TEST BANK for Economics of Money, Banking, and Financial Markets (9th Edition)

TEST BANK for Economics of Money, Banking, and Financial Markets (9th Edition) 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: Previous Edition

2) Financial markets promote greater economic efficiency by channeling funds from . A) investors; savers B) borrowers; savers C) savers; borrowers D) savers; lenders Answer: C Ques Status: Previous Edition

3) Well-functioning financial markets promote A) inflation. B) deflation. C) unemployment. D) growth. Answer: D Ques Status: Previous Edition

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. Answer: B Ques Status: New

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. Answer: D Ques Status: Previous Edition

to

2 Mishkin · The Economics of Money, Banking, and Financial Markets, 9th Edition 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 Answer: C Ques Status: Previous Edition

7) Poorly performing financial markets can be the cause of A) wealth. B) poverty. C) financial stability. D) financial expansion. Answer: B Ques Status: Previous Edition

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. Answer: C Ques Status: Previous Edition

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. Answer: C Ques Status: Previous Edition

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 Answer: A Ques Status: Previous Edition

Chapter 1 Why Study Money, Banking, and Financial Markets? 3

11) The interest rate on Baa (medium quality) corporate bonds is interest rates, and the spread between it and other rates became A) lower; smaller B) lower; larger C) higher; smaller D) higher; larger

, on average, than other in the 1970s.

Answer: D Ques Status: Previous Edition

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. Answer: D Ques Status: Previous Edition

13) High interest rates might rates might saving. A) discourage; encourage B) discourage; discourage C) encourage; encourage D) encourage; discourage

purchasing a house or car but at the same time high interest

Answer: A Ques Status: New

14) An increase in interest rates might income. A) encourage B) discourage C) disallow D) invalidate

saving because more can be earned in interest

Answer: A Ques Status: Previous Edition

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. Answer: A Ques Status: Previous Edition

4 Mishkin · The Economics of Money, Banking, and Financial Markets, 9th Edition 16) High interest rates might cause a corporation to provide more jobs. A) complete B) consider C) postpone D) contemplate

building a new plant that would

Answer: C Ques Status: Previous Edition

17) 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 Ques Status: Previous Edition

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. Answer: C Ques Status: Revised

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. Answer: B

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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. Answer: D Ques Status: Previous Edition

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. Answer: B Ques Status: Previous Edition

Chapter 1 Why Study Money, Banking, and Financial Markets? 5

22) An increase in stock prices the size of people's wealth and may willingness to spend, everything else held constant. A) increases; increase B) increases; decrease C) decreases; increase D) decreases; decrease

their

Answer: A Ques Status: Previous Edition

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 Answer: C Ques Status: New

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. Answer: C Ques Status: Previous Edition

25) A share of common stock is a claim on a corporation's A) debt. B) liabilities. C) expenses. D) earnings and assets. Answer: D Ques Status: Revised

26) 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) "Terrible Tuesday" B) "Woeful Wednesday" C) "Freaky Friday" D) "Black Monday" Answer: D Ques Status: Previous Edition

6 Mishkin · The Economics of Money, Banking, and Financial Markets, 9th Edition 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. Answer: C Ques Status: Previous Edition

28) The Dow reached a peak of over 11,000 before the collapse of the A) housing B) manufacturing C) high-tech D) banking

bubble in 2000.

Answer: C

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29) 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 firm's earnings/assets. Stocks are part of wealth, and changes in their value affect people's willingness to spend. Changes in stock prices affect a firm's ability to raise funds, and thus their investment. Ques Status: Previous Edition

30) Why is it important to understand the bond market? Answer: The bond market supports economic activity by enabling the government and corporations to borrow to undertake their projects and it is the market where interest rates are determined. Ques Status: New

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. Answer: C Ques Status: Previous Edition

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. Answer: B Ques Status: New

Chapter 1 Why Study Money, Banking, and Financial Markets? 7

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. Answer: B Ques Status: Previous Edition

4) 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 society's resources. C) can hurt the performance of the economy. D) hold very little of the average American's wealth. Answer: A Ques Status: Revised

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. Answer: C Ques Status: Previous Edition

6) Financial institutions search for A) higher profits B) regulations C) respect D) higher risk

has resulted in many financial innovations.

