Question

1) Overnight loans issued by the Federal Reserve to commercial banks are known as

	A.	Negotiable CD's
	B.	Federal funds
	C.	Repurchase agreements
	D.	Commercial paper

2) Which type of security has interest payments that are generally exempt from federal income taxes?

	A.	Mortgage-backed securities
	B.	Treasury bonds
	C.	Municipal bonds
	D.	Commercial loans

3) What do the authors mean when they state that financial intermediaries can achieve economies of scale with respect to transaction costs?

	A.	Intermediaries can spread transaction costs across larger transaction volumes, so the cost per unit is lower.
	B.	Intermediaries tend to specialize in certain types of transactions, so their costs are lower because they operate at lower volume than other types of financial firms.

Answer 1

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Answer:

1)

The overnight loans issued by the Federal Reserve to commercial banks are known as Federal Funds. Hence the correct option is option (B)

2)

Generally, the interest on municipal bonds is exempt from federal income tax.

3)

The financial intermediaries reduce the transaction cost when it increases the volume. When the firm increases the amount fund, the transaction cost spreads across the large volume which leads to reduction in the cost.

Thus, option ‘A’ is correct.