Question 1

A ________ is when one party in a financial contract has incentives to act in its own interest rather than in the interests of the other party.

Accepted Answer

A conflict of interest occurs when one party has personal or financial interests that may influence their actions or decisions in a way that is not aligned with the interests of the other party. This can lead to violations of trust, breaches of fiduciary duty, and other ethical concerns. Moral hazard refers to the risk that one party may take excessive risks or engage in reckless behavior because they are protected from the consequences. Risk is a general term that refers to the probability or likelihood of a loss or other negative outcome. Financial panic is a situation in which there is a sudden and widespread loss of confidence in the financial system, leading to widespread selling and a rapid decline in asset prices.

Question 2

The Federal Deposit Insurance Corporation (FDIC)insures each depositor at a commercial bank,savings and loan association,or mutual savings bank up to a loss of ________ per account.

Accepted Answer

The FDIC insures each depositor up to a loss of $250,000 per account, so option B is the correct choice. Option A is incorrect because the limit was increased from $100,000 to $250,000 in 2008. Option C and D are incorrect because they are higher than the current limit.

Question 3

Which of the following is not a regulator of part of the U.S.financial system?

Accepted Answer

All of the options listed are regulators of the U.S. financial system, making option E the correct answer.

Question 4

Which of the following financial intermediaries are depository institutions?

Accepted Answer

A depository institution is a financial intermediary that obtains funds primarily by accepting deposits (deposits are held in a deposit account such as a checking or savings account), and lends those funds to borrowers. Savings and loan associations, commercial banks, and credit unions are all examples of depository institutions. Therefore, the correct answer is D, which includes all of the above institutions.

Question 5

Fire and casualty insurance companies are what type of intermediary?

Accepted Answer

Fire and casualty insurance companies are considered contractual savings institutions because they collect premiums and invest them to pay future claims.

Question 6

At the end of 2012,the value of debt instruments in the U.S.was around ________ trillion,and the value of equities was around ________ trillion.

Accepted Answer

At the end of 2012, the value of debt instruments in the U.S. was approximately $38 trillion, and the value of equities was around $19 trillion.

Question 7

The SEC restricts trading by the largest stockholders (known as ________)in corporations issuing securities.

Accepted Answer

The SEC restricts trading by insiders in corporations issuing securities, as they have access to non-public, material information that could influence stock prices.

Question 8

Asymmetric information can lead to widespread collapse of financial intermediaries,referred to as a

Accepted Answer

Asymmetric information refers to situations where one party in a transaction has more information than the other party. In the context of financial intermediaries, such as banks, if depositors or investors become aware that the financial institutions have hidden problems or risks due to asymmetric information, they may all try to withdraw their money at the same time leading to a financial panic. This is because the financial intermediaries may not have enough liquidity to satisfy all the withdrawal demands at once, leading to a widespread collapse of the financial system. Therefore, B (financial panic) is the best choice.

Question 9

The government regulates financial markets for two main reasons:

Accepted Answer

The government regulates financial markets to ensure the soundness of the financial system and to increase the information available to investors. The soundness of the financial system is important as it prevents issues such as systemic risk, which can have widespread effects on the economy. Additionally, increasing information available to investors can help to reduce information asymmetry, which allows for more efficient allocation of resources in financial markets.

Question 10

U.S.dollars deposited in foreign banks outside the United States or in foreign branches of U.S.are referred to as

Accepted Answer

U.S. dollars deposited in foreign banks outside the United States or in foreign branches of U.S. banks are called Eurodollars. Eurocurrencies refer to any currency deposited in banks outside its country of origin, not just the U.S. dollar. Eurobonds and foreign bonds refer to specific types of international bonds.

Question 11

The major differences between financial regulation in the United States and abroad relate to bank regulation. Specifically,in the past,the U.S.was the only industrialized country to subject banks to restrictions on ________.

Accepted Answer

The United States historically had unique restrictions on the ability of banks to open branches, both within states and across state lines, which was not as common in other industrialized countries.

Question 12

Which of the following are investment intermediaries?

Accepted Answer

The answer of Which of the following are investment intermediaries?
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Question 13

Which of the following are not investment intermediaries?

Accepted Answer

Life insurance companies and pension funds are not investment intermediaries as they do not pool and invest money on behalf of many investors. They mainly provide insurance and retirement benefits respectively. Mutual funds, on the other hand, are investment intermediaries as they pool money from many investors and invest it in a portfolio of stocks, bonds, and other securities.

Question 14

The country whose banks are the most restricted in the range of assets they may hold is

Accepted Answer

The United States has a more restrictive regulatory environment for banks in terms of the range of assets they may hold, compared to Japan, Canada, and Germany. This is largely due to historical banking regulations and reforms aimed at maintaining the stability of the financial system.

Question 15

Foreign currencies that are deposited in banks outside the home country are known as

Accepted Answer

Foreign currencies that are deposited in banks outside the home country are known as Eurocurrencies. Eurodollars refer specifically to deposits denominated in U.S. dollars held in banks outside the United States, while Eurobonds are debt securities that are issued in a currency other than the currency of the country where they are issued.

Question 16

Banks providing depositors with checking accounts that enable them to pay their bills easily is known as

Accepted Answer

Liquidity services refer to the banking services that provide customers with easy access to their funds, allowing them to manage their cash flow efficiently and pay bills without difficulty. Checking accounts are a prime example of this service.

Question 17

Which of the following is a contractual savings institution?

Accepted Answer

A life insurance company is a type of contractual savings institution because individuals typically pay regular premiums in exchange for a contract that promises to pay out a sum of money upon their death or at the end of a specified period. This allows individuals to save for the future and provide financial protection for themselves and their loved ones. Credit unions, savings and loan associations, and mutual funds are not necessarily contractual savings institutions, as their primary purpose may be to provide loans or investments rather than to facilitate savings.

Question 18

Asymmetric information can lead to the widespread collapse of financial intermediaries,referred as financial ________.

Accepted Answer

Asymmetric information occurs when one party to a transaction has more information than the other, often leading to adverse selection or moral hazard. This can cause a panic among investors or depositors, causing them towithdraw their funds from financial intermediaries, which can lead to the widespread collapse of financial intermediaries known as a financial panic. A bubble refers to a situation where the price of an asset is overvalued, often driven by speculation. Asset and transaction are not relevant in this context.

Question 19

The largest depository institution (value of assets)at the end of 2012 was

Accepted Answer

Commercial banks are the largest depository institutions in terms of the value of assets. In 2012, the total assets of commercial banks in the United States amounted to almost $14 trillion, which was significantly higher than the assets held by other depository institutions such as credit unions or pension funds. Mutual funds are not considered depository institutions as they do not hold deposits from the public.

Question 20

The DAX (Germany)and the FTSE 100 (London)are examples of ________.

Accepted Answer

The DAX and FTSE 100 are both well-known stock price indexes that track the performance of the largest companies listed on the Frankfurt and London stock exchanges, respectively. They are not foreign exchanges themselves, nor are they currencies or mutual funds.

Quiz 2: Overview of the Financial System