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| 1 | The financial services industry lends and borrows money. Since the ability of the borrower to repay the loan depends upon future events, risk is a key feature of this industry. |
 | A) | TRUE |
| B) | FALSE |
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| 2 | Banks are financial institutions that receive deposits from individuals and firms and then make loans to individuals and firms. |
| A) | TRUE |
| B) | FALSE |
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| 3 | Insurance companies are not financial institutions since they do not take-in deposits. |
| A) | TRUE |
| B) | FALSE |
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| 4 | A primary function of the financial services industry is to channel the economy’s savings into good investments. |
| A) | TRUE |
| B) | FALSE |
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| 5 | Another important function of the financial services industry is to correctly evaluate the true risk of various investments and to reward lenders for the risk. |
| A) | TRUE |
| B) | FALSE |
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| 6 | Asymmetric information (the borrower knows more about the risks than the lender) is unavoidable and it tends to undermine the development of financial institutions and markets; this is one of the main reasons why financial transactions are heavily regulated in almost all nations. |
| A) | TRUE |
| B) | FALSE |
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| 7 | Prior to the introduction of the euro, France and Germany had separate currencies; this acted as a barrier to trade in financial services since: |
| A) | tariffs made it more expensive to lend across international borders. |
| B) | French and German banks colluded to divide the market between them. |
| C) | the fact that the exchange rate could change made it extra risky for a lender based in one currency to lend to a borrower based in another; thus foreign banks typically would have to charge more for loans than local banks. |
| D) | All of the above. |
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| 8 | European banks have tended to merge with other banks in the same nation, rather than merging across international lines. Nevertheless: |
| A) | competition can rise since banks have the right to make intra-EU loans and the introduction of the euro has made this less risky. |
| B) | financial markets are replacing banks as a source of loans for companies. |
| C) | the result has been a big increase in collusion among banks. |
| D) | None of the above. |
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| 9 | European stock markets are: |
| A) | a way for medium and large companies to raise capital. |
| B) | marked by a ‘home market bias’, i.e. European stock market investors tend to mainly buy stocks listed on their national stock market. |
| C) | becoming more integrated due to the euro. |
| D) | All of the above. |
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| 10 | In the 19th century, Sterling was the undisputed international currency. Sterling was displaced by the: |
| A) | Japanese yen. |
| B) | US dollar. |
| C) | euro. |
| D) | deutschemark. |
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| 11 | A vehicle currency is one that is used to denominate ________ and _______ transactions, even when the currency is not that of either party in the transaction. |
| A) | capital, labour market |
| B) | trade, financial market |
| C) | car, truck |
| D) | None of the above. |
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| 12 | The role of the euro as a vehicle currency has increased when it comes to _______, _______ and _______, but not when it comes to _______. |
| A) | trade, foreign exchange markets, bonds, international reserves |
| B) | international reserves, trade, foreign exchange markets, corporate bonds |
| C) | stocks, bonds, mortages, trade |
| D) | imports, exports, foreign direct investment, trade. |
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| 13 | A parallel currency is one that circulates inside a country in addition to the national currency. At the moment the dollar is the main parallel currency, but the euro is an important parallel currency in ________, ________ and ________. |
| A) | Asia, Australia, Canada. |
| B) | central and eastern Europe, Russia, parts of Sub-Saharan Africa |
| C) | Asia, Australia, New Zealand |
| D) | Canada, Australia, New Zealand |
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| 14 | The introduction of the euro led to a rapid integration of _______ markets, but not _______ markets in euroland. |
| A) | land, labour |
| B) | labour, capital |
| C) | bond, stock |
| D) | land, mortage |
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| 15 | Capital integration that triggers capital flows from capital-rich to capital-poor countries: |
| A) | Hurts capital-owners in the capital-rich country. |
| B) | Hurts workers in the capital-poor country. |
| C) | Lowers welfare in the capital-rich country. |
| D) | Raises welfare in both countries. |