Complete Test Bank Ch1 An Introduction To Money And The

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1) How do central banks, like the U.S. Federal Reserve, contribute to the welfare of a society?

2) Which core principle(s) could you use to explain why credit card issuers charge such high rates of interest?

3) Suppose that IBM considers expanding its operations. The expansion will require $400 million for two new factories which the corporation plans to raise by selling stock and bonds. Which of the core principles will come into play as investors decide whether or not to buy the stock and the bonds?

4) A borrower seeking a mortgage today is often presented with the choice between a mortgage with aninterest rate and monthly payment that stays fixed for the duration of the loan, or a mortgage with aninterest rate and monthly payment that can change as other interest rates change. Typically the interest rate on the fixed-rate mortgage is higher. Having learned the five core principles, does this make sense?

5) Why don’t large financial markets arise by themselves?

6) Identify which item isnot one of the six parts of the financial system.

A) financial markets
B) central banks
C) credit cards
D) financial institutions

7) The current mission of which one of the six parts of the financial system involves serving the public at large?

A) financial markets
B) central banks
C) credit cards
D) financial institutions

8) Which one of the following is the central bank of the United States?

A) the Bank of America
B) the Federal Reserve System
C) the U.S. Treasury
D) Citibank

9) An important way that central banks have changed over time is to provide more

A) risk.
B) money.
C) transparency.
D) regional reserve banks.

10) More of which one of the following is an important key to the financial system?

A) risk
B) information
C) asymmetric trading
D) money

11) Banks and insurance companies are examples of

A) central banks.
B) regulatory agencies.
C) financial institutions.
D) financial instruments.

12) Which part of the financial system is used to transfer risk to those who are best equipped to bear it?

A) central banks
B) regulatory agencies
C) financial institutions
D) financial instruments

13) Which part of the financial system provides oversight through enforcement of rules?

A) central banks
B) regulatory agencies
C) financial institutions
D) financial instruments

14) Which of the following isnot one of the five core principles of money and banking?

A) Risk requires compensation.
B) Time has value.
C) Information is the basis for decisions.
D) Stability creates risk.

15) Investing in financial instruments in today's economy:

A) is an activity practiced only by the wealthy.
B) involves costly transactions.
C) requires a sum of money larger than $100,000 to invest.
D) is made easier by the use of mutual funds.

16) Which of the following is an example of a financial market?

A) a local coffeehouse where people regularly buy and sell financial instruments.
B) a bank that only accepts deposits and issues loans.
C) an electronic network used for buying and selling textbooks.
D) a central bank used for raising taxes and borrowing on behalf of the government.

17) Why would a new home buyer be required to purchase fire insurance before a broker transfers funds to the seller?

A) Risk requires compensation.
B) This provides information to the lender increasing the likelihood that the loan will be repaid.
C) Well-developed financial markets promote economic growth.
D) Increasing the use of banking services provides stability in the macroeconomy.

18) The statement "risk requires compensation" implies that people

A) do not take risk.
B) only accept risk when they absolutely have to.
C) will only accept risk when they are rewarded for doing so.
D) avoid risk at all cost.

19) Mutual funds have

A) been created for very wealthy individuals with a lot of money to invest.
B) increased the risks associated with constructing a portfolio.
C) reduced the costs associated with gathering information on stocks and bonds.
D) increased the transactions costs associated with participating in financial markets.

20) Which one of the following types of action by a central bank could improve the welfare of a society?

A) serving the interests of government rather than the public at large
B) promoting regulations to slow economic growth
C) controlling prices to allocate resources in support of government objectives
D) helping to reduce the volatility of business cycles

21) In the United States, control of the quantity of money is given to the

A) president.
B) Federal Reserve System.
C) Bureau of Printing and Engraving.
D) Department of the Treasury.

22) Financial instruments can transfer

A) neither resources nor risk between people.
B) resources between people but not risk.
C) both resources and risk between people.
D) risk but not resources between people.

