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.

Accepted Answer

U.S. monetary policy is primarily aimed at keeping inflation low and stable and promoting economic growth by adjusting interest rates, money supply, and other monetary tools. This policy is implemented by the Federal Reserve System, which operates independently of Congress.

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.

Accepted Answer

The statement "risk requires compensation" means that people will only take risks if they are rewarded or compensated for doing so. Therefore, the answer is 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.

Accepted Answer

Central banks are intended to act independently from government influences and serve the public interest, not just the government's interests. Therefore, serving the interests of the government at the expense of the public would not improve society's welfare. The other options listed all align with the goals of central banking and can improve economic well-being for society.

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.

Accepted Answer

This is due to the concept of time value of money, where money available at the present time is worth more than the same amount in the future, due to its potential earning capacity. As the individual makes monthly payments with interest over time, the total amount paid will exceed the original purchase price due to the time value of money.

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.

Accepted Answer

The amount of information an individual seeks before making a decision varies directly with the importance of the decision. This means that for important decisions, individuals will seek more information while for less-important decisions, they will seek less information. Therefore, option B is the best choice.

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.

Accepted Answer

Central banks are tasked with controlling inflation by managing the money supply and interest rates. They also work to minimize the size and frequency of business cycle fluctuations, essentially stabilizing the economy. This helps to create a more predictable environment for businesses to operate in and make investment decisions.

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

Accepted Answer

The six parts of the financial system are financial markets, central banks, financial institutions, regulators, payment and settlement systems, and financial infrastructure providers. Credit cards are not a part of the financial system.

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.

Accepted Answer

Money and banking are subject to changes over time, but the five core principles are unlikely to change. Therefore, studying money and banking through these principles offers a stable foundation.

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.

Accepted Answer

The Federal Reserve System, commonly known as the Fed, is responsible for controlling the quantity of money in the US through its monetary policy tools such as setting interest rates, regulating banks, and buying/selling government securities. The Bureau of Printing and Engraving is responsible for producing paper currency and the Department of the Treasury manages government finances, but neither controls the quantity of money in circulation. The President does not directly control the quantity of money, although they can appoint members of the Federal Reserve Board.

Question 10

The New York Stock Exchange is an example of a:
A)financial instrument.
B)financial institution.
C)financial market.
D)bank.

Accepted Answer

The New York Stock Exchange is a financial market where stocks, bonds, and other securities are traded. It is not a financial instrument, institution or 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

Accepted Answer

The Federal Reserve System, also known as the Fed, is the central bank of the United States. It was established in 1913 to supervise and regulate banks and to help stabilize the economy through the use of monetary policy. The Fed is made up of twelve regional Reserve Banks, each of which is responsible for a designated geographic region of the country.

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

Accepted Answer

Stability creates risk is not one of the five core principles of money and banking. The five core principles are: time has value, risk requires compensation, information is the basis for decisions, markets determine prices and allocate resources, and stability improves welfare.

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.

Accepted Answer

Most financial markets in the United States operate under a system with many rules and regulations to ensure a fair market. This is done to protect investors and prevent market manipulation. The regulations are enforced by various agencies, such as the Securities and Exchange Commission (SEC), which oversee the operations of different financial markets.

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.

Accepted Answer

Financial instruments are instruments or tools that allow people to transfer resources and risk between them in the financial system. Examples of financial instruments include stocks, bonds, derivatives, and options. These instruments allow people to invest in assets and share in the returns as well as hedge against potential losses. Therefore, option C is the correct answer.

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.

Accepted Answer

Mutual funds pool money from multiple investors, which allows for the reduction of costs associated with individually researching and purchasing stocks and bonds. This makes investing in a diversified portfolio more accessible and affordable for individual investors who may not have significant financial resources.

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.

Accepted Answer

Financial markets serve as a platform for buying and selling financial instruments, including stocks, bonds, currencies, and derivatives. This lowers the cost and increases the speed of these transactions, making it easier for investors to conduct their business.

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.

Accepted Answer

Financial markets are platforms where financial instruments like stocks, bonds, and other securities are bought and sold. A local coffeehouse where people regularly buy and sell financial instruments, even if informally, acts as a marketplace for these transactions, fitting the definition of a financial market.

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.

Accepted Answer

Stock prices are determined by market transactions based on supply and demand. The value of the company and its performance may influence the demand for the stock, but ultimately it is the buyers and sellers in the market who set the price. The company issuing the stock has some control over the supply of the stock, but not the price at which it trades. The central bank also does not set stock prices.

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.

Accepted Answer

Financial institutions evaluate the creditworthiness of potential borrowers by gathering information regarding their finances. This includes examining their credit score, income, debt-to-income ratio, employment history, and other relevant factors. Based on this information, the financial institution will determine whether the borrower is a high or low risk and set an interest rate accordingly.

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.

Accepted Answer

Investing in financial instruments can be made easier by the use of mutual funds, which allow for smaller sums of money to be invested and offer diversification through the pooling of investments. Investing is not necessarily an activity practiced only by the wealthy and costly transactions are not always involved. The required sum of money to invest varies depending on the investment and individual financial situation.

Quiz 1: An Introduction to Money and the Financial System

U.S.monetary policy is best described as:

The statement "risk requires compensation" implies that people:

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

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:

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

The primary function of central banks is to:

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

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

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

The New York Stock Exchange is an example of a:

The central bank of the United States is:

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

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

Which of the following statements best describes financial instruments?

Mutual funds have:

Which of the following statements best describes financial markets?

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

Stock prices are:

How do financial institutions evaluate the creditworthiness of potential borrowers?

Investing in financial instruments in today's economy: