out transactions M1 M2
 Ex: debit cards, stored value cards, E-cash Used to measure the more liquid Used to measure the less liquid form or
 In a debit card you are withdrawing from money or medium of exchange the store of value (quasi-money)
your account
 credit card you are withdrawing a loan from M1= Currency in circulation M2= M1 +
your bank + checkable deposits +Saving deposits & money market deposits
+ demand deposits +time deposits
+ traveler’s checks + mutual funds shares
+ deposits in foreign currency
Liquidity:means the easiness and fastness
Narrowest measurement Broader (Wider) measurement
which an asset can be converted into money.

Page | 4 to reserve online revision contact: 01066754347 Facebook group: Public Economics study group
Page | 0 to reserve online revision contact: 01066754347 Facebook group: Public Economics study group
 Financial markets promote economic efficiency by:
A) channeling funds from investors to savers.
1) B) creating inflation.
C) channeling funds from savers to investors.
D) reducing investment
Financial markets promote greater economic efficiency by channeling funds
from………….. to…………………….
2)
A) investors; savers B) borrowers; savers
C) savers; borrowers D) savers; lenders
Well-functioning financial markets promotes
3)
A) inflation. B) deflation C) unemployment. D) growth.
A key factor in producing high economic growth is
A) eliminating foreign trade.
4) B) well-functioning financial markets
C) high interest rates.
D) stock market volatility.
fiscal policy can use ……………….. and ……………….. to solve the economic
problems:
a) interest rate and supply of money
5)
b) money supply and taxes
c) taxes and expenditures
d) expenditures and the required reserve ration
during recession, the government should:
a) follow expansionary fiscal policy
b) follow expansionary monetary policy
6)
c) increase money supply and decrease interest rate
d) decrease taxes and increase its expenditures
e) all the above.
during expansion or economic boom, the government should:
a) follow expansionary fiscal policy
b) follow expansionary monetary policy
7)
c) increase money supply and decrease interest rate
d) decrease taxes and increase its expenditures
e) none of the above.
which of the following is an example of financial intermediaries:
8)
a) banks b) pension funds c) insurance companies d) mutual funds

Answers:
1. C 2. C 3. D 4. B 5. C 6. E 7. E 8. E

Page | 1 to reserve online revision contact: 01066754347 Facebook group: Public Economics study group
 Financial markets where markets transferred from units of deficits to units
1)
of surplus
2) Direct finance is a finance where financial intermediary take place
3) Indirect finance is a finance where financial intermediary take play
4) The household is the most important saver
5) The household is the most important borrower
6) There is no difference between direct and indirect finance
The direct finance is a type of finance where people can buy shares from
7)
mutual funds
The indirect finance is a type of finance where previously issued securities
8)
are traded
When people buy shares in primary market this can be considered a type of
9)
direct finance
Being a residual claimant made stock holders in disadvantageous position
10)
compared to bond holder ( )
11) Money market instruments are more liquid than capital market instruments
12) Corporation and banks invest their money in the capital market
Business firms will obtain funds through selling bonds or stocks or treasury
13)
bills
Business firms will obtain funds through selling bonds or stocks or
14)
commercial papers
The government can finance its deficit though selling government bonds and
15)
commercial papers
The basic function of financial market is to transfer funds from savers to
16)
borrowers
The financial markets improve economic efficiency and increase the
17)
production by screening and mirroring the customers
Financial markets help individuals to increase their returns on income and
18)
also their wellbeing
19) There is no difference between interest and dividends
Being a residual claimants made stockholders in an advantageous position
20)
compared to bondholders
21) The debt market is a market where bonds and stocks are traded
22) Equity market is a market where equity instruments are traded

