Question 1

A(n) ____ is a depository institution that is owned by its depositors, who are members of a common organization or association, such as an occupation, a religious group, or a community.

Accepted Answer

A credit union is a type of depository institution that is owned by its members, who are typically part of a common organization or association. Unlike commercial banks, credit unions are not-for-profit organizations that prioritize providing lower fees and interest rates for their members over generating profits for shareholders.

Question 2

Bank panics can cause an economic recession.

Accepted Answer

Bank panics can lead to a loss of confidence in the banking system, resulting in a run on banks and a decrease in lending. This can lead to a reduction in economic activity and cause a recession.

Question 3

The Fed banks are supervised by a central governing body called

Accepted Answer

The Board of Governors is the central governing body of the Federal Reserve System, which supervises and regulates the Fed banks. The Federal Open Market Committee and the Chairman of the Fed are part of the Federal Reserve System but are not specifically responsible for supervising the Fed banks. The Federal Banking Committee does not exist.

Question 4

Fractional reserves mean that banks maintain less than 100 percent of customer deposits in liquid assets, or reserves.

Accepted Answer

Fractional reserves allow banks to hold only a portion of customer deposits as reserves, while the rest can be used for lending and other investments.

Question 5

A(n) ____ is an investment company that accepts money from savers and then use these funds to buy various types of financial assets.

Accepted Answer

The description matches that of a mutual fund. Mutual funds pool money from multiple investors and use those funds to buy a diversified portfolio of investments such as stocks, bonds, and other securities, all of which are managed by a professional investment expert.

Question 6

The primary regulator of investment companies, such as mutual funds, is the Securities and Exchange Commission (SEC).

Accepted Answer

The Securities and Exchange Commission (SEC) is the primary regulator of investment companies, including mutual funds, in the United States.

Question 7

If the federal reserve purchases $100 million worth of government securities in open market operations, what is the maximum amount of change in the money supply if the reserve requirement is 8% and banks hold no excess reserves?

Accepted Answer

When the Federal Reserve purchases $100 million worth of government securities, it pays for them with newly created reserves. Since banks are required to hold 8% of their deposits as reserves, the initial impact on the money supply is a potential increase of $100 million * 1/0.08 = $1.25 billion (the formula is: potential change in the money supply = initial injection of reserves / reserve requirement). Since banks hold no excess reserves, the entire $1.25 billion increase in reserves can be lent out, leading to a potential increase in the money supply of the same amount. Therefore, the maximum amount of change in the money supply is an increase of $1.25 billion. The correct answer is D.

Question 8

Banks are regulated because they provide several important services to their local and national economies.

Accepted Answer

The answer of Banks are regulated because they provide several...

Question 9

The Federal Reserve has decided it wants to increase interest rates by decreasing the money supply through deposits held at financial intermediaries.All else equal, if the reserve requirement is 10% for all deposits, and the Fed wants to decrease deposits by $100 million, which of the following actions should be taken? Assume no excess reserves exist in the banking system.

Accepted Answer

To decrease deposits by $100 million, the Fed needs to remove $111.1 million in reserves from the banking system. This is calculated by dividing $100 million by the reserve requirement of 10%. Since there are no excess reserves in the banking system, the Fed needs to sell government securities to dealers to decrease the money supply. Of the given choices, selling government securities to dealers totaling $11.1 million is the closest option to achieving this goal. The correct answer is D.

Question 10

Goldsmiths became banks when they began to hold fractional reserves and make loans.

Accepted Answer

The answer of Goldsmiths became banks when they began to...

Question 11

Which of the following is not a benefit associated with financial intermediaries?

Accepted Answer

Fund indivisibility is actually a problem that financial intermediaries help to solve by creating smaller denominations of investment for individual investors. Therefore, it is not a benefit associated with financial intermediaries. Reduced costs, financial flexibility, and diversification of risk are all benefits of using financial intermediaries.

Question 12

What is the maximum change in total deposits at financial institutions if the Fed sells $120 billion of government securities to dealers, and the reserve requirement applicable to all deposits is 10%?

Accepted Answer

When the Fed sells $120 billion worth of government securities, reserves in the banking system decrease by $120 billion * 1 = $120 billion.
 
