Chapter 1: Why Study Money, Banking, and Financial Markets?

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.
Answer: C
Ques Status: Revised
2) Financial markets promote greater economic efficiency by channeling funds from ________ to
________.
A) investors; savers
B) borrowers; savers
C) savers; borrowers
D) savers; lenders
Answer: C
Ques Status: New
3) Well-functioning financial markets promote
A) inflation.
B) deflation.
C) unemployment.
D) growth.
Answer: D
4) 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.
Answer: D
Ques Status: Previous Edition
2 Mishkin · Economics of Money, Banking, and Financial Markets, Eighth Edition
5) ________ 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
Answer: C
Ques Status: New
6) Poorly performing financial markets can be the cause of
A) wealth.
B) poverty.
C) financial stability.
D) financial expansion.
Answer: B
7) 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.
Answer: C
8) 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.
Answer: C
Chapter 1 Why Study Money, Banking, and Financial Markets? 3
9) 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
Answer: A
10) The interest rate on Baa (medium quality) corporate bonds is ________, on average, than other
interest rates, and the spread between it and other rates became ________ in the 1970s.
A) lower; smaller
B) lower; larger
C) higher; smaller
D) higher; larger
Answer: D
11) 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.
Answer: D
12) An increase in interest rates might ________ saving because more can be earned in interest
income.
A) encourage
B) discourage
C) disallow
D) invalidate
Answer: A
Ques Status: New
13) 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.
Answer: A
14) 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
Answer: C
Ques Status: New
15) The stock market is important because it 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.
Answer: B
16) Stock prices since the 1950s have been
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.
Answer: C
17) A rising stock market index due to higher share prices
A) increases peopleʹs wealth, but is unlikely to increase their willingness to spend.
B) increases peopleʹs 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 peopleʹs wealth, but is unlikely to increase their willingness to spend.
Answer: B
18) When stock prices fall
A) an individualʹs 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 individualʹs wealth may decrease but their willingness to spend is not affected.
D) an individualʹs wealth may decrease and their willingness to spend may decrease.
Answer: D
Ques Status: New
19) Changes in stock prices
A) do not affect peopleʹs wealth and their willingness to spend
B) affect firmsʹ decisions to sell stock to finance investment spending.
C) occur in regular patterns.
D) are unimportant to decision makers.
Answer: B
20) An increase in stock prices ________ the size of peopleʹs wealth and may ________ their
willingness to spend, everything else held constant.
A) increases; increase
B) increases; decrease
C) decreases; increase
D) decreases; decrease
Answer: A
Ques Status: New
21) 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.
Answer: C
22) A common stock is a claim on a corporationʹs
A) debt.
B) liabilities.
C) expenses.
D) earnings and assets.
Answer: D
23) On ________, October 19, 1987, the market experienced its worst one -day drop in its entire

history with the DIJA falling by more than 500 points.
A) ʺTerrible Tuesdayʺ
B) ʺWoeful Wednesdayʺ
C) ʺFreaky Fridayʺ
D) ʺBlack Mondayʺ
Answer: D
Ques Status: New
24) The decline in stock prices from 2000 through 2002
A) increased individualsʹ willingness to spend.
B) had no effect on individual spending.
C) reduced individualsʹ willingness to spend.
D) increased individual wealth.
Answer: C
25) 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
Answer: C
Ques Status: New
26) The price of one countryʹs currency in terms of another countryʹs currency is called the
A) exchange rate.
B) interest rate.
C) Dow Jones industrial average.
D) prime rate.
Answer: A
27) The market where one currency is converted into another currency is called the ________
market.
A) stock
B) bond
C) derivatives
D) foreign exchange
Answer: D
Ques Status: New
28) Everything else constant, a stronger dollar will mean that
A) vacationing in England becomes more expensive.
B) vacationing in England becomes less expensive.
C) French cheese becomes more expensive.
D) Japanese cars become more expensive.
Answer: B
29) Which of the following is most likely to result from a stronger dollar?
A) U.S. goods exported aboard will cost less in foreign countries, and so foreigners will buy
more of them.
B) U.S. goods exported aboard will cost more in foreign countries and so foreigners will buy
more of them.