Page | 2 to reserve online revision contact: 01066754347 Facebook group: Public Economics study group
 Bonds, treasury bills and commercial papers are good examples of debt
23)
instruments
24) Both bonds and stocks have long maturity date
25) While bonds pay interest, stocks pay dividends
One of the disadvantages of stocks in that the stockholder is considered a
26)
residual claimant
Bonds are debt instruments which represent a contractional agreement
27) between the lender and the borrower though which the borrower should pay
periodic dividends and the principle
Stocks represent a share of ownership and claim to share in net income and
28)
assets of the firm
29) Both bonds and commercial papers are long term debt instruments
Bonds are long term debt instruments while commercial papers and treasury
30)
bills are short term borrowing
One of the advantages of stockholders that they can vote on the important
31)
issues for the firm and elect its members
32) Stock prices are more stable than the bond prices
33) Primary markets are markets where previously issued securities are traded
secondary markets are markets where previously issued securities are
34)
traded
35) Selling new securities are known to the public
Primary market is the market in which new securities are sold to initial
36)
buyers
37) The Egyptian stock exchange is a good example of the secondary market
The price of bond in the secondary market depends on the price of bond in
38)
the primary market
The price of bond in the primary market depends on the price of bond in
39)
the secondary market
Secondary market is very important as it provide liquidity for bondholders
40)
and stockholders
The amount of transactions in the secondary market are less than
41)
transactions made in the primary market
the higher the price of a bond in the secondary market the higher the price
42)
a firm could issue new bond in the primary market.

Page | 3 to reserve online revision contact: 01066754347 Facebook group: Public Economics study group
 43) There is no difference between money market and capital market
44) Money market is a market where short-term securities are traded
Bonds and stocks are examples of securities that traded in the capital
45)
market
46) Capital market securities are less fluctuations and more liquid
47) Stock exchange is a place where trade is done via computers
Over the counter is an organized way of trade where trade is done
48)
through regulations
With direct finance, funds are channeled through the financial market
49)
from borrowers directly to the savers ( ) (previous exams)
Secondary market is a financial market in which bonds and common stock
50)
are sold to initial buyers by the corporations ( ) (previous exams)
Securities can only be traded in secondary markets though an organized
51)
stock exchange market ( ) (previous exams)
Secondary markets make it easier and quicker to sell financial instruments
52) to raise cash. They don’t make the financial instruments more liquid ( )
(previous exams)
A liquid asset is always sold in an over-the-counter market( ) (previous
53)
exams)
A financial market in which only short-term debt instruments are traded is
54)
called capital market ( ) (previous exams)
the direct finance is done when the relationship between borrower and
55)
savers is directly without intermediation

Answers:
1. F 2. F 3. T 4. T 5. F 6. F 7. F 8. T 9. T 10. T
11. T 12. F 13. F 14. T 15. F 16. T 17. T 18. T 19. F 20. F
21. F 22. T 23. T 24. F 25. T 26. T 27. F 28. T 29. F 30. T
31. T 32. F 33. F 34. T 35. F 36. T 37. T 38. F 39. T 40. T
41. F 42. T 43. F 44. T 45. T 46. F 47. F 48. F 49. F 50. F
51. F 52. F 53. F 54. F 55. T

Page | 4 to reserve online revision contact: 01066754347 Facebook group: Public Economics study group
 Question two MCQ
Which of the following statements about the characteristics of debt and
equities is true? (previous exams)
a) the can both be long-term financial instruments
1)
b) bond holders are residual claimants
c) the income from bonds is typically more variable than that from equities
d) bonds pay dividends
Equity holders are a corporation`s……………… that means the corporation must
2) pay all of its debt holders before it pays its equity holders. (previous exams)
a) debtors b) brokers c) residual claimants d) underwriters
A corporation acquires new funds only when its securities are sold in
the…………….: (previous exams)
a) primary market by an investment bank
3)
b) primary market by a stock exchange broker
c) secondary market by a securities dealer.
d) secondary market by a commercial bank
A financial market in which only short-term debt instruments are traded is
4) called the……………………….. market. (previous exams)
a) bond b) money c) capital d) stock
Every financial market has the following characteristic: (test bank)
a) it determines the level of interest rates
5) b) it allows common stock to be traded
c) it allows loans to be mad
d) it channels funds from lenders- savers to borrowers- spenders
The financial markets have the basic function of (test bank)
a) getting people with funds to lend together with people who want to
borrow funds
6)
b) assuring that the swings in the business cycle are less pronounced
c) assuring that government need never resort to printing money
d) providing a risk-free repository of spending power.
Which of the flowing can be described as direct finance? (test bank)
a) you take out a mortgage from your local bank
7) b) you borrow $2500 from a friend
c) you buy shares of common stock in the secondary market
d) you buy shares in a mutual fund

