Deck 1: An Introduction to Money and the Financial System

Question 1

U.S.monetary policy is best described as:

A)aimed at keeping inflation low and stable and growth high and stable.
B)determining the denominations of a country's currency.
C)one of the most important functions of congress.
D)attempting to keep inflation constant at zero percent.

Answer 1

A

Question 2

The statement "risk requires compensation" implies that people:

A)do not take risk.
B)only accept risk when they absolutely have to.
C)will only accept risk when they are rewarded for doing so.
D)avoid risk at all cost.

Answer 2

C

Question 3

Central banks can improve the welfare of a society by doing all of the following except:

A)serving the interests of government rather than the public at large.
B)helping to promote economic growth.
C)focusing on keeping the overall level of prices stable.
D)helping to reduce the volatility of business cycles.

Answer 3

A

Question 4

When an individual obtains a car loan and makes all of the regular monthly payments, the sum of the payments made will exceed the purchase price of the car.This is due primarily to the core principle:

A)risk requires compensation.
B)information is the basis for decisions.
C)markets determine prices and allocate resources.
D)time has value.

Question 5

The amount of information an individual would seek before making a decision:

A)is about the same across all individuals.
B)varies directly with the importance of the decision.
C)is the same across all decisions but varies across individuals.
D)depends on how much time it will take to get the information regardless of the decision.

Question 6

The primary function of central banks is to:

A)increase risk and volatility to increase compensation.
B)control inflation, as well as help reduce the size and frequency of business cycle fluctuations.
C)increase the uncertainty that firms face in making investment decisions.
D)eliminate the need for banks to collect financial information.

Question 7

Identify which item is not one of the six parts of the financial system.

A)Financial markets
B)Central banks
C)Credit cards
D)Financial institutions

Question 8

Studying money and banking through five core principles is helpful because:

A)studies have shown students have a difficult time remembering more than five topics.
B)everything in economics can be reduced to five core principles.
C)money and banking can undergo drastic changes overtime, but the five principles do not.
D)these five principles are understood by everyone.

Question 9

In the United States, control of the quantity of money is given to the:

A)President.
B)Federal Reserve System.
C)Bureau of Printing and Engraving.
D)Department of the Treasury.

Question 10

The New York Stock Exchange is an example of a:

A)financial instrument.
B)financial institution.
C)financial market.
D)bank.

Question 11

The central bank of the United States is:

A)the Bank of America
B)the Federal Reserve System
C)the U.S.Treasury
D)Citibank

Question 12

Identify which of the following is not one of the five core principles of money and banking.

A)Risk requires compensation
B)Time has value
C)Information is the basis for decisions
D)Stability creates risk

Question 13

Most financial markets in the United States operate under a system:

A)without any formal rules or regulation.
B)with many rules and regulation to ensure a fair market.
C)where it depends on which state where the financial market is located since some states do not have any regulations.
D)that is totally controlled by the federal government.

Question 14

Which of the following statements best describes financial instruments?

A)All financial instruments are a means of payment.
B)Financial instruments can transfer resources between people but not risk.
C)Financial instruments can transfer resources and risk between people.
D)Financial instruments can transfer risk but not resources between people.

Question 15

Mutual funds have:

A)been created for very wealthy individuals with a lot of money to invest.
B)increased the risks associated with constructing a portfolio.
C)reduced the costs associated with gathering information on stocks and bonds.
D)increased the transactions costs associated with participating in financial markets.

Question 16

Which of the following statements best describes financial markets?

A)Financial markets lower the cost and increase the speed of buying and selling financial instruments.
B)Financial markets increase the speed of buying and selling, but they also increase the cost since people are earning fees for these transactions.
C)Financial markets are a good example of unregulated markets.
D)Financial markets today offer fewer instruments than they did in the past.

Question 17

Which of the following is an example of a financial market?

A)A local coffeehouse where people regularly buy and sell financial instruments.
B)A bank that only accepts deposits and issues loans.
C)An electronic network used for buying and selling textbooks.
D)A central bank used for raising taxes and borrowing on behalf of the government.

Question 18

Stock prices are:

A)set by the company issuing the stock.
B)set by the central bank.
C)determined by market transactions.
D)unrelated to the value of the company issuing the stock.

Question 19

How do financial institutions evaluate the creditworthiness of potential borrowers?

A)They offer high interest rates because only the best borrowers will be able to afford them.
B)They gather information regarding the borrowers' finances.
C)They do not evaluate creditworthiness because everyone is treated the same.
D)They do not evaluate the creditworthiness because they know the borrower will honor his/her obligation to repay the loan.

Question 20

Investing in financial instruments in today's economy:

A)is an activity practiced only by the wealthy.
B)involves costly transactions.
C)requires a relatively large sum of money to invest (more than $100,000).
D)is made easier by the use of mutual funds.

Question 21

What is the primary function of U.S.regulatory agencies in the U.S.financial system?

Question 22

In 2010, regulators of many nations agreed on a major update of internationally active banks known as:

A)Basel III.
B)the Fred-Bob Act.
C)the Gramm-Leach-Bliley Act.
D)the Dodd-Frank Act.

Question 23

Which core principle(s) could you use to explain why credit card issuers charge such high rates of interest?

Question 24

The largest regulatory change in U.S.financial markets since 1930 is known as:

A)Basel III.
B)the Fred-Bob Act.
C)the Gramm-Leach-Bliley Act.
D)the Dodd-Frank Act.

Question 25

A borrower seeking a mortgage today is often presented with the choice between a mortgage whose interest rate and monthly payment stays fixed for the duration of the loan, or a mortgage whose interest rate and monthly payment can change as other interest rates change.Typically the interest rate on the fixed-rate mortgage is higher.Having learned the five core principles, does this make sense?

Question 26

Identify the five core principles of Money and Banking.

Question 27

Identify the six parts of the financial system.

Question 28

How do central banks, like the U.S.Federal Reserve, contribute to the welfare of a society?

Question 29

If the U.S.Supreme Court ruled that states could no longer require people to have auto insurance, do you think most people would cancel their policies? Explain.

Question 30

Suppose that IBM considers expanding its operations.The expansion will require $400 million for two new factories which the corporation plans to raise by selling stock and bonds.Which of the core principles will come into play as investors decide whether or not to buy the stock and the bonds?
The five core principles are: #1) Time has value; #2) Risk requires compensation; #3) Information is the basis for decisions; #4) Markets determine prices and allocate resources; #5) Stability improves welfare.Investors considering buying IBM's stock and bonds would surely have principle #2 in mind; they would assess the risk involved in IBM's expansion and want to be compensated for it.This would clearly involve information (principle #3).Principle #1 would come into play with the bonds; are they 1-year bonds? 5-year bonds? The longer the time period involved, everything else constant, the greater the return investors would require.Principles #4 and #5 are not totally irrelevant here, as investors will rely on markets to price the stocks and bonds and will judge IBM's expansion based on the outlook for the economy as a whole (stability).