Answer: A Ques Status: New

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. Answer: B Ques Status: Previous Edition

8) 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: Previous Edition

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8 Mishkin · The Economics of Money, Banking, and Financial Markets, 9th Edition 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 Answer: D Ques Status: Previous Edition

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 Answer: D Ques Status: Previous Edition

11) The delivery of financial services electronically is called A) e-business B) e-commerce C) e-finance D) e-possible Answer: C

.

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12) What crucial role do financial intermediaries perform in an economy? Answer: Financial intermediaries borrow funds from people who have saved and make loans to other individuals and businesses and thus improve the efficiency of the economy. 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

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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 Answer: C Ques Status: Previous Edition

Chapter 1 Why Study Money, Banking, and Financial Markets? 9

3) Sustained downward movements in the business cycle are referred to as A) inflation. B) recessions. C) economic recoveries. D) expansions. Answer: B Ques Status: Previous Edition

4) During a recession, output declines resulting 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. Answer: B Ques Status: New

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 Ques Status: Previous Edition

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 Ques Status: Previous Edition

7)

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: Previous Edition

8) 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 Ques Status: Previous Edition

10 Mishkin · The Economics of Money, Banking, and Financial Markets, 9th Edition 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. Answer: D Ques Status: Previous Edition

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. Answer: B Ques Status: Previous Edition

11) 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 Ques Status: Previous Edition

12) From 1950-2008 the price level in the United States increased more than A) twofold B) threefold C) sixfold D) ninefold

.

Answer: C Ques Status: Revised

13) Complete Milton Friedman's famous statement, "Inflation is always and everywhere a phenomenon." A) recessionary B) discretionary C) repressionary D) monetary Answer: D Ques Status: Previous Edition

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 Answer: B Ques Status: New

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Chapter 1 Why Study Money, Banking, and Financial Markets? 11

15) 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 "inflation is always and everywhere a monetary phenomenon." 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 Ques Status: Previous Edition

16) Countries that experience very high rates of inflation may also have A) balanced budgets. B) rapidly growing money supplies. C) falling money supplies. D) constant money supplies. Answer: B Ques Status: Revised

17) 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 Ques Status: Previous Edition

18) The management of money and interest rates is called nation's bank. A) monetary; superior B) fiscal; superior C) fiscal; central D) monetary; central

policy and is conducted by a

Answer: D Ques Status: Previous Edition

19) 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 Ques Status: Previous Edition

12 Mishkin · The Economics of Money, Banking, and Financial Markets, 9th Edition 20)

policy involves decisions about government spending and taxation. A) Monetary B) Fiscal C) Financial D) Systemic Answer: B Ques Status: Previous Edition

21) 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: Previous Edition

22) A budget time period. A) deficit B) surplus C) surge D) surfeit

occurs when government expenditures exceed tax revenues for a particular

Answer: A Ques Status: New

23) 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 Ques Status: Previous Edition

24) 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 Ques Status: Previous Edition

25) 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: Previous Edition

Chapter 1 Why Study Money, Banking, and Financial Markets? 13

1.4 Why Study International Finance? 1) American companies can borrow funds A) only in U.S. financial markets. B) only in foreign financial markets. C) in both U.S. and foreign financial markets. D) only from the U.S. government. Answer: C Ques Status: New

2) The price of one country's currency in terms of another country's currency is called the A) exchange rate. B) interest rate. C) Dow Jones industrial average. D) prime rate. Answer: A Ques Status: Previous Edition

3) 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: Previous Edition

4) 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 Ques Status: Previous Edition

5) 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 Ques Status: Previous Edition

14 Mishkin · The Economics of Money, Banking, and Financial Markets, 9th Edition 6) 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 Ques Status: Previous Edition

7) Everything else held constant, a stronger dollar benefits A) American businesses; American consumers B) American businesses; foreign businesses C) American consumers; American businesses D) foreign businesses; American consumers

and hurts

.

Answer: C Ques Status: Previous Edition

8) From 1980 to early 1985 the dollar A) appreciated; consumers B) appreciated, businesses C) depreciated; consumers D) depreciated, businesses

in value, thereby benefiting American

.

