Lesson 4.4.1

4.4.1 Role of financial markets Quiz: Pearson Edexcel Economics A, Unit 4

20 questions

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Lesson 4.4.1, Role of financial markets: 20 multiple choice questions for the Pearson Edexcel Economics A (9EC0), Unit 4: Theme 4: A global perspective, written with Revision Ninja.

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The 20 questions

  1. Which is a key function of financial markets that allows savers and borrowers to be matched?

    • Pooling the savings of many households and lending them to businesses and individuals who need finance
    • Guaranteeing that every business receives a loan from the central bank whenever it requests finance
    • Forcing all households to spend their entire income each year so that consumption is maximised in the economy
    • Setting the level of tax revenue that the government must collect from each sector of the economy each year

  2. How do financial markets help to facilitate the exchange of goods and services?

    • They require all goods to be paid for in cash only, which removes the need for any credit or payment systems
    • They provide payment systems and credit that allow buyers and sellers to transact across distances and times
    • They prevent all trade by restricting the use of money to government-approved transactions in every market
    • They replace the need for any goods to be produced, since trade is conducted entirely through financial assets

  3. What is a forward market in currencies?

    • A market in which governments set the exchange rate for the next decade in a single legal agreement
    • A market in which currencies are exchanged instantly at the current spot rate with no contract for the future
    • A market in which currencies are bought only by the central bank to build up its reserves of foreign exchange
    • A market in which contracts are agreed today to exchange currencies at a set rate on a future date

  4. Why might a UK exporter use a forward contract?

    • To make a speculative profit from a sharp fall in the value of the currency it expects to receive in the future
    • To ensure that the foreign buyer pays a higher price for goods than the market rate, which raises profits
    • To avoid paying any tax on export earnings, since forward contracts are exempt from all tax in the UK
    • To fix the sterling value of a future foreign-currency receipt and so reduce the risk from exchange rate movements

  5. What is a forward market in commodities used for?

    • Agreeing today the price at which a commodity will be bought or sold on a future date, to manage price risk
    • Storing commodities for the government, so that prices are fixed at the same level in every year by law
    • Ensuring that commodities are never traded across borders, so that domestic producers always face no competition
    • Selling commodities only at their current price, with no agreement made about any future transaction at all

  6. How does a stock market help businesses to raise finance?

    • By allowing firms to issue shares to investors, who provide capital in return for a stake in the company
    • By requiring firms to borrow only from the government at a fixed interest rate, set each year in advance
    • By ensuring that share prices never change, so that investors always receive the same return on their money
    • By forcing all firms to pay out all their profits as wages, so that they have no need to raise any new capital

  7. Which is an example of a market for equities?

    • A market for fixed-rate government bonds with a set maturity date and a fixed interest coupon each year
    • A market for foreign currencies in which banks buy and sell sterling for dollars at the spot rate each day
    • A stock exchange on which investors buy and sell shares in listed companies
    • A market for commodities in which farmers sell wheat to millers at a price fixed by government each harvest

  8. Which of these is a role of financial markets in helping households?

    • Requiring them to hold all their savings in cash, which protects them from any loss in value over time
    • Preventing them from borrowing for any purpose, which reduces their debt and the risk of default
    • Setting the price of all goods they buy, which ensures that they never pay more than the legal maximum
    • Allowing them to save and earn a return, and to borrow for purchases such as a home

  9. Why does a well-functioning financial sector matter for investment?

    • It has no effect on investment, because firms fund all their investment from retained profits in every case
    • It raises the cost of capital for all firms, since borrowing is always more expensive than any other source of finance
    • It channels savings into productive investment, lowering the cost of capital for firms that want to expand
    • It reduces investment, because all funds held in banks are taxed by government so that firms cannot borrow them

  10. What does it mean to say that financial markets 'facilitate saving'?

    • They allow savers to withdraw funds only once a century, which removes any incentive to save in the economy
    • They guarantee that all savings are used for consumption, so that households never build up any wealth at all
    • They offer savers places to hold funds that earn a return, which encourages people to save rather than hoard money
    • They force savers to hold money in cash, so that the banks can take a fee from every deposit made in the economy