Page | 5 to reserve online revision contact: 01066754347 Facebook group: Public Economics study group
 An important function of secondary markets is to (test bank)
a) make it easier to sell financial instruments to raise funds
8) b) raise funds for corporations through the sale of securities
c) make it easier for government to raise taxes
d) create a market for newly constructed houses
Secondary market makes financial instruments more (test bank)
9)
a) solid b) rapid c) liquid d) risky
The higher a security`s price in the secondary market the ……………..funds a
10) firm can raise by selling securities in the ………….market (test bank)
a) more; primary b) more; secondary c) less; primary d) less ; secondary
A breakdown of financial markets can result in
11) A) financial stability. B) rapid economic growth.
C) political instability. D) stable prices.
The principal lender-savers are
12)
A) governments. B) businesses. C) households. D) foreigners.
Which of the following can be described as direct finance?
A) You take out a mortgage from your local bank.
13) B) You borrow $2500 from a friend.
C) You buy shares of common stock in the secondary market.
D) You buy shares in a mutual fund.
The principal borrower-investors are
14)
A) governments. B) businesses. C) households. D) foreigners.
Which of the following can be described as involving direct finance?
A) A corporation issues new shares of stock.
15) B) People buy shares in a mutual fund.
C) A pension fund manager buys a short-term corporate security in the secondary market.
D) An insurance company buys shares of common stock in the over-the-counter markets.
Which of the following can be described as involving direct finance?
A) A corporation takes out loans from a bank.
16) B) People buy shares in a mutual fund.
C) A corporation buys a short-term corporate security in a secondary market.
D) People buy shares of common stock in the primary markets.
Which of the following can be described as involving indirect finance?
A) You make a loan to your neighbor.
B) A corporation buys a share of common stock issued by another corporation in the primary
17)
market.
C) You buy a U.S. Treasury bill from the U.S. Treasury.
D) You make a deposit at a bank.

Page | 6 to reserve online revision contact: 01066754347 Facebook group: Public Economics study group
 Which of the following can be described as involving indirect finance?
A) You make a loan to your neighbor. B) You buy shares in a mutual fund.
18) C) You buy a U.S. Treasury bill from the U.S. Treasury.
D) A corporation buys a short-term security issued by another corporation in the primary
market.
Securities are ________ for the person who buys them, but are ________
19) for the individual or firm that issues them.
A) assets; liabilities B) liabilities; assets
C) negotiable; nonnegotiable D) nonnegotiable; negotiable
With ________ finance, borrowers obtain funds from lenders by selling
20) them securities in the financial markets.
A) active B) determined C) indirect D) direct
With direct finance, funds are channeled through the financial market from
21) the ________ directly to the ________.
A) savers, spenders B) spenders, investors C) borrowers, savers D) investors, savers
Which of the following statements about the characteristics of debt and
equity is false?
22) A) They can both be long-term financial instruments.
B) They can both be short-term financial instruments.
C) They both involve a claim on the issuer's income.
D) They both enable a corporation to raise funds.
Which of the following is an example of an intermediate-term debt?
23) A) A thirty-year mortgage. B) A sixty-month car loan.
C) A six-month loan from a finance company. D) A Treasury bond.
If the maturity of a debt instrument is less than one year,the debt is called
24)
A) short-term. B) intermediate-term. C) long-term. D) prima-term.
When I purchase ________, I own a portion of a firm and have the right to
25) vote on issues important to the firm and to elect its directors.
A) bonds B) bills C) notes D) stock
Equity holders are a corporation's ________. That means the corporation
26) must pay all of its debt holders before it pays its equity holders.
A) debtors B) brokers C) residual claimants D) underwriters
Which of the following benefit directly from any increase in the
27) corporation's profitability?
A) a bond holder B) a commercial paper holder C) a shareholder D) a T-bill holder
A financial market in which previously issued securities can be resold is called a
28) ________ market.
A) primary B) secondary C) tertiary D) used securities
An important financial institution that assists in the initial sale of securities
29) in the primary market is the
A) investment bank. B) commercial bank. C) stock exchange. D) brokerage house.

