Tackle the Test: Free-Response Questions

1. Question

   Identify and describe the three tasks of a well-functioning financial system.

   Rubric for FRQ 1 (6 points)

   1 point: Decrease transaction costs

   1 point: A well-functioning financial system facilitates investment spending by allowing companies to borrow large sums of money without incurring large transaction costs.

   1 point: Decrease risk

   1 point: A well-functioning financial system helps people reduce their exposure to risk, so that they are more willing to engage in investment spending in the face of uncertainty in the economy.

   1 point: Provide liquidity

   1 point: A well-functioning financial system allows the fast, low-cost conversion of assets into cash.

2. Question

   List and describe the four most important types of financial intermediaries. (4 points)

   Rubric for FRQ 2 (4 points)

   1 point: A mutual fund is a financial intermediary that creates a stock portfolio by buying and holding shares in companies and then selling shares of the stock portfolio to individual investors.

   1 point: A life insurance company is a firm that guarantees a payment to the policyholder’s beneficiaries (typically, the family) when the policyholder dies.

   1 point: A bank is an institution that helps resolve the conflict between lenders’ needs for liquidity and the illiquid financing needs of borrowers who don’t want to use the stock or bond markets.

   1 point: A pension fund is a nonprofit institution that collects the savings of its members and invests those funds in a variety of assets, providing its members with income when they retire.