C) U.S. goods exported abroad will cost more in foreign countries, and so foreigners will
buy fewer of them.
D) Americans will purchase fewer foreign goods.
Answer: C
30) Everything else held constant, a weaker dollar will likely hurt
A) textile exporters in South Carolina.
B) wheat farmers in Montana that sell domestically.
C) automobile manufacturers in Michigan that use domestically produced inputs.
D) furniture importers in California.
Answer: D
31) Everything else held constant, a stronger dollar benefits ________ and hurts ________.
A) American businesses; American consumers
B) American businesses; foreign businesses
C) American consumers; American businesses
D) foreign businesses; American consumers
Answer: C
Ques Status: Study Guide
32) From 1980 to early 1985 the dollar ________ in value, thereby benefiting American ________.
A) appreciated; consumers
B) appreciated, businesses
C) depreciated; consumers
D) depreciated, businesses
Answer: A
33) From 1980 to 1985 the dollar appreciated relative to the British pound. Holding everything else
constant, one would expect that, when compared to 1980,
A) fewer Britons traveled to the United States in 1985.
B) Britons imported more wine from California in 1985.
C) Americans exported more wheat to England in 1985.
D) more Britons traveled to the United States in 1985.
Answer: A
34) When in 1985 a British pound cost approximately $1.30, a Shetland sweater that cost 100
British pounds would have cost $130. With a weaker dollar, the same Shetland sweater would
have cost
A) less than $130.
B) more than $130.
C) $130, since the exchange rate does not affect the prices that American consumers pay for
foreign goods.
D) $130, since the demand for Shetland sweaters will decrease to prevent an increase in
price due to the stronger dollar.
Answer: B
35) Everything else held constant, a decrease in the value of the dollar relative to all foreign
currencies means that the price of foreign goods purchased by Americans
A) increases
B) decreases.
C) remains unchanged.
D) either increases, decreases, or remains unchanged.
Answer: A
36) American farmers who sell beef to Europe benefit most from
A) a decrease in the dollar price of euros.
B) an increase in the dollar price of euros.
C) a constant dollar price for euros.
D) a European ban on imports of American beef.
Answer: B
37) If the price of a euro (the European currency) increases from $1.00 to $1.10, then, everything
else held constant,
A) a European vacation becomes less expensive.
B) a European vacation becomes more expensive.
C) the cost of a European vacation is not affected.
D) foreign travel becomes impossible.
Answer: B
38) Everything else held constant, Americans who love French wine benefit most from
A) a decrease in the dollar price of euros.
B) an increase in the dollar price of euros.
C) a constant dollar price for euros.
D) a ban on imports from Europe.
Answer: A
39) What is a stock? How do stocks affect the economy?
Answer: A stock represents a share of ownership of a corporation, or a claim on a firmʹs
earnings/assets. Stocks are part of wealth, and changes in their value affect peopleʹs
willingness to spend. Changes in stock prices affect a firmʹs ability to raise funds, and
thus their investment.
1.2 Why Study Banking and Financial Institutions?
1) Channeling funds from individuals with surplus funds to those desiring funds when the saver
does not purchase the borrowerʹs security is known as
A) barter.
B) redistribution.
C) financial intermediation.
D) taxation.
Answer: C
2) 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.
Answer: B
3) Economists group commercial banks, savings and loan associations, credit unions, mutual
funds, mutual savings banks, insurance companies, pension funds, and finance companies
together under the heading financial intermediaries. Financial intermediaries
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 societyʹs resources.
C) can hurt the performance of the economy.
D) hold very little of the average Americanʹs wealth.
Answer: A
4) 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 societyʹs resources.
Answer: C
5) 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.
Answer: B
6) Financial institutions that accept deposits and make loans are called ________.
A) exchanges
B) banks
C) over-the-counter markets
D) finance companies
Answer: B
Ques Status: New
7) The financial intermediaries that the average person interacts with most frequently are
________.
A) exchanges
B) over-the-counter markets
C) finance companies
D) banks
Answer: D
Ques Status: New
8) 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
Answer: D
Ques Status: New
9) The delivery of financial services electronically is called ________.
