Question 1

Which of the following policy tools does the Fed use most frequently?

Accepted Answer

Open market operations (buying or selling government securities) is the most frequently used policy tool by the Fed as it provides a quick and effective way to adjust the money supply in the economy. Reserve requirement changes and margin requirement changes are used less frequently, while the discount rate is often used only in emergency situations.

Question 2

A local government in Iowa issued bonds to the general public to build a community park in the locality. The primary objective of the proposed community park is to enhance the green cover in the locality. Which of the following best describes the bonds issued in this scenario?

Accepted Answer

The answer of A local government in Iowa issued bonds...

Question 3

If the Fed reduced reserve requirements, _____.

Accepted Answer

If the Fed reduced reserve requirements, it would free up more money for banks to lend out. This could potentially stimulate economic growth by increasing the availability of credit for businesses and consumers. However, it could also lead to inflation if the increased borrowing results in too much demand for goods and services.

Question 4

Which of the following agencies regulates both state and federally chartered commercial banks?

Accepted Answer

The answer of Which of the following agencies regulates both...

Question 5

All market participants must keep detailed records of every aspect of every trade. What is this called?

Accepted Answer

The detailed record-keeping of every aspect of every trade is known as an audit trail. This is essential for regulatory compliance and to ensure transparency in market transactions. A paper trail may also refer to the physical documentation of these records, but it is not as comprehensive or organized as an audit trail. Trade recordkeeping and prospectuses are related to specific aspects of market activity, but they do not encompass all the necessary information that is included in an audit trail.

Question 6

Which of the following interest rates does the Federal Reserve actually set?

Accepted Answer

The answer of Which of the following interest rates does...

Question 7

Madelyn Inc., an automobile company, decides to expand its operation abroad by setting up three new manufacturing plants. Since enough funds were not available for this expansion process, Madelyn decides to list its company on its national stock exchange and issue securities for raising additional capital. The market for Madelyn's securities can be described as a _____ market.

Accepted Answer

The market for Madelyn's securities can be described as a primary market, as the company is issuing its securities for the first time to raise additional capital. Secondary market refers to the market where already issued securities are bought and sold among investors. Insider and limit order markets are not relevant in this context.

Question 8

Which of the following actions would have the effect of increasing the supply of money and credit and lowering interest rates?

Accepted Answer

When the Fed buys government securities, it increases the money supply and lowers interest rates because it injects new money into the economy, making credit easier to obtain. This is a common strategy for expanding the money supply and boosting economic growth. Raising the margin requirement (B) makes it more difficult to obtain credit, while raising the reserve requirement (C) reduces the amount of money banks can lend out. Both of these actions would decrease the money supply and raise interest rates. Raising the discount rate (D) is a strategy for controlling inflation and reducing the money supply, which would also raise interest rates.

Question 9

Securities represent obligations on the part of issuers-businesses and governments-to provide purchasers with expected or stated returns on the funds invested or loaned.

Accepted Answer

Securities are indeed financial instruments that represent a form of investment or loan and come with the expectation or promise of a certain level of return or payment from the issuer. This can be in the form of interest payments, dividends, or capital appreciation.

Question 10

Businesses are net savers, while households are net users of funds.

Accepted Answer

The answer of Businesses are net savers, while households are...

Question 11

The Securities and Exchange Commission requires virtually all new public issues of corporate securities to be registered. As part of the registration process for a new security issue, the issuer must prepare a(n) ____.

Accepted Answer

The issuer must prepare a prospectus as part of the registration process for a new security issue. This document provides information about the company and the offering, allowing investors to make informed decisions about whether to invest.

Question 12

The financial system describes the process by which funds flow from savers to users.

Accepted Answer

The financial system includes all institutions, regulations, and markets involved in the creation, exchange, and transfer of financial assets and liabilities, including the process by which funds flow from savers to users.

Question 13

Out of the 20 largest banks in the world, ________ of them are U.S. banks.

Accepted Answer

According to data from S&P Global Market Intelligence, as of 2020, only three of the top 20 largest banks in the world are US banks. These banks are JPMorgan Chase, Bank of America, and Wells Fargo.

Question 14

Jaxon works as a senior accountant at Martinez Inc., a multinational technology giant. As a senior accountant at the company, Jaxon had exclusive access to some of the sensitive financial information of Martinez. It was later found that Jaxon had sold some of the sensitive information to a rival company for an undisclosed amount. Which of the following describes Jaxon's activity?

Accepted Answer

Jaxon's activity is insider trading, which is the illegal trading of a company's stocks or other securities by individuals who have access to non-public information about the company.

Question 15

When the Fed sells government securities, banks have ________ money to lend and economic growth ________.

Accepted Answer

When the Fed sells government securities, it decreases the money supply in the economy, and banks have less money to lend out. As a result, economic growth will slow down.

Question 16

The chairman of the Federal Reserve Board can accelerate economic activity by lowering interest rates. What primary method does the Federal Reserve use to accomplish this?

Accepted Answer

The primary method used by the Federal Reserve to lower interest rates is buying Treasury securities. When the Fed buys Treasury securities from banks, it increases the amount of money banks have available to lend out, which in turn lowers the interest rates that banks charge for loans.

Question 17

A local government agency of Nebraska issued municipal securities for the purpose of building a community hospital. Austin Hunter Corp., a financial services company, decides to purchase these securities from the government and resell them to the investing public. Which of the following describes the process undertaken by Austin Hunter Corp.?

Accepted Answer

Austin Hunter Corp. is engaging in underwriting, which is the process of purchasing securities from the issuer and reselling them to investors. The other options listed are not relevant to this scenario.

Question 18

The ___ establishes and updates rules to ensure that member brokers perform their basic functions honestly and fairly.

Accepted Answer

The NASD (National Association of Securities Dealers) is responsible for establishing and updating rules for member brokers to ensure they operate honestly and fairly. NASDAQ and NYSE are stock exchanges, and while they also have regulations, those are more focused on the functioning of the exchanges themselves. FDIC (Federal Deposit Insurance Corporation) is a government agency that insures bank deposits and promotes stability in the financial system.

Question 19

Operating under severe recessionary conditions, the Federal Reserve System decides to reduce its reserve requirements from the current level of 9 percent to 7.5 percent. Which of the following is likely to happen following the Fed's move?

Accepted Answer

By reducing the reserve requirements, the Fed is allowing commercial banks to have more funds available to lend. This increases the availability of credit, making it easier for individuals and businesses to borrow at lower rates of interest. It does not necessarily have a direct impact on unemployment or economic growth. It could indirectly influence growth by facilitating access to credit for businesses to invest and expand, however, this impact is not as clear cut as the availability of credit.

Question 20

_____ is defined as the use of material nonpublic information about a company to make investment profits.

Accepted Answer

Insider trading is defined as the use of material nonpublic information about a company to make investment profits. Underwriting refers to the process of raising capital through the issuance of securities. Thrift supervision is a regulatory function that oversees the operations of savings and loan associations. Self-regulation refers to the ability of an industry or profession to regulate itself without outside intervention.

Quiz 16: The Financial System