Question 1

How do financial institutions evaluate the creditworthiness of potential borrowers?

Accepted Answer

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 B

Question 2

Which of the following statements best describes financial instruments?

Accepted Answer

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 C

Question 3

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

Accepted Answer

You could explain the high rates of interest from three principles.First, risk requires compensation, and certainly the credit card issuers are taking a risk when they let people use the cards.There is a risk that some users may not repay the credit card company.Second, you can also justify it from the principle that time has value.The borrowers are using the issuer's funds, and the issuer needs to be compensated for letting the borrower use these funds.Some borrowers do not repay for considerable periods of time.Third, you could also invoke the principle that people use information in making their decisions.Credit card issuers need to acquire information on each applicant before a card is issued and this process is costly.Unfortunately, the applicants who are denied do not get the card, but those who are approved must help cover the information costs.

Question 4

Mutual funds have:

Accepted Answer

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

Question 5

Most financial markets in the United States operate under a system:

Accepted Answer

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

Question 6

Stock prices are:

Accepted Answer

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

Question 7

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?

Accepted Answer

The answer of Countries that are economically stable tend to...

Question 8

Current U.S.monetary policy is best described as:

Accepted Answer

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

Question 9

Which of the following statements best describes financial markets?

Accepted Answer

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

Question 10

Banks usually offer higher rates of interest to people willing to keep their funds in the bank longer because:

Accepted Answer

A)  These depositors are the banks' best customers
B)  Banks really do not want a lot of people coming into the bank
C)  Bankers realize time has value and people need to be compensated if they are to keep their money in the bank longer
D)  These depositors are very wealthy and so have other options about what to do with their funds

Question 11

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?

Accepted Answer

The answer of A borrower seeking a mortgage today is...

Question 12

In the United States control of the money supply is given to:

Accepted Answer

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

Question 13

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:

Accepted Answer

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

Question 14

The primary function of central banks is to:

Accepted Answer

A)  Increase risk and volatility to increase compensation
B)  Control inflation and help reduce business cycle fluctuations
C)  Increase the uncertainty that firms face in making investment decisions
D)  Eliminate the need for banks to collect financial information

Question 15

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

Accepted Answer

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

Question 16

Identify which of the following is not one of the five core principles of money and banking?

Accepted Answer

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

Question 17

Identify the six parts of the financial system.

Accepted Answer

The answer of Identify the six parts of the financial...

Question 18

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?

Accepted Answer

The answer of Why do banks usually offer higher rates...

Question 19

What is the primary function of U.S.regulatory agencies in the U.S.financial system?

Accepted Answer

The answer of What is the primary function of U.S.regulatory...

Question 20

Central banks can improve the welfare of a society by doing all of the following except:

Accepted Answer

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

Exam 1: An Introduction to Money and the Financial System