23) Financial markets

A) lower the cost and increase the speed of buying and selling financial instruments.
B) increase the speed of buying and selling, but they also increase the cost since people are earning fees for these transactions.
C) are a good example of unregulated markets.
D) today offer fewer instruments than they did in the past.

24) Which one of the following parts of the financial system is responsible for making sure that the elements of the system operate in a safe and reliable manner?

A) financial markets
B) money
C) financial institutions
D) regulatory agencies

25) The New York Stock Exchange is an example of a

A) financial instrument.
B) financial institution.
C) financial market.
D) bank.

26) When an individual obtains a car loan and makes all of the regular monthly payments, the sum of the payments made will exceed the purchase price of the car. This is due primarily to which core principle?

A) Risk requires compensation.
B) Information is the basis for decisions.
C) Markets determine prices and allocate resources.
D) Time has value.

27) Car insurance shelters drivers from the possibility of losing all their wealth in the event that they cause an accident in which someone is seriously injured. This best illustrates which core principle?

A) Risk requires compensation.
B) Information is the basis for decisions.
C) Markets determine prices and allocate resources.
D) Time has value.

28) A central bank’s pursuit of policies that control inflation and reduce business cycle fluctuations best illustrates which core principle?

A) Risk requires compensation.
B) Stability improves welfare.
C) Markets determine prices and allocate resources.
D) Time has value.

29) Which one of the following provides an economy with a foundation for economic efficiency and economic growth?

A) high levels of risk in investing
B) healthy and constantly evolving financial system
C) government that regulates output markets
D) tax structure that redistributes income

30) Most financial markets in the United States operate under a system

A) without any formal rules or regulations.
B) with many rules and regulations to ensure a fair market.
C) where the rules and regulations depend on the state in which the financial market is located.
D) that is totally controlled by the federal government.

31) How do financial institutions evaluate the creditworthiness of potential borrowers?

A) They offer high interest rates because only the best borrowers will be able to afford them.
B) They gather information regarding the borrowers' finances.
C) They do not evaluate creditworthiness because everyone is treated the same.
D) They do not evaluate the creditworthiness because they know the borrower will honor his/her obligation to repay the loan.

32) Stock prices are

A) set by the company issuing the stock.
B) set by the central bank.
C) determined by market transactions.
D) unrelated to the value of the company issuing the stock.

33) The primary function of central banks is to

A) increase risk and volatility to increase compensation.
B) control inflation, as well as help reduce the size and frequency of business cycle fluctuations.
C) increase the uncertainty that firms face in making investment decisions.
D) eliminate the need for banks to collect financial information.

34) The goal of U.S. monetary policy is best described as

A) keeping inflation low and stable and growth high and stable.
B) determining the denominations of a country's currency.
C) one of the most important functions of Congress.
D) attempting to keep inflation constant at 0 percent.

35) Studying money and banking through five core principles is helpful because

A) studies have shown students have a difficult time remembering more than five topics.
B) everything in economics can be reduced to five core principles.
C) money and banking can undergo drastic changes overtime, but the five principles do not.
D) these five principles are understood by everyone.

36) The large regulatory change in U.S. financial markets that followed the Great Recession is known as

A) Basel III.
B) the Glass-Steagall Act.
C) the Gramm-Leach-Bliley Act.
D) the Dodd-Frank Act.

37) In 2010, regulators of many nations agreed on a major update of internationally active banks known as

A) Basel III.
B) the Glass-Steagall Act.
C) the Gramm-Leach-Bliley Act.
D) the Dodd-Frank Act.

38) Identify the five core principles of Money and Banking.

39) Identify the six parts of the financial system.

40) How do the primary functions of financial institutions and regulatory agencies differ in the U.S. financial system?

41) If the U.S. Supreme Court ruled that states could no longer require people to have auto insurance, do you think most people would cancel their policies? Use one of the five core principles to explain your answer.