  11. Which function of financial markets allows firms to protect against falls in the value of foreign currency earnings?

    • Providing forward markets in currencies, where contracts can fix an exchange rate for a future date
    • Providing a market for equities, where shares of companies can be bought and sold without any exchange rate risk
    • Providing a loan market for households, where mortgages can be obtained at low rates of interest in every year
    • Providing a savings market, where households can deposit money at a fixed rate of interest for many years

  12. Which of the following is an example of the financial sector lending to businesses?

    • A bank providing a loan to a manufacturing firm to buy new equipment, repayable with interest over several years
    • A government giving a grant to a school to pay for a new building, with no requirement for repayment at all
    • A household paying a bill for its electricity supply, which is a payment for a utility service rather than a loan
    • A firm making a donation to a charity, which is a transfer payment with no return expected by the firm

  13. Which statement best describes how forward and spot markets differ?

    • Spot transactions settle at a price fixed years in advance, while forward contracts settle at the current price
    • Spot transactions settle now at the current price, while forward contracts fix a price today for settlement at a future date
    • Spot and forward markets are identical in every respect, since both settle at the current price on the same day
    • Spot markets operate only for commodities, while forward markets operate only for currencies and never for goods

  14. Why might a market for equities be useful to an economy as a whole?

    • It allows firms to raise long-term finance for growth, and gives savers a way to share in the returns of businesses
    • It has no effect on the economy, since share prices are unrelated to the profits and investment of the companies listed
    • It reduces the number of firms in the economy, since shareholders always force weak firms out of business each year
    • It prevents firms from raising any finance, since shares are only held by governments and not by private savers

  15. A firm wants to borrow to fund a five-year expansion. Which financial market function is most relevant?

    • The lending function, which provides longer-term finance for investment through loans or bonds
    • The forward currency function, which fixes the exchange rate that the firm will pay on its future borrowing
    • The payments function, which only allows firms to pay for goods that have already been received in full
    • The spot commodity function, which settles immediate purchases of raw materials at the current market price

  16. Which is a risk that a forward currency contract is designed to reduce?

    • The risk that the firm's customers will refuse to buy its products at any price in the market
    • The risk that interest rates will fall, so that the firm's existing loans become more expensive to repay
    • The risk that the firm will be required to pay corporation tax on its profits from overseas sales
    • The risk that the exchange rate will move against the firm between agreeing a deal and settling it

  17. Which of these is not a function of financial markets as described in the economic theory of finance?

    • Providing forward markets in currencies so that exchange rate risk can be managed
    • Providing a market for equities so that firms can raise capital by issuing shares
    • Setting the level of national income tax for the government each year in the annual budget
    • Facilitating saving by offering savers interest-bearing accounts and investments

  18. Which best describes a benefit of having a deep and well-regulated financial sector?

    • It allows efficient allocation of capital and can make it easier for households and firms to manage risk
    • It makes it harder for households to borrow, since regulation always reduces the availability of finance to them
    • It guarantees that all investments succeed, since regulation removes all risk from lending and investing
    • It removes the need for savings altogether, because the financial sector provides all finance without any savings

  19. What is the function of a bond market?

    • It allows households to buy shares in companies that have listed on the stock exchange each year
    • It allows farmers to sell commodities for delivery at a price fixed by the government each harvest
    • It allows central banks to set the exchange rate by buying and selling their own currency on the market
    • It allows governments and firms to borrow long term by issuing debt that lenders buy and hold

  20. A UK firm borrows £1m from a bank for five years, rather than issuing shares. Which function of the financial sector is this?

    • Providing a market for equities, since the firm has sold part of its ownership to the bank as shareholders
    • Facilitating saving, since the bank records the loan as a deposit of the firm's savings in the bank account
    • Providing forward markets in currencies, since the firm will repay the loan in a foreign currency later
    • Lending to businesses, providing debt finance for investment

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