Economics of Money, Banking, and Financial Markets, 11e (Mishkin)
Chapter 1 Why Study Money, Banking, and Financial Markets?
1.1 Why Study Financial Markets?
1) Financial markets promote economic efficiency by
A) channeling funds from investors to savers.
B) creating inflation.
C) channeling funds from savers to investors.
D) reducing investment.
2) Financial markets promote greater economic efficiency by channeling funds from ________
to ________.
A) investors; savers
B) borrowers; savers
C) savers; borrowers
D) savers; lenders
3) Well-functioning financial markets promote
A) inflation.
B) deflation.
C) unemployment.
D) growth.
4) A key factor in producing high economic growth is
A) eliminating foreign trade.
B) well-functioning financial markets.
C) high interest rates.
D) stock market volatility.
5) Markets in which funds are transferred from those who have excess funds available to those
who have a shortage of available funds are called
A) commodity markets.
B) fund-available markets.
C) derivative exchange markets.
D) financial markets.
6) ________ markets transfer funds from people who have an excess of available funds to people
who have a shortage.
A) Commodity
B) Fund-available
C) Financial
D) Derivative exchange
7) Poorly performing financial markets can be the cause of
A) wealth.
B) poverty.
C) financial stability.
D) financial expansion.
8) The bond markets are important because they are
A) easily the most widely followed financial markets in the United States.
B) the markets where foreign exchange rates are determined.
C) the markets where interest rates are determined.
D) the markets where all borrowers get their funds.
9) The price paid for the rental of borrowed funds (usually expressed as a percentage of the
rental of $100 per year) is commonly referred to as the
A) inflation rate.
B) exchange rate.
C) interest rate.
D) aggregate price level.
10) Compared to interest rates on long-term U.S. government bonds, interest rates on three-
month Treasury bills fluctuate ________ and are ________ on average.
A) more; lower
B) less; lower
C) more; higher
D) less; higher
11) The interest rate on Baa corporate bonds is ________, on average, than interest rates on
Treasuries, and the spread between these rates became ________ in the 1970s.
A) lower; smaller
B) lower; larger
C) higher; smaller
D) higher; larger
12) Everything else held constant, a decline in interest rates will cause spending on housing to
A) fall.
B) remain unchanged.
C) either rise, fall, or remain the same.
D) rise.
13) High interest rates might ________ purchasing a house or car but at the same time high
interest rates might ________ saving.
A) discourage; encourage
B) discourage; discourage
C) encourage; encourage
D) encourage; discourage
14) An increase in interest rates might ________ saving because more can be earned in interest
income.
A) encourage
B) discourage
C) disallow
D) invalidate
15) Everything else held constant, an increase in interest rates on student loans
A) increases the cost of a college education.
B) reduces the cost of a college education.
C) has no effect on educational costs.
D) increases costs for students with no loans.
16) High interest rates might cause a corporation to ________ building a new plant that would
provide more jobs.
A) complete
B) consider
C) postpone
D) contemplate
17) The stock market is
A) where interest rates are determined.
B) the most widely followed financial market in the United States.
C) where foreign exchange rates are determined.
D) the market where most borrowers get their funds.
18) Stock prices are
A) relatively stable trending upward at a steady pace.
B) relatively stable trending downward at a moderate rate.
C) extremely volatile.
D) unstable trending downward at a moderate rate.
19) A rising stock market index due to higher share prices
A) increases people’s wealth, but is unlikely to increase their willingness to spend.
B) increases people’s wealth and as a result may increase their willingness to spend.
C) decreases the amount of funds that business firms can raise by selling newly-issued stock.
D) decreases people’s wealth, but is unlikely to increase their willingness to spend.
20) When stock prices fall
A) an individual’s wealth is not affected nor is their willingness to spend.
B) a business firm will be more likely to sell stock to finance investment spending.
C) an individual’s wealth may decrease but their willingness to spend is not affected.
D) an individual’s wealth may decrease and their willingness to spend may decrease.
21) Changes in stock prices
A) do not affect people’s wealth and their willingness to spend.
B) affect firms’ decisions to sell stock to finance investment spending.
C) occur in regular patterns.
D) are unimportant to decision makers.
22) An increase in stock prices ________ the size of people’s wealth and may ________ their
willingness to spend, everything else held constant.
A) increases; increase
B) increases; decrease
C) decreases; increase
D) decreases; decrease
23) Low stock market prices might ________ consumers willingness to spend and might
________ businesses willingness to undertake investment projects.
A) increase; increase
B) increase; decrease
C) decrease; decrease
D) decrease; increase
24) Fear of a major recession causes stock prices to fall, everything else held constant, which in
turn causes consumer spending to
A) increase.
B) remain unchanged.
C) decrease.
D) cannot be determined.
25) A share of common stock is a claim on a corporation’s
A) debt.
B) liabilities.
C) expenses.
D) earnings and assets.
26) On ________, October 19, 1987, the stock market experienced its worst one-day drop in its
entire history with the DJIA falling by 22%.
A) “Terrible Tuesday”
B) “Woeful Wednesday”
C) “Freaky Friday”
D) “Black Monday”
27) The decline in stock prices from 2000 through 2002
A) increased individuals’ willingness to spend.
B) had no effect on individual spending.