Answer: A Ques Status: Previous Edition

9) 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 Ques Status: Previous Edition

10) 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

Ques Status: Previous Edition

Chapter 1 Why Study Money, Banking, and Financial Markets? 15

11) 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 Ques Status: Previous Edition

12) 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 Ques Status: Previous Edition

13) 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 Ques Status: Previous Edition

14) 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 Ques Status: Previous Edition

15) From 1980-1985, the dollar strengthened in value against other currencies. Who was helped and who was hurt by this strong dollar? Answer: American consumers benefitted because imports were cheaper and consumers could purchase more. American businesses and workers in those businesses were hurt as domestic and foreign sales of American products fell. Ques Status: New

16 Mishkin · The Economics of Money, Banking, and Financial Markets, 9th Edition

1.5 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 Ques Status: Previous Edition

2) 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 Ques Status: Previous Edition

3) Which of the following items are not counted in U.S. GDP? A) your purchase of a new Ford Mustang B) your purchase of new tires for your old car C) GM's purchase of tires for new cars D) a foreign consumer's purchase of a new Ford Mustang Answer: C Ques Status: New

4) 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 Ques Status: Previous Edition

5) 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 Ques Status: Previous Edition

Chapter 1 Why Study Money, Banking, and Financial Markets? 17

6) Nominal GDP is output measured in prices. A) current; current B) current; fixed C) fixed; fixed D) fixed; current

prices while real GDP is output measured in

Answer: B Ques Status: New

7) GDP measured with constant prices is referred to as A) real GDP. B) nominal GDP. C) the GDP deflator. D) industrial production. Answer: A Ques Status: Previous Edition

8) If your nominal income in 2002 was $50,000, and prices doubled between 2002 and 2008, to have the same real income, your nominal income in 2008 must be A) $50,000. B) $75,000. C) $90,000. D) $100,000. Answer: D

Ques Status: Revised

9) If your nominal income in 1998 is $50,000, and prices increase by 50% between 1998 and 2008, then to have the same real income, your nominal income in 2008 must be A) $50,000. B) $75,000. C) $100,000. D) $150,000. Answer: B

Ques Status: Revised

10) To convert a nominal GDP to a real GDP, you would use A) the PCE deflator. B) the CPI measure. C) the GDP deflator. D) the PPI measure. Answer: C Ques Status: New

18 Mishkin · The Economics of Money, Banking, and Financial Markets, 9th Edition 11) 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

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12) When prices are measured in terms of fixed (base-year) prices they are called A) nominal B) real C) inflated D) aggregate

prices.

Answer: B Ques Status: Previous Edition

13) 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: Previous Edition

14) To calculate the growth rate of a variable, you will A) calculate the percentage change from one time period to the next. B) calculate the difference between the two variables. C) add the ending value to the beginning value. D) divide the increase by the number of time periods. Answer: A Ques Status: New

15) 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

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Chapter 1 Why Study Money, Banking, and Financial Markets? 19

16) 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 Ques Status: Previous Edition

17) 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) /Pt - 1. C) πt = (Pt + 1 - Pt) /Pt. D) πt = (Pt - Pt - 1) /Pt.

Answer: A Ques Status: Previous Edition

18) 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

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19) 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

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20) 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 Ques Status: Previous Edition

Chapter 2

An Overview of the Financial System 2.1 Function of Financial Markets 1) Every financial market has the following characteristic: A) It determines the level of interest rates. B) It allows common stock to be traded. C) It allows loans to be made. D) It channels funds from lenders-savers to borrowers-spenders. Answer: D Ques Status: Previous Edition

2) Financial markets have the basic function of A) getting people with funds to lend together with people who want to borrow funds. B) assuring that the swings in the business cycle are less pronounced. C) assuring that governments need never resort to printing money. D) providing a risk-free repository of spending power. Answer: A Ques Status: Previous Edition

3) Financial markets improve economic welfare because A) they channel funds from investors to savers. B) they allow consumers to time their purchase better. C) they weed out inefficient firms. D) eliminate the need for indirect finance. Answer: B Ques Status: Previous Edition

4) Well-functioning financial markets A) cause inflation. B) eliminate the need for indirect finance. C) cause financial crises. D) produce an efficient allocation of capital. Answer: D Ques Status: Previous Edition

5) A breakdown of financial markets can result in A) financial stability. B) rapid economic growth. C) political instability. D) stable prices. Answer: C Ques Status: Previous Edition

Chapter 2 An Overview of the Financial System 21

6) The principal lender-savers are A) governments. B) businesses. C) households. D) foreigners. Answer: C Ques Status: New

7) Which of the following can be described as direct finance? A) You take out a mortgage from your local bank. B) You borrow $2500 from a friend. C) You buy shares of common stock in the secondary market. D) You buy shares in a mutual fund. Answer: B Ques Status: Previous Edition

8) Assume that you borrow $2000 at 10% annual interest to finance a new business project. For this loan to be profitable, the minimum amount this project must generate in annual earnings is A) $400. B) $201. C) $200. D) $199. Answer: B

