Chapter 01
An Introduction to Money and the Financial System
Multiple-Choice Questions
1. Identify which item is not one of the six parts of the financial system.
a. Financial markets
b. Central banks
c. Credit cards
d. Financial institutions
2. Identify which item is not one of the six parts of the financial system.
a. Financial instruments
b. Central banks
c. Credit cards
d. Financial institutions
3. The central bank of the United States is:
a. the Bank of America
b. the Federal Reserve System
c. the U.S. Treasury
d. Citibank
4. Identify which of the following is not 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
5. Investing in financial instruments in today‘s economy:
a. is an activity practiced only by the wealthy.
b. involves costly transactions.
c. requires a relatively large sum of money to invest (more than $100,000).
d. is made easier by the use of mutual funds.
6. 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.
7. The amount of information an individual would seek before making a decision:
a. is about the same across all individuals.
b. varies directly with the importance of the decision.
c. is the same across all decisions but varies across individuals.
d. depends on how much time it will take to get the information regardless of the decision.
8. 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.
9. 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.
10. Central banks can improve the welfare of a society by doing all of the following except:
a. serving the interests of government rather than the public at large.
b. helping to promote economic growth.
c. focusing on keeping the overall level of prices stable.
d. helping to reduce the volatility of business cycles.
11. 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.
12. Which of the following statements best describes financial instruments?
a. All financial instruments are a means of payment.
b. Financial instruments can transfer resources between people but not risk.
c. Financial instruments can transfer resources and risk between people.
d. Financial instruments can transfer risk but not resources between people.
13. Which of the following statements best describes financial markets?
a. Financial markets lower the cost and increase the speed of buying and selling financial
instruments.
b. Financial markets increase the speed of buying and selling, but they also increase the cost
since people are earning fees for these transactions.
c. Financial markets are a good example of unregulated 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.
b. financial institution.
c. financial market.
d. bank.
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.
b. information is the basis for decisions.
c. markets determine prices and allocate resources.
d. time has value.
16. Most financial markets in the United States operate under a system:
a. without any formal rules or regulation.
b. with many rules and regulation to ensure a fair market.
c. where it depends on which state where the financial market is located since some states do
not have any regulations.
d. that is totally controlled by the federal government.
17. 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.
18. 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.
19. 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.
20. U.S. monetary policy is best described as:
a. aimed at 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 zero percent.
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.
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.
22. The largest regulatory change in U.S. financial markets since 1930 is known as:
a. Basel III.
b. the Fred-Bob Act.
c. the Gramm-Leach-Bliley Act.
d. the Dodd-Frank Act.
23. In 2010, regulators of many nations agreed on a major update of internationally active
banks known as:
a. Basel III.
b. the Fred-Bob Act.
c. the Gramm-Leach-Bliley Act.
d. the Dodd-Frank Act.
Short Answer Questions
24. Identify the five core principles of Money and Banking.
25. Identify the six parts of the financial system.
26. What is the primary function of U.S. regulatory agencies in the U.S. financial system?
27. 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.
Essay Questions
28. How do central banks, like the U.S. Federal Reserve, contribute to the welfare of a society?
29. Which core principle(s) could you use to explain why credit card issuers charge such
high rates of interest?
30. 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?
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,
doe
s
thi
s make sense?
