Question 1

If the reserve requirement for banks is fixed at 10% and the Fed wishes to decrease the money supply by $500 billion,what type of open market operation should the Fed undertake?
A) Sell $55.56 billion in government securities
B) Purchase $55.56 billion in government securities
C) Sell $50.00 billion in government securities
D) Purchase $50.00 billion in government securities

Accepted Answer

When the Fed sells government securities, it takes money out of circulation, effectively decreasing the money supply. With a 10% reserve requirement, every dollar the Fed removes from the banking system results in a tenfold decrease in the money supply due to the money multiplier effect. Therefore, to decrease the money supply by $500 billion, the Fed needs to sell $50 billion in government securities. However, the correct calculation to achieve a $500 billion reduction through open market operations, considering the multiplier effect, is not provided in the options directly. The closest option, given the intent to decrease the money supply, is to sell government securities, but the specific amounts listed ($55.56 billion and $50.00 billion) do not directly correspond to the correct multiplier calculation based on the information provided. The correct approach involves selling securities, but a precise calculation to reach exactly $500 billion reduction with a 10% reserve requirement would typically involve selling $50 billion, not the amounts listed. Thus, the principle behind the correct answer is selling securities, but the provided options do not accurately reflect the standard multiplier calculation.

Question 2

Bank panics can cause an economic recession.

Accepted Answer

Bank panics can lead to widespread bank failures, loss of confidence in the financial system, and a decrease in lending and investment activities, which can lead to a reduction in economic activity and a recession.

Question 3

What is the maximum change in total deposits at financial institutions if the Fed sells $120 billion of government securities to dealers,and the reserve requirement applicable to all deposits is 10%?
A) $1.20 trillion decrease
B) $133 billion increase
C) $1.08 trillion increase
D) $1.08 trillion decrease
E) None of the above.

Accepted Answer

When the Fed sells $120 billion of government securities to dealers, the reserves of the financial institutions decrease by $120 billion. Due to the reserve requirement of 10%, the maximum change in total deposits at financial institutions would be 10 times the change in reserves, which is $1.2 trillion. However, since the initial change in reserves is a decrease of $120 billion, the maximum change in total deposits would be a decrease of $1.08 trillion. Therefore, the correct choice is (D).

Question 4

A(n)____ is a depository institution that is owned by its depositors,who are members of a common organization or association,such as an occupation,a religious group,or a community.
A) pension fund
B) commercial bank
C) credit union
D) insurance company
E) mutual fund

Accepted Answer

The description fits that of a credit union, as it is owned by its depositors/members who share a common affiliation, as opposed to a commercial bank or insurance company. A pension fund and mutual fund are investment entities, not depository institutions.

Question 5

A mutual fund that invests primarily in short-term,low risk securities like commercial paper and Treasury bills are called ____ mutual funds.
A) value
B) growth
C) money market
D) indexed

Accepted Answer

Money market mutual funds invest in short-term, low risk securities such as commercial paper, Treasury bills, and certificates of deposit. These funds are considered low risk and are typically used as a temporary place to hold cash or as a short-term investment option.

Question 6

The primary regulator of investment companies,such as mutual funds,is the Securities and Exchange Commission (SEC).

Accepted Answer

The Securities and Exchange Commission (SEC) is the primary regulator of investment companies, including mutual funds.

Question 7

The Federal Reserve has decided it wants to increase interest rates by decreasing the money supply through deposits held at financial intermediaries.All else equal,if the reserve requirement is 10% for all deposits,and the Fed wants to decrease deposits by $100 million,which of the following actions should be taken? Assume no excess reserves exist in the banking system.
A) Buy government securities from dealers totaling $1 billion.
B) Sell government securities to dealers totaling $111 million.
C) Buy government securities from dealers totaling $11.1 million.
D) Sell government securities to dealers totaling $11.1 million.
E) None of the above.

Accepted Answer

If the Fed wants to decrease deposits by $100 million, it needs to decrease the amount of reserves in the banking system by $100 million / 0.1 = $1 billion. This can be achieved by selling government securities to dealers totaling $1 billion, but none of the answer choices represent that option.

However, selling government securities to dealers totaling $11.1 million would decrease the amount of deposits by $111 million ($11.1 million / 0.1), which is close to the target amount. Therefore, answer choice D is the best option available.

