Introduction to Financial Institutions: Reducing Liquidity and Price Risk Quiz
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Questions and Answers

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?

    <p>Reduction in liquidity and price risk</p> Signup and view all the answers

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

    <p>By purchasing primary securities from corporations</p> Signup and view all the answers

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

    <p>Higher marketability</p> Signup and view all the answers

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

    <p>Outside money</p> Signup and view all the answers

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

    <p>Inside money</p> Signup and view all the answers

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

    <p>Transmitting monetary policy</p> Signup and view all the answers

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

    <p>Credit allocation regulation</p> 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?

    <p>Qualified Thrift Lender Test (QTL)</p> Signup and view all the answers

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

    <p>Credit allocation regulations</p> Signup and view all the answers

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

    <p>By offering demand deposits with a guaranteed interest rate</p> Signup and view all the answers

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

    <p>Diversification of investment portfolios</p> Signup and view all the answers

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

    <p>By facing less price risk than demand deposits</p> Signup and view all the answers

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

    <p>Increased liquidity of assets</p> 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?

    <p>Reduced transaction costs through economies of scale</p> Signup and view all the answers

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

    <p>Facilitating payment transactions</p> Signup and view all the answers

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