Gretel and Hansel

1-11 When an FI functions as a broker, they are selling a financial asset that they have created and will continue to hold on their balance sheet.

Answer: F

1-12 An FI acting as an agent in matching savers and borrowers of funds can attain economies of scale and provide this service more efficiently than either the saver or borrower could on their own.

Answer: T

1-13 Financial institutions are subject to economies of scale in the collection of information.

Answer: T

1-14 As an asset transformer, the FI issues financial claims that are more attractive to household savers than the claims directly issued by corporations.

Answer: T

1-15 The asset transformation function of an FI is to issue primary financial claims to corporations while purchasing primary claims issued by households and other investors.

Answer: F

1-16 Secondary securities are securities that serve as collateral for primary securities.

Answer: F

1-17 FIs are independent market entities that create financial assets whose value is the transformation of financial risk.

Answer: T

1-18 The more costly it is to supervise the use of funds by a borrower, the less likely a saver will encounter agency costs.

Answer: F

1-19 As a delegated monitor, an FI’s actions reduce agency costs.

Answer: T

1-20 The ability of diversification to eliminate much of the risk from the asset side of the balance sheet of an FI is the result of choosing assets that are less than perfectly positively correlated.

Answer: T

1-21 Research shows that there is a significant reduction in risk achieved by investing in as few as 8 different securities.

Answer: F

1-22 Depository institutions serve as the primary conduit through which monetary policy actions impact the economy.

Answer: T

1-23 The liabilities of depository institutions are significant components of the money supply.

Answer: T

1-24 The goal of credit allocation is the encouragement of FIs to diversity the...