Chapter 01 – An Introduction to Money and the Financial System
1. Identify which item is not one of the six parts of the financial system.
A. Financial markets
2. The central bank of the United States is:
D. Citibank
Chapter 01 – An Introduction to Money and the Financial System
3. Identify which of the following is not one of the five core principles of money and
banking?
A. Risk requires compensation
4. Investing in financial instruments in today’s economy:
A. Is an activity practiced only by the wealthy
5. Which of the following is an example of a financial market?
D. A central bank used for raising taxes and borrowing on behalf of the government
Chapter 01 – An Introduction to Money and the Financial System
6. The amount of information an individual would seek before making a decision:
D. Depends on how much time it will take to get the information regardless of the decision
7. The statement “risk requires compensation” implies that people:
A. Do not take risk
8. Mutual funds have:
A. Been created for very wealthy individuals with a lot of money to invest
Chapter 01 – An Introduction to Money and the Financial System
9. Banks usually offer higher rates of interest to people willing to keep their funds in the bank
longer because:
A. These depositors are the banks’ best customers
10. Central banks can improve the welfare of a society by doing all of the following except:
D. Helping to reduce the volatility of business cycles
11. In the United States control of the money supply is given to:
D. The Department of the Treasury
Chapter 01 – An Introduction to Money and the Financial System
12. Which of the following statements best describes financial instruments?
A. All financial instruments are a means of payment
13. Which of the following statements best describes financial markets?
D. Financial markets today offer fewer instruments than they did in the past
14. The New York Stock Exchange is an example of:
A. A financial instrument
Chapter 01 – An Introduction to Money and the Financial System
15. 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
the core principle:
A. Risk requires compensation
D. That is totally controlled by the federal government
17. How do financial institutions evaluate the creditworthiness of potential borrowers?
D. They do not evaluate the creditworthiness because they know the borrower will honor
his/her obligation to repay the loan
18. Stock prices are:
A. Set by the company issuing the stock
19. The primary function of central banks is to:
D. Eliminate the need for banks to collect financial information
20. Current U.S. monetary policy is best described as:
D. Attempting to keep inflation constant at zero percent
Chapter 01 – An Introduction to Money and the Financial System
21. 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
Short Answer Questions
22. Identify the five core principles of Money and Banking.
23. Identify the six parts of the financial system.
1-9
24. What is the primary function of U.S. regulatory agencies in the U.S. financial system?
25. 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? Explain.
26. Why do banks usually offer higher rates of interest to savers willing to provide their
savings to the bank for a longer period of time? To which core principle does this relate?
Essay Questions
Chapter 01 – An Introduction to Money and the Financial System
27. How do central banks, like the U.S. Federal Reserve, contribute to the welfare of a
society?
28. Which core principle(s) could you use to explain why credit card issuers charge such high
rates of interest?
Chapter 01 – An Introduction to Money and the Financial System
29. 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?
30. Countries that are economically stable tend to grow faster than those with an unstable
business cycle. Why is this? How can the central bank improve conditions in the unstable
countries?
Chapter 01 – An Introduction to Money and the Financial System
31. A borrower seeking a mortgage today is often presented with the choice between a
mortgage whose interest rate and monthly payment stays fixed for the duration of the loan, or
a mortgage whose interest rate and monthly payment 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?