Question 8

Which of the following financial institutions is most likely to be the cheapest source of funds for individual borrowers?
A) credit unions
B) savings and loans
C) commercial bank
D) insurance company
E) finance company

Accepted Answer

Credit unions are not-for-profit organizations that are owned by their members, so they typically offer lower interest rates and fees than for-profit banks and finance companies. They are therefore likely to be the cheapest source of funds for individual borrowers.

Question 9

A(n)____ is an investment company that accepts money from savers and then use these funds to buy various types of financial assets.
A) savings and loans
B) insurance company
C) mutual savings bank
D) mutual fund
E) commercial bank

Accepted Answer

A mutual fund is specifically designed to accept money from savers and then use those funds to purchase a diverse range of financial assets on behalf of its investors. Mutual funds enable individuals to invest in a professionally managed, diverse portfolio of financial assets, such as stocks, bonds, and real estate, that might be difficult or risky to invest in individually. Mutual funds are regulated by the Securities and Exchange Commission and are subject to strict investment guidelines to protect investors. The other answer options, such as savings and loans, insurance companies, mutual savings banks, or commercial banks, may accept deposits or invest funds in various financial assets, but they do not solely focus on mutual funds.

Question 10

Which of the following is not a major provision of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010?
A) New organizations to protect and inform consumers will be created
B) greater transparency for trading exotic securities will be required
C) stockholders will be permitted to have a say on corporate governance,including executive compensation,through nonbinding votes
D) Fannie Mae and Freddie Mac will be liquidated

Accepted Answer

While the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 does address the issue of Fannie Mae and Freddie Mac and attempts to reform the housing finance system, it does not specifically call for their liquidation. Therefore, option D is the correct answer, as it is not a major provision of the act. Options A, B, and C, on the other hand, are major provisions that aim to protect consumers by creating new organizations, increasing transparency, and empowering stockholders.

Question 11

Suppose the Federal Reserve increases deposits at financial institutions by $50 billion through its open market operations.If the reserve requirement for all deposits is increased from 8% to 10% at the same time the Fed increases deposits,what is the maximum impact the Fed's actions can have on total deposits?
A) $575 billion increase
B) $450 billion increase
C) $2.5 trillion increase
D) Actually,deposits would decrease,but there is not enough information to determine by what amount.
E) None of the above.

Accepted Answer

If the Fed increases deposits by $50 billion, and the reserve requirement is increased from 8% to 10%, financial institutions would need to hold an additional $2 billion ($50 billion x 0.02) in reserves. As a result, the maximum impact on total deposits would be $450 billion ($50 billion divided by 0.08 minus $2 billion divided by 0.10). This is because financial institutions can create new loans based on their excess reserves and with the new reserve requirement, they would have less excess reserves to create new loans. Therefore, the maximum impact on total deposits would be limited to $450 billion.

Question 12

Goldsmiths became banks when they began to hold fractional reserves and make loans.

Accepted Answer

The answer of Goldsmiths became banks when they began to...

Question 13

Which of the following is not a benefit associated with financial intermediaries?
A) reduced costs
B) fund indivisibility
C) financial flexibility
D) diversification of risk

Accepted Answer

Fund indivisibility is actually a problem that financial intermediaries aim to solve, rather than a benefit they provide. Financial intermediaries can pool together small amounts of funds from savers and invest them in large, productive projects that would otherwise be too costly or risky for individual savers to invest in directly, thereby solving the problem of fund indivisibility. The benefits associated with financial intermediaries include reduced costs, financial flexibility, and diversification of risk.

Question 14

Banks are regulated because they provide several important services to their local and national economies.

Accepted Answer

The answer of Banks are regulated because they provide several...

Question 15

Suppose the Federal Reserve increased deposits by $100 billion,but the reserve requirement on all deposits was 100%.What impact would the change in deposits have on the money supply?
A) The money supply would increase by $100 billion.
B) The money supply would increase by an infinite amount.
C) The money supply would decrease by $100 billion.
D) The money supply would decrease by an infinite amount.
E) The money supply would not change.

Accepted Answer

Since the reserve requirement is 100%, the entire increase in deposits will be held as reserves and will not be available for lending or creating more money. Therefore, there will be no change in the money supply.