Page | 7 to reserve online revision contact: 01066754347 Facebook group: Public Economics study group
 When an investment bank ________ securities, it guarantees a price for a
30) corporation's securities and then sells them to the public.
A) underwrites B) undertakes C) overwrites D) overtakes
________ work in the secondary markets matching buyers with sellers of securities.
31)
A) Dealers B) Underwriter C) Brokers D) Claimants
A corporation acquires new funds only when its securities are sold in the
A) primary market by an investment bank.
32) B) primary market by a stock exchange broker.
C) secondary market by a securities dealer.
D) secondary market by a commercial bank.
An important function of secondary markets is to
A) make it easier to sell financial instruments to raise funds.
33) B) raise funds for corporations through the sale of securities.
C) make it easier for governments to raise taxes.
D) create a market for newly constructed houses.
Secondary markets make financial instruments more
34)
A) solid. B) vapid. C) liquid. D) risky.
A liquid asset is
A) an asset that can easily and quickly be sold to raise cash.
35) B) a share of an ocean resort.
C) difficult to resell.
D) always sold in an over-the-counter market.
The higher a security's price in the secondary market the ________ funds a
firm can raise by selling securities in the ________ market.
36)
A) more; primary B) more; secondary C) less; primary D)
less; secondary
When secondary market buyers and sellers of securities meet in one central location
to conduct trades the market is called a(n)
37)
A) exchange. B) over-the-counter market. C) common market. D) barter
market
In a(n) ________ market, dealers in different locations buy and sell securities to
38) anyone who comes to them and is willing to accept their prices.
A) exchange B) over-the-counter C) common D) barter
A financial market in which only short-term debt instruments are traded is called
39) the ________ market.
A) bond B) money C) capital D) stock
Equity instruments are traded in the ________ market.
40)
A) money B) bond C) capital D) commodities
U.S. Treasury bills pay no interest but are sold at a ________. That is, you will
41) pay a lower purchase price than the amount you receive at maturity.
A) premium B) collateral C) default D) discount

Page | 8 to reserve online revision contact: 01066754347 Facebook group: Public Economics study group
 U.S. Treasury bills are considered the safest of all money market instruments
42) because there is almost no risk of
A) defeat. B) default. C) desertion. D) demarcation.
A short-term debt instrument issued by well-known corporations is called
43) A) commercial paper. B) corporate bonds.
C) municipal bonds. D) commercial mortgages
Collateral is ________ the lender receives if the borrower does not pay back the
44) loan.
A) a liability B) an asset C) a present D) an offering
Which of the following instruments is not traded in a money market?
A) Residential mortgages B) U.S.
45)
Treasury Bills
C) Negotiable bank certificates of deposit D) Commercial paper
If bad credit risks are the ones who most actively seek loans and, therefore,
receive them from financial intermediaries, then financial intermediaries face the
46)
problem of
A) moral hazard. B) adverse selection. C) free-riding. D) costly state verification.
The problem created by asymmetric information before the transaction occurs is
called ________, while the problem created after the transaction occurs is called
________.
47) A) adverse selection; moral hazard B) moral hazard; adverse
selection
C) costly state verification; free-riding D) free-riding; costly state
verification
An example of the problem of ________ is when a corporation uses the funds
raised from selling bonds to fund corporate expansion to pay for Caribbean cruises
48)
for all of its employees and their families.
A) adverse selection B) moral hazard C) risk sharing D) credit risk
Adverse selection is a problem associated with equity and debt contracts arising from
A) the lender's relative lack of information about the borrower's potential returns and risks
of his investment activities.
49) B) the lender's inability to legally require sufficient collateral to cover a 100% loss if the
borrower defaults.
C) the borrower's lack of incentive to seek a loan for highly risky investments.
D) the borrower's lack of good options for obtaining funds.

