Question 1

Financial intermediation is best defined as the process by which

Accepted Answer

Financial intermediation is the process by which financial institutions accept savings from savers and make loans to investors, thereby facilitating the flow of funds from savers to investors. This allows savers to earn a return on their savings and investors to secure funding for their projects, leading to economic growth and development.

Question 2

How does the liquidity approach to measuring the money supply differ from the transaction approach?

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Question 3

Which of the following is NOT an example of a financial intermediary?

Accepted Answer

The U.S. Treasury Department is not a financial intermediary as it is a government institution responsible for managing the country's finances and monetary policy. Financial intermediaries are typically private sector entities that facilitate the flow of funds between savers and borrowers.

Question 4

Financial intermediaries are institutions that

Accepted Answer

Financial intermediaries act as middlemen between savers and investors by channeling funds from savers to investors in forms such as loans, mortgages, and securities. This includes institutions such as banks, credit unions, insurance companies, and investment companies. They are not involved in producing money for the government or regulating stock and bond markets or overseeing government institutions.

Question 5

Savings accounts, certificates of deposit, and bonds pay interest and stocks pay dividends. Why does anyone hold on to currency or other forms of money and lose this extra income?

Accepted Answer

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Question 6

Financial intermediaries are important because

Accepted Answer

Financial intermediaries, such as banks and mutual funds, play an important role in the economy by bringing together lenders and borrowers. They do this in a way that can lower transaction costs, making it easier for individuals and businesses to invest or borrow money. This, in turn, can promote economic growth and development. Option B, C, and D are not correct because financial intermediaries do not necessarily provide large funds to the stock market, employ large numbers of people, or increase costs for banks.

Question 7

A checkable and debitable banking account is

Accepted Answer

A checkable and debitable banking account is considered a liability to a commercial bank because the bank owes the account balance to the account holder and must pay it upon demand.

Question 8

Why is money as a medium of exchange important in an economy?

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Question 9

What is money?

Accepted Answer

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Question 10

The financial institutions in our banking system are all in the business of transferring funds from savers to investors. This process is known as

Accepted Answer

Financial intermediation refers to the process of financial institutions, such as banks, receiving funds from savers and then lending/investing those funds to borrowers/investors. This process allows for the transfer of funds from savers to investors, while also providing benefits such as risk diversification and liquidity transformation. The other options - A) the circular flow, B) direct financing, and C) money laundering - do not accurately describe this process.

Question 11

Suppose that a new customer opens a checking account and a saving account, placing $250,000 in each. Later, the bank makes a loan of $500,000 to a business firm. For this bank

Accepted Answer

Assets increase by $500,000 due to the loan given out, which is considered an asset for the bank. Liabilities increase by $500,000 because the checking and saving accounts, where the customer deposited a total of $500,000, are considered liabilities for the bank.

Question 12

A business owner applies for a bank loan to launch a fairly low-risk project. After receiving the loan, she cancels the low-risk project and instead uses the borrowed funds for a high-risk venture. This is an example of

Accepted Answer

The scenario described in the question is an example of moral hazard. Moral hazard is when one party takes undue risks knowing that they will not have to bear the full consequences of those risks, because someone else will bear some of the costs. In this case, the business owner is taking a riskier bet with the loan funds now that they have access to them and do not have to worry about payback on the low-risk project.

Question 13

What is liquidity? Why is money the most liquid of all assets? What is the cost of this liquidity?

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Question 14

For the United States, what is money based on the transactions approach to measuring money?

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Question 15

What are the functions of money?

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Question 16

Financial institutions that receive most of their funds from the savings of the public are

Accepted Answer

Thrift institutions, also known as savings and loan associations or savings banks, receive most of their funds from the savings of the public. These institutions specialize in accepting deposits and making mortgage loans.

Question 17

An item to which a business holds legal claim is called a(n)

Accepted Answer

An asset is something that a business owns and has legal claim to, such as property, equipment, inventory, and accounts receivable. This distinguishes it from a liability, which is a debt or obligation owed by the business, and a loan or time deposit, which are financial instruments representing money borrowed or invested.

Question 18

What is a fiduciary monetary system?

Accepted Answer

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Question 19

Suppose you place your savings in a time deposit at the bank, and that bank lends some of those funds to a business that desires a loan. This is an example of

Accepted Answer

This is an example of indirect finance, where funds are first obtained from savers through financial intermediaries, like banks, before being lent to borrowers who need them to invest in their businesses or meet other financial obligations. This is in contrast to direct finance, where borrowers obtain funds directly from savers without going through a financial intermediary.

Question 20

Financial institutions participate in which of the following activities?

Accepted Answer

Financial institutions participate in all of the above activities, including financial intermediation, indirect finance, and the issuance of loans. Financial intermediation involves connecting borrowers and lenders, while indirect finance involves providing funds to borrowers through other institutions or markets. The issuance of loans involves providing funds directly to borrowers in exchange for future repayment with interest.

Quiz 15: Money, Banking, and Central Banking