A) e-business
B) e-commerce
C) e-finance
D) e-possible
Answer: C
Ques Status: New
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.
Answer: B
2) Evidence from the United States and other foreign countries indicates that
A) there is a strong positive association between inflation and growth rate of money over
long periods of time.
B) there is little support for the assertion that ʺinflation is always and everywhere a
monetary phenomenon.ʺ
C) countries with low monetary growth rates tend to experience higher rates of inflation, all
else being constant.
D) money growth is clearly unrelated to inflation.
Answer: A
3) 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
Answer: C
Ques Status: New
4) Sustained downward movements in the business cycle are referred to as
A) inflation.
B) recessions.
C) economic recoveries.
D) expansions.
Answer: B
5) Prior to all recessions since 1900, there has been a drop in
A) inflation.
B) the money stock.
C) the growth rate of the money stock.
D) interest rates.
Answer: C
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 have been preceded by declines in share prices on the stock exchange.
C) recessions have been preceded by dollar depreciation.
D) recessions have been preceded by a decline in the growth rate of money.
Answer: D
7) A sharp increase in the growth of the money supply is likely followed by
A) a recession.
B) a depression.
C) an increase in the inflation rate.
D) no change in the economy.
Answer: C
8) 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.
Answer: D
9) ________ theory relates changes in the quantity of money to changes in aggregate economic
activity and the price level.
A) Monetary
B) Fiscal
C) Financial
D) Systemic
Answer: A
Ques Status: New
10) The management of money and interest rates is called ________ policy and is conducted by a
nationʹs ________ bank.
A) monetary; superior
B) fiscal; superior
C) fiscal; central
D) monetary; central
Answer: D
Ques Status: New
11) The organization responsible for the conduct of monetary policy in the United States is the
A) Comptroller of the Currency.
B) U.S. Treasury.
C) Federal Reserve System.
D) Bureau of Monetary Affairs.
Answer: C
12) 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.
Answer: B
13) If ten years ago the prices of the items bought last month by the average consumer would have
been much higher, 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.
Answer: A
14) From 1950-2005 the price level in the United States increased more than ________.
A) twofold
B) threefold
C) sixfold
D) ninefold
Answer: C
Ques Status: New
15) One likely explanation for the relatively high rates of inflation experienced in many Latin
American countries is the
A) relatively slow growth in the money supply in these countries.
B) relatively rapid growth in the money supply in these countries.
C) decline in the prices of basic commodities in these countries.
D) budget surpluses maintained in these countries.
Answer: B
16) Complete Milton Friedmanʹs famous statement, ʺInflation is always and everywhere a
________ phenomenon.ʺ
A) recessionary
B) discretionary
C) repressionary
D) monetary
Answer: D
17) Countries that experience very high rates of inflation have
A) balanced budgets.
B) rapidly growing money supplies.
C) falling money supplies.
D) constant money supplies.
Answer: B
18) ________ policy involves decisions about government spending and taxation.
A) Monetary
B) Fiscal
C) Financial
D) Systemic
Answer: B
Ques Status: New
19) When tax revenues are greater than government expenditures, the government has a budget
________.
A) crisis
B) deficit
C) surplus
D) revision
Answer: C
Ques Status: New
20) Budgets deficits can be a concern because they might
A) ultimately lead to higher inflation.
B) lead to lower interest rates.
C) lead to a slower rate of money growth.
D) lead to higher bond prices.
Answer: A
21) Budget deficits are important because deficits
A) cause bank failures.
B) always cause interest rates to fall.
C) can result in higher rates of monetary growth.
D) always cause prices to fall.
Answer: C
22) Between 1950 and 1980 in the U.S., interest rates trended upward. During this same time
period,
A) the rate of money growth declined.
B) the rate of money growth increased.
C) the government budget deficit (expressed as a percentage of GNP) trended downward.
D) the aggregate price level declined quite dramatically.
Answer: B
23) What happens to economic growth and unemployment during a business cycle recession?
What is the relationship between the money growth rate and a business cycle recession?
Answer: During a recession, output declines and unemployment increases. Prior to every
recession in the U.S. the money growth rate has declined, however, not every decline is
followed by a recession.