Using the money multiplier formula, we can calculate the maximum change in total deposits:

Change in Deposits = (1 / Reserve Requirement) x Change in Reserves

Change in Deposits = (1 / 0.10) x (-$120 billion) = -$1.2 trillion

Since the change in deposits is negative, it means that total deposits at financial institutions will decrease by $1.2 trillion.

Therefore, the correct answer is D) $1.08 trillion decrease, which is the closest option to -$1.2 trillion.

Question 13

A mutual fund that invests primarily in short-term, low risk securities like commercial paper and Treasury bills are called ____ mutual funds.

Accepted Answer

Money market mutual funds invest in short-term, low risk securities like commercial paper and Treasury bills. Value, growth, and indexed mutual funds do not necessarily invest in these types of securities.

Question 14

Suppose the Federal Reserve increases deposits at financial institutions by $50 billion through its open market operations.If the reserve requirement for all deposits is increased from 8% to 10% at the same time the Fed increases deposits, what is the maximum impact the Fed's actions can have on total deposits?

Accepted Answer

If the Fed increases deposits by $50 billion, and the reserve requirement for all deposits is increased from 8% to 10%, then the maximum increase in total deposits would be:

50 billion / (1 - 0.10) = $55.56 billion

This represents an increase in total deposits of $5.56 billion above the original $50 billion increase from the Fed, for a total increase of $55.56 billion. Therefore, the answer is B.

Question 15

Which of the following is not a major provision of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010?

Accepted Answer

Fannie Mae and Freddie Mac are not mentioned in the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. They fall under a separate legislation, the Housing and Economic Recovery Act of 2008.

Question 16

Suppose the Federal Reserve increased deposits by $100 billion, but the reserve requirement on all deposits was 100%.What impact would the change in deposits have on the money supply?

Accepted Answer

The reserve requirement on all deposits being 100% means that banks would have to hold all of the $100 billion increase in deposits as reserves and would not be able to lend out any additional money. Therefore, the money supply would not change.

Question 17

With 100 percent reserve banking, little or no lending is possible.

Accepted Answer

In 100 percent reserve banking, banks are required to keep all deposits as reserves and cannot lend out any money. Therefore, little or no lending is possible under this system.

Question 18

If the reserve requirement for banks is fixed at 10% and the Fed wishes to decrease the money supply by $500 billion, what type of open market operation should the Fed undertake?

Accepted Answer

When the Fed sells government securities, it takes money out of circulation, effectively decreasing the money supply. With a 10% reserve requirement, every dollar the Fed removes from the banking system results in a tenfold decrease in the money supply due to the money multiplier effect. Therefore, to decrease the money supply by $500 billion, the Fed needs to sell $50 billion in government securities. However, the correct calculation to achieve a $500 billion reduction through open market operations, considering the multiplier effect, is not provided in the options directly. The closest option, given the intent to decrease the money supply, is to sell government securities, but the specific amounts listed ($55.56 billion and $50.00 billion) do not directly correspond to the correct multiplier calculation based on the information provided. The correct approach involves selling securities, but a precise calculation to reach exactly $500 billion reduction with a 10% reserve requirement would typically involve selling $50 billion, not the amounts listed. Thus, the principle behind the correct answer is selling securities, but the provided options do not accurately reflect the standard multiplier calculation.

Question 19

Which of the following financial institutions is most likely to be the cheapest source of funds for individual borrowers?

Accepted Answer

Credit unions are member-owned and not-for-profit organizations, which typically offer lower interest rates and fees compared to for-profit institutions like commercial banks or finance companies. This can make them the cheapest source of funds for individual borrowers.

Question 20

Mutual funds that invest primarily in instruments that generate fairly constant annual cash flows such as bonds and preferred stocks are ____.

Accepted Answer

Income funds invest in instruments such as bonds and preferred stocks that provide steady cash flows, making them ideal for investors seeking regular income. The other options, such as growth funds and value funds, may focus more on capital appreciation than consistent income. Money market funds, on the other hand, invest in short-term, low-risk securities such as Treasury bills and certificates of deposit, and may have a lower yield than income funds. Social funds, also known as socially responsible funds, invest in companies that meet certain ethical or moral criteria, and may not necessarily prioritize income generation.

Quiz 4: Financial Intermediaries and the Banking System