Financial Institutions – Quiz 1, 2026 – Study Material and Practice Questions
Money and financial assets - ANS✔✔ • Money is anything that is generally acceptable in
exchange for goods and serves, and is clearly an asset.
• Financial assets are intangible assets whose value is derived from a contractual claim. In
addition to money, financial assets also include stocks and bonds.
• Bank accounts such as checking accounts and savings accounts are also financial assets
because they are contractual claims on funds on deposit with the depository institution, or
bank.
Financial markets - ANS✔✔ • Financial markets essentially bring savers together with
borrowers.
• Savers and borrowers initially meet in the primary market, where financial instruments or
financial assets are initially sold. However, reselling and buying takes place in the secondary
market.
• The prices (or interest rates) determined in these financial markets turn out to be extremely
important.
• Another important financial market is the market for risk. This is the insurance market.
• Financial markets are so vital to the overall economy that oversight and regulation is
necessary. Central banks are often one of the main regulators, and monetary policy uses
financial markets to help guide the overall economy.
,Central banks - ANS✔✔ • While the Federal Reserve is the central bank and monetary authority
of the United States, it is, naturally, not the only central bank in the global economy.
• Other critical central banks around the world include the Bank of Japan, the Bank of England,
and the Bank of Canada.
• We live in an interconnected global economy, thus it important to understand how the major
central banks around the world function and the challenges they face.
Banking system and financial institutions - ANS✔✔ • Banks face many risks, or the potential for
losses. Their ability to manage this risk is pitted against their drive to earn an accounting profit
and satisfy the demands of their shareholders.
• The push for profits, however, can lead bank management to undertake actions that can put
their bank—and thus, by extension, the entire financial system—at risk.
• This problem, called systemic risk, is one that bank regulators need to monitor closely.
• This then leads to the question: how should banks and financial markets be regulated? This is
not an easy question to address! But, how and to what extent banks and financial markets are
regulated will have far-reaching implications for us all!
Money Defined - ANS✔✔ • "Generally accepted" in exchange for goods and services
• Russian Ruble Crisis of 1999: people stopped using the official ruble in exchange for goods and
services
• Are currencies considered money all the time? NO
, Money Defined (continued) - ANS✔✔ • Currency substitution - Use of another country's
currency in private transactions.
• The local currency remains legal tender and continues to circulate
• Legal Tender - Assets accepted for repayment of debt to the government as well as private
transactions.
• Dollarization: The situation when market participants use another country's currency as
money
• "Official semi-dollarization" - another country's currency is legal tender, but the country also
issues its own currency.
Functions of Money (1) - ANS✔✔ 1) Medium of Exchange
• Medium of Exchange - usable for buying and selling goods and services.
• Money allows society to escape the complications of barter (which requires a double
coincidence of wants).
• Money enables society to gain the advantages of geographic and human specialization
Functions of Money (2) - ANS✔✔ 2) Unit of Account
• Society uses monetary units - As a yardstick for measuring the relative worth of a wide variety
of goods, services and resources.
Money and financial assets - ANS✔✔ • Money is anything that is generally acceptable in
exchange for goods and serves, and is clearly an asset.
• Financial assets are intangible assets whose value is derived from a contractual claim. In
addition to money, financial assets also include stocks and bonds.
• Bank accounts such as checking accounts and savings accounts are also financial assets
because they are contractual claims on funds on deposit with the depository institution, or
bank.
Financial markets - ANS✔✔ • Financial markets essentially bring savers together with
borrowers.
• Savers and borrowers initially meet in the primary market, where financial instruments or
financial assets are initially sold. However, reselling and buying takes place in the secondary
market.
• The prices (or interest rates) determined in these financial markets turn out to be extremely
important.
• Another important financial market is the market for risk. This is the insurance market.
• Financial markets are so vital to the overall economy that oversight and regulation is
necessary. Central banks are often one of the main regulators, and monetary policy uses
financial markets to help guide the overall economy.
,Central banks - ANS✔✔ • While the Federal Reserve is the central bank and monetary authority
of the United States, it is, naturally, not the only central bank in the global economy.
• Other critical central banks around the world include the Bank of Japan, the Bank of England,
and the Bank of Canada.
• We live in an interconnected global economy, thus it important to understand how the major
central banks around the world function and the challenges they face.
Banking system and financial institutions - ANS✔✔ • Banks face many risks, or the potential for
losses. Their ability to manage this risk is pitted against their drive to earn an accounting profit
and satisfy the demands of their shareholders.
• The push for profits, however, can lead bank management to undertake actions that can put
their bank—and thus, by extension, the entire financial system—at risk.
• This problem, called systemic risk, is one that bank regulators need to monitor closely.
• This then leads to the question: how should banks and financial markets be regulated? This is
not an easy question to address! But, how and to what extent banks and financial markets are
regulated will have far-reaching implications for us all!
Money Defined - ANS✔✔ • "Generally accepted" in exchange for goods and services
• Russian Ruble Crisis of 1999: people stopped using the official ruble in exchange for goods and
services
• Are currencies considered money all the time? NO
, Money Defined (continued) - ANS✔✔ • Currency substitution - Use of another country's
currency in private transactions.
• The local currency remains legal tender and continues to circulate
• Legal Tender - Assets accepted for repayment of debt to the government as well as private
transactions.
• Dollarization: The situation when market participants use another country's currency as
money
• "Official semi-dollarization" - another country's currency is legal tender, but the country also
issues its own currency.
Functions of Money (1) - ANS✔✔ 1) Medium of Exchange
• Medium of Exchange - usable for buying and selling goods and services.
• Money allows society to escape the complications of barter (which requires a double
coincidence of wants).
• Money enables society to gain the advantages of geographic and human specialization
Functions of Money (2) - ANS✔✔ 2) Unit of Account
• Society uses monetary units - As a yardstick for measuring the relative worth of a wide variety
of goods, services and resources.