Ques Status: New
1.4 How We Will Study Money, Banking, and Financial Markets
1) There are no questions for section 1.4 How We Will Study Money, Banking, and Financial
Markets
Answer: No Correct Answer Was Provided.
1.5 Concluding Remarks
1) There are no questions for section 1.5 Concluding Remarks
Answer: No Correct Answer Was Provided.
1.6 Appendix: Defining Aggregate Output, Income, the Price Level, and the Inflation
Rate
1) The most comprehensive measure of aggregate output is
A) gross domestic product.
B) net national product.
C) the stock value of the industrial 500.
D) national income.
Answer: A
2) Values measured using current prices are called ________ values.
A) nominal
B) real
C) inflated
D) aggregate
Answer: A
Ques Status: New
3) When the total value of final goods and services is calculated using current prices, the
resulting measure is referred to as
A) real GDP.
B) the GDP deflator.
C) nominal GDP.
D) the index of leading indicators.
Answer: C
4) GDP measured with constant prices is referred to as
A) real GDP.
B) nominal GDP.
C) the GDP deflator.
D) industrial production.
Answer: A
5) If the aggregate price level at time t is denoted by Pt, the inflation rate from time t - 1 to t is
defined as
A) πt = (Pt - Pt - 1)/Pt - 1.
B) πt = (Pt + 1 - Pt - 1) /P t - 1.
C) πt = (Pt + 1 - Pt) /P t.
D) πt = (Pt - Pt - 1) /P t.
Answer: A
6) The gross domestic product is the
A) the value of all wealth in an economy.
B) the value of all goods and services sold to other nations in a year.
C) the market value of all final goods and services produced in an economy in a year.
D) the market value of all intermediate goods and services produced in an economy in a
year.
Answer: C
7) If an economy has aggregate output of $20 trillion, then aggregate income is
A) $10 trillion.
B) $20 trillion.
C) $30 trillion.
D) $40 trillion.
Answer: B
8) If your nominal income in 1996 was $50,000, and prices doubled between 1996 and 2002, to
have the same real income, your nominal income in 2002 must be
A) $50,000.
B) $75,000.
C) $90,000.
D) $100,000.
Answer: D
9) If your nominal income in 1990 is $50,000, and prices increase by 50% between 1990 and 2000,
then to have the same real income, your nominal income in 2000 must be
A) $50,000.
B) $75,000.
C) $100,000.
D) $150,000.
Answer: B
10) If nominal GDP in 2001 is $9 trillion, and 2001 real GDP in 1996 prices is $6 trillion, the GDP
deflator price index is
A) 7.
B) 100.
C) 150.
D) 200.
Answer: C
11) If the price level increases from 200 in year 1 to 220 in year 2, the rate of inflation from year 1 to
year 2 is
A) 20%.
B) 10%.
C) 11%.
D) 120%.
Answer: B
12) If real GDP grows from $10 trillion in 2002 to $10.5 trillion in 2003, the growth rate for real
GDP is
A) 5%.
B) 10%.
C) 50%.
D) 0.5%.
Answer: A
13) If real GDP in 2002 is $10 trillion, and in 2003 real GDP is $9.5 trillion, then real GDP growth
from 2002 to 2003 is
A) 0.5%.
B) 5%.
C) 0%.
D) -5%.
Answer: D
14) If the CPI is 120 in 1996 and 180 in 2002, then between 1996 and 2002, prices have increased by
A) 180%.
B) 80%.
C) 60%.
D) 50%.
Answer: D
15) If the CPI in 2004 is 200, and in 2005 the CPI is 180, the rate of inflation from 2004 to 2005 is
A) 20%.
B) 10%.
C) 0%.
D) -10%.
Answer: D
16) The measure of the aggregate price level that is most frequently reported in the media is the
________.
A) GDP deflator
B) producer price index
C) consumer price index
D) household price index
Answer: C
Ques Status: New
17) When prices are measured in terms of fixed (base-year) prices they are called ________ prices.
A) nominal
B) real
C) inflated
D) aggregate
Answer: B
Ques Status: New

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23) On ________, October 19, 1987, the market experienced its worst one -day drop in its entire

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