Question 1

1-53 Nondepository financial institutions are represented by all of the following EXCEPT

Accepted Answer

Credit unions are depository financial institutions, not nondepository financial institutions.

Question 2

1-42 Firms in industries that have low costs of entry tend to enjoy larger profits than firms in industries with high costs of entry.

Accepted Answer

Firms in industries with high costs of entry tend to have a smaller number of competitors and barriers to entry. This can result in larger profits for these firms. Conversely, industries with low costs of entry tend to have more competition, which often leads to lower profits.

Question 3

1-46 Pension and mutual funds have a lower correlation between the maturities of their assets and liabilities than do commercial banks and thrifts.

Accepted Answer

The answer of 1-46 Pension and mutual funds have a...

Question 4

1-50 Services provided by depository institutions have become relatively less significant as a portion of all services provided by FIs.

Accepted Answer

This statement is true. With the rise of digital banking and other financial service providers, depository institutions (such as banks and credit unions) have seen their services become less significant compared to other financial institutions.

Question 5

1-45 One reason for the increasing proportion of total financial assets controlled by pension funds and investment companies is that these intermediaries exploit the comparative advantages of size and diversification.

Accepted Answer

Pension funds and investment companies can achieve economies of scale and diversification benefits, which enable them to efficiently manage large amounts of assets compared to individual investors. As a result, they have become major players in the financial markets, controlling a significant proportion of total financial assets.

Question 6

1-47 Savers increasingly favor investments that closely imitate diversified investments in the direct securities markets over the transformed financial claims offered by traditional FIs.

Accepted Answer

The statement suggests that savers are more likely to prefer investments that mimic diversified investments in direct securities markets rather than traditional financial institutions.

Question 7

1-51 Economic collapse during the 1930s,the banking system in the U.S> performed directly or indirectly all financial services.Those functions included all of the following EXCEPT

Accepted Answer

Money market funds were not yet established as a financial service during the 1930s.

Question 8

1-57 Which of the following is NOT a major function of financial intermediaries?

Accepted Answer

Financial intermediaries are not responsible for managing the nation's money supply. This is typically the responsibility of central banks or monetary authorities. The other options - brokerage services, asset transformation services, information production, and administration of the payments mechanism - are all major functions of financial intermediaries.

Question 9

1-52 Depository financial institutions include all of the following EXCEPT

Accepted Answer

Investment banks are not depository institutions as they do not take deposits from customers. The other options listed (commercial banks, savings banks, and credit unions) are all depository institutions.

Question 10

1-58 Advantages of depositing funds into a typical bank account instead of directly buying corporate securities include all of the following EXCEPT

Accepted Answer

Depositing funds into a typical bank account may have lower transaction costs compared to directly buying corporate securities, as banks can offer economies of scale and lower fees. The other options listed are advantages of depositing funds into a bank account.

Question 11

1-49 The Internet has allowed individual investors to purchase securities while benefiting from decreased transactions costs.

Accepted Answer

The statement is true. The Internet has made it easier and cheaper for individual investors to purchase securities through online brokers and trading platforms.

Question 12

1-56 In its role as a delegated monitor,an FI

Accepted Answer

As a delegated monitor, an FI performs all of the above roles, including keeping track of loan payments, working with financially distressed borrowers, holding portfolios of loans, and ensuring that loan proceeds are utilized appropriately.

Question 13

1-48 The standardization of many FI products is evidence of the inefficient institutionalization by financial markets and the mechanisms through which these products trade.

Accepted Answer

Standardization of financial products often indicates efficiency in financial markets, as it facilitates easier trading, comparison, and risk management.

Question 14

1-54 Which of the following statements is FALSE?

Accepted Answer

While financial intermediaries may provide loans to entities that have exhausted all other options, the lender of last resort is typically a central bank.

Question 15

1-44 The proportion of financial assets controlled by depository institutions has been increasing in recent years.

Accepted Answer

The proportion of financial assets controlled by depository institutions has generally been decreasing due to the growth of non-bank financial institutions and the diversification of financial services.

Question 16

1-59 Many households place funds with financial institutions because many FI accounts provide

Accepted Answer

All of the choices listed provide reasons why households may choose to place funds with financial institutions. Lower denominations are typically available with FI accounts compared to other securities, and they often offer more flexible maturities than directly negotiated debt contracts. Additionally, FI accounts generally provide better liquidity, making it easier for households to access their funds if needed. Lastly, FI accounts typically involve less price risk if interest rates change, providing a measure of stability and security for households.

Question 17

1-60 The reason FIs can offer highly liquid,low price-risk contracts to savers while investing in relatively illiquid and higher risk assets is

Accepted Answer

Financial institutions (FIs) can offer liquid, low-risk contracts due to diversification (A and B), cost advantages in monitoring (D), and the inability of individual savers to achieve the same level of diversification (C).

Question 18

1-43 In recent years,the proportion of savings and demand deposits have decreased and the proportion of pension funds have increased in the financial assets held by U.S.households.

Accepted Answer

This statement is correct, as reported by the Federal Reserve, the proportion of savings and demand deposits held by U.S. households has shown a gradual decline since the 1980s, while the proportion of pension funds has increased.

Question 19

1-55 Which function of an FI reduces transaction and information costs between a corporation and individual which may encourage a higher rate of savings?

Accepted Answer

Brokerage services provided by financial intermediaries (FIs) help reduce transaction and information costs, making it easier and more efficient for individuals to invest and save, thus potentially encouraging a higher rate of savings.

Question 20

1-41 The passage of legislation to ensure that FIs are meeting the needs of their local communities is an example of entry regulation.

Accepted Answer

Entry regulation refers to the rules and requirements that must be met for a firm to enter a market. Legislation ensuring financial institutions meet community needs is more related to community reinvestment or service obligations, not entry regulation.

Quiz 1: Why Are Financial Institutions Special