1. A 2. C 3. A 4. B 5. D 6. A 7. B 8. A 9. C 10. A
11. C 12. C 13. B 14. B 15. A 16. D 17. D 18. B 19. A 20. D
21. A 22. B 23. B 24. A 25. D 26. C 27. C 28. B 29. A 30. A
31. C 32. A 33. A 34. C 35. A 36. A 37. A 38. B 39. B 40. C
41. D 42. B 43. A 44. B 45. A 46. B 47. A 48. B 49. A 50.

Page | 9 to reserve online revision contact: 01066754347 Facebook group: Public Economics study group
 To an economist, ________ is anything that is generally accepted in
1) payment for goods and services or in the repayment of debt.
A) wealth B) income C) money D) credit
Of money's three functions, the one that distinguishes money from other
assets is its function as a
A) store of value.
2)
B) unit of account.
C) standard of deferred payment.
D) medium of exchange.
A problem with barter exchange when there are many goods is that in a
barter system
A) transactions costs are minimized.
3)
B) there exists a multiple number of prices for each good.
C) there is only one store of value.
D) exchange of services is impossible.
Because it is a unit of account, money
A) increases transaction costs.
4) B) reduces the number of prices that need to be calculated.
C) does not earn interest.
D) discourages specialization.
To an economist, …………………. Is anything that is generally accepted in
5) payment for goods and services or in the repayment of debt.
a) wealth b) income c) money d) credit
Currency includes:
6) a) paper money and coins b) paper money, coins and checks
c) paper money & checks d) paper money, coins, checks & savings deposits
The difference between money and income is that:
a) money is a flow and income is a stock
7) b) money is a stock and income is a flow
c) there is no difference between money and income are both stocks
d) there is no difference between money and income are both flows
Money is:
a) a flow of earnings per unit time
b) anything that is generally accepted in payment for goods and services or
8)
in the repayment of debt
c) the total collection of pieces of property that are a store of value
d) always based on a precious metal like gold or silver

Page | 10 to reserve online revision contact: 01066754347 Facebook group: Public Economics study group
 Which of the following are true statements?
9) a) wealth is a stock variable b) money is a flow variable
c) income is a stock variable d) wealth is a flow variable
…………………. Is used to make purchases while …………..is the total collection
10) of pieces of property that serve to store value
a) money, income b) wealth, income c) income, money d) money, wealth
…………is a flow of earnings per unit of time.
11)
a) income b) money c) wealth d) currency
Of money`s three functions, the one that distinguishes money from other
assets is its function as a ……..
12)
a) store of value b) unit of account
c) standard of deferred payment d) medium of exchange
Which of the following statements is best explain how the use of money in
an economy increases economic efficiency?
a) money increases economic efficiency because it is costless to produce
13) b) money increases economic efficiency because it discourages specialization
c) money increases economic efficiency because it decreases transaction
cost
d) money cannot influence economic efficiency
………………… are the time and effort spent to exchange goods and services.
14) a) bargaining costs b) transaction costs
c) contracting costs d) barter costs
Money………..transaction costs, allowing people to specialize in what they do
15) best.
a) reduces b) increases c) enhances d) eliminates
Because it is a unit of account, money:
a) increases transaction costs
16) b) reduces the number of prices that need to be calculated
c) doesn’t earn interest
d) exchange of services is impossible
A problem with barter exchange when there are many goods is that in a
barter system
a) transaction costs are minimized
17)
b) there is only one store of value
c) there exists a multiple number of prices for each good
d) exchange services is impossible

