Question 1

The qualified thrift lender test is used to determine whether an institution is classified as a Savings Institution (Thrift).

Accepted Answer

The qualified thrift lender test is indeed used to determine the classification of an institution as a Savings Institution (Thrift).

Question 2

Time intermediation involves the investment of small amounts by investors into mutual funds that invest in long-term securities such as stocks and bonds.

Accepted Answer

The answer of Time intermediation involves the investment of small...

Question 3

Credit allocation regulations are typically designed to benefit customers as well as the financial institution that must implement the guidelines.

Accepted Answer

The answer of Credit allocation regulations are typically designed to...

Question 4

The goal of credit allocation is the encouragement of FIs to diversity the composition of their assets.

Accepted Answer

The goal of credit allocation is to direct financing to particular sectors or types of borrowers, rather than to encourage diversity in the composition of financial institutions' assets.

Question 5

The liabilities of depository institutions are significant components of the money supply.

Accepted Answer

Depository institutions, such as commercial banks, savings and loans, and credit unions, hold deposits from customers. These deposits are liabilities of the depository institutions, as they owe the depositors their money upon demand. These liabilities are a significant component of the money supply because they represent the amount of money that is available for withdrawal and use by customers. Therefore, an increase or decrease in the liabilities of depository institutions can have an impact on the overall money supply.

Question 6

The Federal Reserve mandates reserve requirements for depository institutions so that the DIs may provide payment services for the U.S. economy.

Accepted Answer

The Federal Reserve mandates reserve requirements for depository institutions primarily to control the amount of money in circulation, not specifically to provide payment services for the U.S. economy. Reserve requirements are a tool used in monetary policy.

Question 7

By diversifying investments, an FI is able to more accurately predict the expected return on its asset portfolio.

Accepted Answer

The answer of By diversifying investments, an FI is able...

Question 8

Regulation of FIs is an attempt to enhance the social welfare benefits and mitigate the social costs of providing FI services.

Accepted Answer

Regulation of FIs is intended to have a positive impact on society by creating a safer and more stable financial system while also protecting consumers from unfair or predatory practices. This ultimately results in greater social welfare benefits while reducing potential social costs associated with financial instability or consumer harm.

Question 9

The adverse effects on the economy that can occur because of major disturbances to the special functions or services provided by financial institutions are negative externalities.

Accepted Answer

Negative externalities refer to the unintended negative consequences for the economy or society caused by the actions of individuals or organizations. Major disturbances to financial institutions can cause adverse effects on the economy, which are considered negative externalities.

Question 10

Commercial banks and finance companies have traditionally served the needs of the residential real estate market.

Accepted Answer

The answer of Commercial banks and finance companies have traditionally...

Question 11

Unfairly excluding some potential financial service consumers from the financial services marketplace is a reason why FIs must absorb net regulatory burden.

Accepted Answer

Unfairly excluding potential financial service consumers goes against the principles of financial inclusion and can lead to economic inequality. To ensure fair access to financial services, FIs must comply with regulations that aim to prevent discrimination and ensure equal opportunity for all consumers. This may make it necessary for FIs to absorb some additional regulatory burden.

Question 12

Research shows that there is a significant reduction in risk achieved by investing in as few as 6 different securities.

Accepted Answer

The answer of Research shows that there is a significant...

Question 13

In an attempt to enhance the net social welfare benefits of the services provided by financial intermediaries, safety and soundness regulation requires a DI to hold a minimum level of cash reserves against deposits.

Accepted Answer

The answer of In an attempt to enhance the net...

Question 14

The part of the money supply produced by depository institutions is referred to outside money because it is produced outside of the government.

Accepted Answer

Depository institutions contribute to the money supply by creating deposits through lending, but they do not produce the entire money supply.

Question 15

Because FIs remove imperfections between households and corporations, households tend to save more than they would if FIs did not exist.

Accepted Answer

FIs provide a mechanism for households to save by offering safe and convenient options for depositing money, investing in securities, and obtaining loans. This increases the amount of savings households are able to accumulate, as well as enables them to invest in productive assets, which can lead to higher returns in the long run.

Question 16

The ability of diversification to eliminate much of the risk from the asset side of the balance sheet of an FI is the result of choosing assets that are less than perfectly positively correlated.

Accepted Answer

Diversification involves investing in assets that have different risk-return characteristics and are less than perfectly positively correlated. By holding a diversified portfolio, the FI can reduce the overall risk of its asset portfolio, thereby making it less vulnerable to unexpected losses from any single asset or market.

Question 17

Depository institutions serve as the primary conduit through which monetary policy actions impact the economy.

Accepted Answer

This is true. Depository institutions, such as commercial banks, credit unions, and savings and loans associations, are the main institutions that receive monetary policy actions from the central bank and can then adjust their own lending and deposit rates accordingly. This impacts the availability and cost of credit for businesses and consumers, which in turn affects economic activity and inflation levels.

Question 18

Because of changes in regulatory barriers, technology, and financial innovation, a single financial service firm may now be able to offer a full set of financial services.

Accepted Answer

With the changes in regulatory barriers, technology, and financial innovation, it is now possible for a single financial service firm to offer a full set of financial services, such as banking, investment, insurance, and more. This is known as financial convergence or the integration of different financial products and services.

Question 19

The ability of savers to transfer wealth between youth and old age and across generations is called maturity intermediation.

Accepted Answer

The ability of savers to transfer wealth between youth and old age and across generations is referred to as time intermediation, not maturity intermediation. Maturity intermediation involves financial institutions accepting deposits with one set of terms (e.g., short-term) and making loans or investments with different terms (e.g., long-term).

Question 20

The efficiency with which FIs provide payment services directly benefits the economy.

Accepted Answer

FIs play a crucial role in facilitating payments between different parties in the economy. By providing efficient payment services, they help reduce transaction costs, increase the speed and security of transactions, and enable businesses and consumers to conduct transactions more easily. This helps improve overall economic efficiency and productivity.

Quiz 1: Why Are Financial Institutions Special