C) reduced individuals’ willingness to spend.
D) increased individual wealth.
28) The Dow reached a peak of over 11,000 before the collapse of the ________ bubble in 2000.
A) housing
B) manufacturing
C) high-tech
D) banking
29) When I purchase a corporate ________, I am lending the corporation funds for a specific
time. When I purchase a corporation’s ________, I become an owner in the corporation.
A) bond; stock
B) stock; bond
C) stock; debt security
D) bond; debt security
30) What is a stock? How do stocks affect the economy?
31) Why is it important to understand the bond market?
1.2 Why Study Financial Institutions and Banking?
1) Channeling funds from individuals with surplus funds to those desiring funds when the saver
does not purchase the borrower’s security is known as
A) barter.
B) redistribution.
C) financial intermediation.
D) taxation.
2) A financial crisis is
A) not possible in the modern financial environment.
B) a major disruption in the financial markets.
C) a feature of developing economies only.
D) typically followed by an economic boom.
3) Banks are important to the study of money and the economy because they
A) channel funds from investors to savers.
B) have been a source of rapid financial innovation.
C) are the only important financial institution in the U.S. economy.
D) create inflation.
4) Banks
A) provide a channel for linking those who want to save with those who want to invest.
B) produce nothing of value and are therefore a drain on society’s resources.
C) are the only financial institutions allowed to give loans.
D) hold very little of the average American’s wealth.
5) Banks, savings and loan associations, mutual savings banks, and credit unions
A) are no longer important players in financial intermediation.
B) since deregulation now provide services only to small depositors.
C) have been adept at innovating in response to changes in the regulatory environment.
D) produce nothing of value and are therefore a drain on society’s resources.
6) Financial institutions search for ________ has resulted in many financial innovations.
A) higher profits
B) regulations
C) respect
D) higher risk
7) Banks and other financial institutions engage in financial intermediation, which
A) can hurt the performance of the economy.
B) can benefit economic performance.
C) has no effect on economic performance.
D) involves borrowing from investors and lending to savers.
8) Financial institutions that accept deposits and make loans are called
A) exchanges.
B) banks.
C) over-the-counter markets.
D) finance companies.
9) The financial intermediaries that the average person interacts with most frequently are
A) exchanges.
B) over-the-counter markets.
C) finance companies.
D) banks.
10) Which of the following is NOT a financial institution?
A) a life insurance company
B) a pension fund
C) a credit union
D) a business college
11) The delivery of financial services electronically is called
A) e-business.
B) e-commerce.
C) e-finance.
D) e-possible.
12) What crucial role do financial intermediaries perform in an economy?
1.3 Why Study Money and Monetary Policy?
1) Money is defined as
A) bills of exchange.
B) anything that is generally accepted in payment for goods and services or in the repayment of
debt.
C) a risk-free repository of spending power.
D) the unrecognized liability of governments.
2) The upward and downward movement of aggregate output produced in the economy is
referred to as the
A) roller coaster.
B) see saw.
C) business cycle.
D) shock wave.
3) Sustained downward movements in the business cycle are referred to as
A) inflation.
B) recessions.
C) economic recoveries.
D) expansions.
4) During a recession, output declines result in
A) lower unemployment in the economy.
B) higher unemployment in the economy.
C) no impact on the unemployment in the economy.
D) higher wages for the workers.
5) Prior to almost all recessions since 1950, there has been a drop in
A) inflation.
B) the money stock.
C) the growth rate of the money stock.
D) interest rates.
6) Evidence from business cycle fluctuations in the United States indicates that
A) a negative relationship between money growth and general economic activity exists.
B) recessions are usually preceded by declines in bond prices.
C) recessions are usually preceded by dollar depreciation.
D) recessions are usually preceded by a decline in the growth rate of money.
7) ________ theory relates the quantity of money and monetary policy to changes in aggregate
economic activity and inflation.
A) Monetary
B) Fiscal
C) Financial
D) Systemic
8) A continuing increase in the growth of the money supply is likely followed by
A) a recession.
B) a depression.
C) an increase in the price level.
D) no change in the economy.
9) It is true that inflation is a
A) continuous increase in the money supply.
B) continuous fall in prices.
C) decline in interest rates.
D) continually rising price level.
10) Which of the following is a TRUE statement?
A) Money or the money supply is defined as Federal Reserve notes.
B) The average price of goods and services in an economy is called the aggregate price level.
C) The inflation rate is measured as the rate of change in the federal government budget deficit.
D) The aggregate price level is measured as the rate of change in the inflation rate.
11) If the prices would have been much higher ten years ago for the items the average consumer
purchased last month, then one can likely conclude that
A) the aggregate price level has declined during this ten-year period.
B) the average inflation rate for this ten-year period has been positive.
C) the average rate of money growth for this ten-year period has been positive.
D) the aggregate price level has risen during this ten-year period.
12) From 1950-2014 the price level in the United States increased more than
A) twofold.
B) threefold.
C) sixfold.
D) tenfold.
13) Complete Milton Friedman’s famous statement, “Inflation is always and everywhere a
________ phenomenon.”
A) recessionary
B) discretionary
C) repressionary
D) monetary
14) There is a ________ association between inflation and the growth rate of money ________.
A) positive; demand
B) positive; supply
C) negative; demand
D) negative; supply