Question 1

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 2

Small investors in mutual funds are often able to realize larger returns than they would receive from bank deposits.

Accepted Answer

Mutual funds are investments that pool money from multiple investors to invest in a diversified portfolio of stocks, bonds, and other securities. Unlike bank deposits, which typically offer lower returns and are subject to inflation, mutual funds can provide higher returns over the long term. Small investors in mutual funds also have access to professional portfolio management and the ability to diversify their investments, which can help mitigate risk.

Question 3

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 4

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

Regulatory barriers have been lowered, technology has allowed for more efficient and integrated services, and financial innovation has allowed for the development of new products and services, making it possible for a single financial service firm to offer a full range of financial services to its clients.

Question 5

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 6

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 7

The passage of legislation to prevent discrimination in lending is an example of regulation to protect investors.

Accepted Answer

The passage of legislation to prevent discrimination in lending is primarily aimed at protecting consumers or borrowers, not investors. This type of regulation ensures fair access to credit without bias based on race, gender, or other discriminatory factors.

Question 8

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

Accepted Answer

Efficient payment services provided by FIs contribute to smooth and timely transactions, which in turn helps businesses and individuals to save time and money. This boosts economic growth and development.

Question 9

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

Accepted Answer

Unfair exclusion of potential financial service consumers goes against the principles of fair access to financial products and services for all, which is why FIs have to bear the regulatory burden to ensure compliance with laws and regulations that prevent discrimination and promote financial inclusion.

Question 10

Research shows that there is a significant reduction in risk achieved by investing in as few as 8 different securities.

Accepted Answer

Research generally suggests that diversification benefits are more pronounced with a larger number of securities, typically around 20-30, to significantly reduce unsystematic risk.

Question 11

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

Adverse effects on the economy caused by disturbances to financial institutions' functions can cause negative externalities, as they affect other economic agents who are not directly involved in the financial system.

Question 12

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

Accepted Answer

Depository institutions, such as banks, have liabilities in the form of deposits made by their customers. These deposits are a significant component of the money supply because they can be withdrawn as cash or used to make payments using various forms of electronic transfers.

Question 13

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

Accepted Answer

This is true. Depository institutions, such as banks, credit unions, and savings and loans associations, are the main organizations through which monetary policy actions, such as changes in interest rates or reserve requirements, are passed on to the broader economy through lending and borrowing activities.

Question 14

The purpose of guaranty funds in safety and soundness regulation is to protect claim-holders when an FI collapses or fails.

Accepted Answer

Guaranty funds, also known as deposit insurance, are established by regulatory authorities to protect claim-holders (such as depositors, policyholders, or investors) when a financial institution (FI) fails or collapses, ensuring they can recover at least a portion of their losses. This helps to maintain public confidence in the safety and soundness of the financial system.

Question 15

The qualified thrift lender test is utilized to determine whether an institution can serve as an FI.

Accepted Answer

The qualified thrift lender test was utilized in the past to determine whether a savings and loan institution could serve as a financial institution. However, the test is no longer used as a criteria for determining whether an institution can serve as an FI.

Question 16

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 aims to promote financial stability, protect consumers, and prevent or mitigate financial crises, thus leading to broader social welfare benefits. However, it may also impose compliance costs on FIs, restrict innovation and competition, and potentially lead to unintended consequences. The overall goal is to balance these trade-offs and ensure that the benefits outweigh the costs.

Question 17

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 18

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 19

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 20

In most countries, cash is required to be held in reserve against deposits.

Accepted Answer

In most countries, banks are required by law to hold a percentage of their deposits in reserve as cash or in accounts with central banks. This is done to ensure the stability of the banking system and to protect depositors' funds.

Quiz 1: Why Are Financial Institutions Special