Page | 11 to reserve online revision contact: 01066754347 Facebook group: Public Economics study group
 If the price level doubles, the value of money
a) doubles
18) b) more than double, due to scale economies
c) rises but does not double, due to diminishing returns
d) falls by 50%
A fall in price level :
a) does not affect the value of money
19) b) has an uncertain effect on the value of money
c) increases the value of money
d) reduces the value of money
During hyperinflation:
a) the value of money rises rapidly
b) money no longer functions as a good store of value and people may
20) resort to barter transactions on a much larger scale
c) middle- class savers benefit as price rise
d) money`s value remains fixed to the price level; that is if prices double
so does the value of money
The disadvantages of the barter system:
a) many numbers of prices
21 b) lower transaction costs
c) there is a double coincidence
d) less effort and highly efficient
________ is used to make purchases while ________ is the total
collection of pieces of property that serve to store value.
A) Money; income
22)
B) Wealth; income
C) Income; money
D) Money; wealth
________ is a flow of earnings per unit of time.
23)
A) Income B) Money C) Wealth D) Currency
As the payments system evolves from barter to a monetary system,
A) commodity money is likely to precede the use of paper currency.
B) transaction costs increase.
24)
C) the number of prices that need to be calculated increase rather
dramatically.
D) specialization decreases.

Page | 12 to reserve online revision contact: 01066754347 Facebook group: Public Economics study group
 A disadvantage of ________made from precious metals is that it is very
25) heavy and hard to transport from one place to another.
A) commodity money B) fiat money C) electronic money D) paper money
________ is the narrowest monetary aggregate that the Fed reports.
26)
A) M0 B) M1 C) M2 D) M3
The components of the U.S. M1 money supply are demand and checkable
deposits plus
27) A) currency. B) currency plus savings deposits.
C) currency plus travelers’ checks.
D) currency plus travelers checks plus money market deposits.
Which of the following is not included in the M1 measure of money but is
included in the M2 measure of money?
28)
A) Currency B) Traveler's checks
C) Demand deposits D) Small-denomination time deposits
Which of the following is not included in the monetary aggregate M2?
29)
A) Currency B) Savings bonds C) Traveler's checks D) Checking deposits
Of the following, the largest is
30)
A) money market deposit accounts. B) demand deposits. C) M1. D) M2.
If an individual moves money from a small-denomination time deposit to a
demand deposit account,
A) M1 increases and M2 stays the same.
31)
B) M1 stays the same and M2 increases.
C) M1 stays the same and M2 stays the same.
D) M1 increases and M2 decreases.
If an individual moves money from a demand deposit account to a money
market deposit account,
A) M1 decreases and M2 stays the same.
32)
B) M1 stays the same and M2 increases.
C) M1 stays the same and M2 stays the same.
D) M1 increases and M2 decreases.
If an individual moves money from currency to a demand deposit account,
A) M1 decreases and M2 stays the same.
33) B) M1 stays the same and M2 increases.
C) M1 stays the same and M2 stays the same.
D) M1 increases and M2 stays the same.

1) C 2) D 3) B 4) B 5) C 6) A 7) B 8) B 9) A 10) D
11) A 12) D 13) C 14) B 15) A 16) B 17) C 18) D 19) D 20) B
21) A 22) D 23) A 24) A 25) A 26) B 27) C 28) D 29) B 30) D
31) A 32) A 33) C

Page | 13 to reserve online revision contact: 01066754347 Facebook group: Public Economics study group