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9) You can borrow $5000 to finance a new business venture. This new venture will generate annual earnings of $251. The maximum interest rate that you would pay on the borrowed funds and still increase your income is A) 25%. B) 12.5%. C) 10%. D) 5%. Answer: D

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10) Which of the following can be described as involving direct finance? A) A corporation issues new shares of stock. B) People buy shares in a mutual fund. C) A pension fund manager buys a short-term corporate security in the secondary market. D) An insurance company buys shares of common stock in the over -the-counter markets. Answer: A Ques Status: Previous Edition

11) Which of the following can be described as involving direct finance? A) A corporation takes out loans from a bank. B) People buy shares in a mutual fund. C) A corporation buys a short-term corporate security in a secondary market. D) People buy shares of common stock in the primary markets. Answer: D

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22 Mishkin · The Economics of Money, Banking, and Financial Markets, 9th Edition 12) Which of the following can be described as involving indirect finance? A) You make a loan to your neighbor. B) A corporation buys a share of common stock issued by another corporation in the primary market. C) You buy a U.S. Treasury bill from the U.S. Treasury. D) You make a deposit at a bank. Answer: D Ques Status: Previous Edition

13) Which of the following can be described as involving indirect finance? A) You make a loan to your neighbor. B) You buy shares in a mutual fund. C) You buy a U.S. Treasury bill from the U.S. Treasury. D) A corporation buys a short-term security issued by another corporation in the primary market. Answer: B

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14) Securities are for the person who buys them, but are firm that issues them. A) assets; liabilities B) liabilities; assets C) negotiable; nonnegotiable D) nonnegotiable; negotiable

for the individual or

Answer: A Ques Status: Previous Edition

15) With finance, borrowers obtain funds from lenders by selling them securities in the financial markets. A) active B) determined C) indirect D) direct Answer: D Ques Status: Previous Edition

16) With direct finance funds are channeled through the financial market from the to the . A) savers, spenders B) spenders, investors C) borrowers, savers D) investors, savers Answer: A Ques Status: Previous Edition

directly

Chapter 2 An Overview of the Financial System 23

17) Distinguish between direct finance and indirect finance. Which of these is the most important source of funds for corporations in the United States? Answer: With direct finance, funds flow directly from the lender/saver to the borrower. With indirect finance, funds flow from the lender/saver to a financial intermediary who then channels the funds to the borrower/investor. Financial intermediaries (indirect finance) are the major source of funds for corporations in the U.S. Ques Status: Previous Edition

2.2 Structure of Financial Markets 1) Which of the following statements about the characteristics of debt and equity is false? A) They can both be long-term financial instruments. B) They can both be short-term financial instruments. C) They both involve a claim on the issuer's income. D) They both enable a corporation to raise funds. Answer: B Ques Status: Previous Edition

2) Which of the following statements about the characteristics of debt and equities is true? A) They can both be long-term financial instruments. B) Bond holders are residual claimants. C) The income from bonds is typically more variable than that from equities. D) Bonds pay dividends. Answer: A Ques Status: Previous Edition

3) Which of the following statements about financial markets and securities is true? A) A bond is a long-term security that promises to make periodic payments called dividends to the firm's residual claimants. B) A debt instrument is intermediate term if its maturity is less than one year. C) A debt instrument is intermediate term if its maturity is ten years or longer. D) The maturity of a debt instrument is the number of years (term) to that instrument's expiration date. Answer: D

Ques Status: Previous Edition

4) Which of the following is an example of an intermediate -term debt? A) A thirty-year mortgage. B) A sixty-month car loan. C) A six month loan from a finance company. D) A Treasury bond. Answer: B Ques Status: Previous Edition

24 Mishkin · The Economics of Money, Banking, and Financial Markets, 9th Edition 5) If the maturity of a debt instrument is less than one year, the debt is called A) short-term B) intermediate-term C) long-term D) prima-term Answer: A

.

Ques Status: Previous Edition

6) Long-term debt has a maturity that is A) between one and ten years. B) less than a year. C) between five and ten years. D) ten years or longer.

.

