Introduction to Financial Institutions: Reducing Liquidity and Price Risk Quiz

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What is the primary role of Financial Institutions (FIs) as asset transformers?

Issuing primary securities to corporations

Purchasing secondary securities from households

Purchasing primary securities from corporations (correct)

Issuing secondary securities to households

How do Financial Institutions (FIs) reduce information costs for investors?

By avoiding interactions with borrowing firms

By increasing agency costs for savers

By effectively managing agency costs (correct)

By exposing principals to agent actions

In what way do Financial Institutions (FIs) encourage a higher rate of savings?

By offering financial claims more attractive to household savers (correct)

By issuing corporate equity directly

By purchasing primary securities from households

By avoiding the issuance of insurance policies

What benefit do household savers gain from purchasing secondary securities from Financial Institutions?

Reduction in liquidity and price risk Signup and view all the answers

How do Financial Institutions (FIs) reduce transaction costs through economies of scale?

By purchasing primary securities from corporations Signup and view all the answers

What distinguishes secondary securities sold by Financial Institutions to households from primary securities issued by corporations?

Higher marketability Signup and view all the answers

What type of money does the central bank directly control in the economy?

Outside money Signup and view all the answers

Which type of money supply is predominantly controlled by deposits within the economy?

Inside money Signup and view all the answers

What is the primary purpose of reserve requirements in facilitating monetary policy transmission?

Transmitting monetary policy Signup and view all the answers

Which regulation aims to support socially important sectors like housing and farming?

Credit allocation regulation Signup and view all the answers

In the US, what test requires a significant percentage of assets to be held in residential mortgages or approved loans?

Qualified Thrift Lender Test (QTL) Signup and view all the answers

Which type of regulations set limits on loan interest rates, aiming to prevent excessive charges?

Credit allocation regulations Signup and view all the answers

How do banks and thrifts reduce liquidity and price risk for small investors?

By offering demand deposits with a guaranteed interest rate Signup and view all the answers

What allows financial institutions to reduce information costs through economies of scale?

Diversification of investment portfolios Signup and view all the answers

In what way do FIs reduce liquidity and price risk with their secondary claims?

By facing less price risk than demand deposits Signup and view all the answers

What is one of the benefits of diversifying investment portfolios for financial institutions?

Increased liquidity of assets Signup and view all the answers

Which factor contributes to financial institutions being able to allocate credit to areas of special need like home mortgages?

Reduced transaction costs through economies of scale Signup and view all the answers

What role do payment services like FedWire and CHIPS play in the special roles of financial institutions?

Facilitating payment transactions Signup and view all the answers