Question 16

If the federal reserve purchases $100 million worth of government securities in open market operations,what is the maximum amount of change in the money supply if the reserve requirement is 8% and banks hold no excess reserves?
A) Decrease by $1.25 billion
B) Increase by $1.25 billion
C) Decrease by $1.15 billion
D) Increase by $1.15 billion

Accepted Answer

The maximum change in the money supply equation is:

Change in Money Supply = (1/Required Reserve Ratio) x Change in Reserves

In this case, the change in reserves is $100 million, and the required reserve ratio is 8%, or 0.08 as a decimal. Thus:

Change in Money Supply = (1/0.08) x 100 million
= $1.25 billion

Since the Federal Reserve is purchasing securities, this action increases bank reserves and allows banks to lend out more money, increasing the money supply by the calculated maximum of $1.25 billion. Therefore, the correct answer is (D) Increase by $1.15 billion (note that this is a typo in the options, the correct answer is $1.25 billion).

Question 17

Mutual funds that invest primarily in instruments that generate fairly constant annual cash flows such as bonds and preferred stocks are ____.
A) income funds
B) growth funds
C) value funds
D) money market funds
E) social funds

Accepted Answer

Mutual funds that invest primarily in instruments that generate fairly constant annual cash flows are known as income funds. These funds are attractive to investors who are seeking a regular income stream from their investments. Examples of instruments that income funds might invest in include bonds and preferred stocks.

Question 18

Fractional reserves mean that banks maintain less than 100 percent of customer deposits in liquid assets,or reserves.

Accepted Answer

Fractional reserves is a banking system in which banks hold only a fraction of their customers' deposits as reserves, while lending out the rest of the money. This means that banks do not maintain 100% reserves but only a fraction of it.

Question 19

The Fed banks are supervised by a central governing body called
A) the Board of Governors
B) the Federal Open Market Committee
C) the Chairman of the Fed
D) the Federal Banking Committee

Accepted Answer

The Board of Governors is the central governing body of the Fed and is responsible for supervising the 12 regional reserve banks. The Federal Open Market Committee (FOMC) is responsible for setting monetary policy, but it is composed of members from both the Board of Governors and regional reserve banks. The Chairman of the Fed is the head of the Board of Governors and also the public face of the Fed, but they do not directly supervise the regional reserve banks. The Federal Banking Committee does not exist, so option D is incorrect.

Question 20

With 100 percent reserve banking,little or no lending is possible.

Accepted Answer

In 100 percent reserve banking, banks are required to keep all deposits as reserves and cannot lend out any money. Therefore, little or no lending is possible under this system.

Quiz 4: Financial Intermediaries and the Banking System

If the reserve requirement for banks is fixed at 10% and the Fed wishes to decrease the money supply by $500 billion,what type of open market operation should the Fed undertake?

Bank panics can cause an economic recession.

What is the maximum change in total deposits at financial institutions if the Fed sells $120 billion of government securities to dealers,and the reserve requirement applicable to all deposits is 10%?

A(n) ____ is a depository institution that is owned by its depositors,who are members of a common organization or association,such as an occupation,a religious group,or a community.

A mutual fund that invests primarily in short-term,low risk securities like commercial paper and Treasury bills are called ____ mutual funds.

The primary regulator of investment companies,such as mutual funds,is the Securities and Exchange Commission (SEC).

Which of the following financial institutions is most likely to be the cheapest source of funds for individual borrowers?

A(n) ____ is an investment company that accepts money from savers and then use these funds to buy various types of financial assets.

Which of the following is not a major provision of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010?

Goldsmiths became banks when they began to hold fractional reserves and make loans.

Which of the following is not a benefit associated with financial intermediaries?

Banks are regulated because they provide several important services to their local and national economies.

Suppose the Federal Reserve increased deposits by $100 billion,but the reserve requirement on all deposits was 100%.What impact would the change in deposits have on the money supply?

If the federal reserve purchases $100 million worth of government securities in open market operations,what is the maximum amount of change in the money supply if the reserve requirement is 8% and banks hold no excess reserves?

Mutual funds that invest primarily in instruments that generate fairly constant annual cash flows such as bonds and preferred stocks are ____.

Fractional reserves mean that banks maintain less than 100 percent of customer deposits in liquid assets,or reserves.

The Fed banks are supervised by a central governing body called

With 100 percent reserve banking,little or no lending is possible.