Question 1

1-31 The efficiency with which FIs provide payment services directly benefits the economy.

Accepted Answer

When financial institutions (FIs) efficiently provide payment services, it benefits the economy by reducing transaction costs, increasing the speed of transactions, and facilitating economic activity. This can lead to increased productivity and economic growth.

Question 2

1-29 The ability of savers to transfer wealth between youth and old age and across generations is called maturity intermediation.

Accepted Answer

Maturity intermediation refers to the process by which financial institutions transform short-term liabilities into long-term assets, not the transfer of wealth across different life stages or generations.

Question 3

1-35 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

Safety and soundness regulation requires a depository institution (DI) to hold a minimum level of capital, not cash reserves, to ensure stability and protect depositors.

Question 4

1-28 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 answer of 1-28 The Federal Reserve mandates reserve requirements...

Question 5

1-24 The goal of credit allocation is the encouragement of FIs to diversity the composition of their assets.

Accepted Answer

The answer of 1-24 The goal of credit allocation is...

Question 6

1-26 The qualified thrift lender test is utilized to determine whether an institution can serve as an FI.

Accepted Answer

The qualified thrift lender test is used to determine if an institution qualifies as a thrift, not specifically as a financial institution (FI).

Question 7

1-22 Depository institutions serve as the primary conduit through which monetary policy actions impact the economy.

Accepted Answer

Depository institutions, such as banks, play a crucial role in the implementation of monetary policy by adjusting their lending rates and deposit rates in response to changes in the target federal funds rate set by the Federal Reserve. These changes in turn impact the availability of credit and ultimately the level of economic activity.

Question 8

1-21 Research shows that there is a significant reduction in risk achieved by investing in as few as 8 different securities.

Accepted Answer

The answer of 1-21 Research shows that there is a...

Question 9

1-34 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 aimed at promoting stability, safety, and soundness of the financial system by protecting the interests of consumers and ensuring the proper functioning of financial markets. This, in turn, is considered to enhance social welfare benefits and mitigate social costs associated with providing FI services.

Question 10

1-23 The liabilities of depository institutions are significant components of the money supply.

Accepted Answer

Depository institutions such as banks, credit unions, and savings and loan associations issue liabilities such as deposits to their customers. These deposits are part of the money supply as they can be withdrawn and used as a medium of exchange. Therefore, the liabilities of depository institutions are indeed significant components of the money supply.

Question 11

1-32 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 due to disturbances in financial institutions' specialized functions or services are considered negative externalities, meaning they are unintended side effects of economic activity that harm individuals or society as a whole.

Question 12

1-40 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 an example of regulation to protect borrowers, not investors.

Question 13

1-36 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

The statement is true.

Question 14

1-27 Commercial banks and finance companies have traditionally served the needs of the residential real estate market.

Accepted Answer

Commercial banks and finance companies have traditionally served the needs of the commercial and consumer lending markets, while mortgage companies and savings and loan associations have been more focused on the residential real estate market.

Question 15

1-38 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 are established to protect claim-holders in the event of an FI failure or collapse.

Question 16

1-33 Unfairly excluding some potential financial service consumers from the financial services marketplace is a reason why FIs must absorb net regulatory burden.

Accepted Answer

FIs must absorb net regulatory burden to ensure that they are not unfairly excluding some potential financial service consumers from the financial services marketplace. By adhering to regulations and managing risk, FIs can provide greater access to financial services to all consumers, regardless of their background, income level, or credit history. This promotes financial inclusion and overall economic growth.

Question 17

1-39 In most countries,cash is required to be held in reserve against deposits.

Accepted Answer

Most countries have reserve requirements, which means that financial institutions must keep a certain percentage of their deposits in cash or other liquid assets. This is done to ensure that banks have enough funds to meet the demands of their customers and to prevent bank runs.

Question 18

1-30 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 1-30 Time intermediation involves the investment of...

Question 19

1-25 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 1-25 Credit allocation regulations are typically designed...

Question 20

1-37 Small investors in mutual funds are often able to realize larger returns than they would receive from bank deposits.

Accepted Answer

Mutual funds have the potential to offer higher returns than bank deposits because they invest in a diverse range of assets such as stocks, bonds, and other securities. This diversification allows for potentially higher returns, but also comes with higher levels of risk. It's important for investors to carefully consider their risk tolerance and investment goals before choosing to invest in mutual funds.

Quiz 1: Why Are Financial Institutions Special