c. one of the most important functions of congress.
d. attempting to keep inflation constant at zero percent.
Ans: A
Difficulty: 01 Easy
Learning Objective: 01-01
AACSB: Reflective Thinking
Blooms: Understand
Topic: The Six Parts of 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. 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.
Ans: C
Difficulty: 01 Easy
Learning Objective: 01-02
AACSB: Reflective Thinking
Blooms: Understand
Topic: The Five Core Principles of Money and Banking
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.
Ans: D
Difficulty: 01 Easy
Learning Objective: 01-01
AACSB: Reflective Thinking
Blooms: Remember
Topic: The Six Parts of the Financial System
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.
Ans: A
Difficulty: 01 Easy
Learning Objective: 01-01
AACSB: Reflective Thinking
Blooms: Remember
Topic: The Six Parts of the Financial System
Short Answer Questions
24. Identify the five core principles of Money and Banking.
Ans: #1) Time has value; #2) Risk requires compensation; #3) Information is the basis for decisions; #4) Markets determine prices and allocate resources; #5) Stability improves welfare. Difficulty: 01 Easy
Learning Objective: 01-02
AACSB: Reflective Thinking
Blooms: Remember
Topic: The Five Core Principles of Money and Banking
25. Identify the six parts of the financial system.
Ans: They are: money, financial markets, financial instruments, financial institutions, government regulatory agencies, and central banks.
Difficulty: 01 Easy
Learning Objective: 01-01
AACSB: Reflective Thinking
Blooms: Remember
Topic: The Six Parts of the Financial System
26. What is the primary function of U.S. regulatory agencies in the U.S. financial system? Ans: To provide wide-ranging financial regulation—rules for the operation of financial institutions and markets—and supervision —oversight through examination and enforcement.
Difficulty: 01 Easy
Learning Objective: 01-01
AACSB: Reflective Thinking
Blooms: Remember
Topic: The Six Parts of the 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.
Ans: Probably not. Auto insurance falls under the principle that risk requires compensation. For most people the additional risk they would face of driving without insurance exceeds the cost of the insurance, so they are better off purchasing auto insurance to reduce their risk.
Difficulty: 02 Medium
Learning Objective: 01-02
AACSB: Analytical Thinking
Blooms: Analyze
Topic: The Five Core Principles of Money and Banking
Essay Questions
28. How do central banks, like the U.S. Federal Reserve, contribute to the welfare of a society? Ans: One of the core principles is that stability improves welfare (primarily by reducing risk). One of the functions of a central bank is to try to get rid of the risk that people cannot get rid of on their own, like the risk that comes from economic fluctuations, volatile price level changes or volatility in economic growth. To whatever degree the central bank can smooth these fluctuations, risk can be reduced and the overall welfare of a society can be improved.
Difficulty: 02 Medium
Learning Objective: 01-02
AACSB: Reflective Thinking
Blooms: Understand
Topic: The Five Core Principles of Money and Banking
29. Which core principle(s) could you use to explain why credit card issuers charge such high rates of interest?
Ans: 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.