Answer: D Ques Status: Previous Edition

7) When I purchase , I own a portion of a firm and have the right to vote on issues important to the firm and to elect its directors. A) bonds B) bills C) notes D) stock Answer: D Ques Status: Previous Edition

8) Equity holders are a corporation's holders before it pays its equity holders. A) debtors B) brokers C) residual claimants D) underwriters

. That means the corporation must pay all of its debt

Answer: C Ques Status: Previous Edition

9) Which of the following benefit directly from any increase in the corporation's profitability? A) a bond holder B) a commercial paper holder C) a shareholder D) a T-bill holder Answer: C Ques Status: New

10) A financial market in which previously issued securities can be resold is called a market. A) primary B) secondary C) tertiary D) used securities Answer: B Ques Status: Previous Edition

Chapter 2 An Overview of the Financial System 25

11) An important financial institution that assists in the initial sale of securities in the primary market is the A) investment bank. B) commercial bank. C) stock exchange. D) brokerage house. Answer: A Ques Status: Previous Edition

12) When an investment bank and then sells them to the public. A) underwrites B) undertakes C) overwrites D) overtakes

securities, it guarantees a price for a corporation's securities

Answer: A Ques Status: Previous Edition

13) Which of the following is not a secondary market? A) foreign exchange market B) futures market C) options market D) IPO market Answer: D Ques Status: New

14)

work in the secondary markets matching buyers with sellers of securities. A) Dealers B) Underwriters C) Brokers D) Claimants Answer: C Ques Status: Previous Edition

15) A corporation acquires new funds only when its securities are sold in the A) primary market by an investment bank. B) primary market by a stock exchange broker. C) secondary market by a securities dealer. D) secondary market by a commercial bank. Answer: A Ques Status: Previous Edition

16) A corporation acquires new funds only when its securities are sold in the A) secondary market by an investment bank. B) primary market by an investment bank. C) secondary market by a stock exchange broker. D) secondary market by a commercial bank. Answer: B Ques Status: Previous Edition

26 Mishkin · The Economics of Money, Banking, and Financial Markets, 9th Edition 17) An important function of secondary markets is to A) make it easier to sell financial instruments to raise funds. B) raise funds for corporations through the sale of securities. C) make it easier for governments to raise taxes. D) create a market for newly constructed houses. Answer: A Ques Status: Previous Edition

18) Secondary markets make financial instruments more A) solid. B) vapid. C) liquid. D) risky. Answer: C Ques Status: Previous Edition

19) A liquid asset is A) an asset that can easily and quickly be sold to raise cash. B) a share of an ocean resort. C) difficult to resell. D) always sold in an over-the-counter market. Answer: A

Ques Status: New

20) The higher a security's price in the secondary market the selling securities in the market. A) more; primary B) more; secondary C) less; primary D) less; secondary

funds a firm can raise by

Answer: A Ques Status: Previous Edition

21) When secondary market buyers and sellers of securities meet in one central location to conduct trades the market is called a(n) A) exchange. B) over-the-counter market. C) common market. D) barter market. Answer: A Ques Status: New

22) Forty or so dealers establish a "market" in these securities by standing ready to buy and sell them. A) Secondary stocks B) Surplus stocks C) U.S. government bonds D) Common stocks Answer: C Ques Status: Previous Edition

Chapter 2 An Overview of the Financial System 27

23) Which of the following statements about financial markets and securities is true? A) Many common stocks are traded over-the-counter, although the largest corporations usually have their shares traded at organized stock exchanges such as the New York Stock Exchange. B) As a corporation gets a share of the broker's commission, a corporation acquires new funds whenever its securities are sold. C) Capital market securities are usually more widely traded than shorter -term securities and so tend to be more liquid. D) Because of their short-terms to maturity, the prices of money market instruments tend to fluctuate wildly. Answer: A

Ques Status: Previous Edition

24) A financial market in which only short-term debt instruments are traded is called the market. A) bond B) money C) capital D) stock Answer: B Ques Status: Previous Edition

25) Equity instruments are traded in the A) money B) bond C) capital D) commodities

market.

Answer: C Ques Status: Previous Edition

26) Corporations receive funds when their stock is sold in the primary market. Why do corporations pay attention to what is happening to their stock in the secondary market? Answer: The existence of the secondary market makes their stock more liquid and the price in the secondary market sets the price that the corporation would receive if they choose to sell more stock in the primary market. Ques Status: Previous Edition

27) Describe the two methods of organizing a secondary market. Answer: A secondary market can be organized as an exchange where buyers and sellers meet in one central location to conduct trades. An example of an exchange is the New York Stock Exchange. A secondary market can also be organized as an over -the-counter market. In this type of market, dealers in different locations buy and sell securities to anyone who comes to them and is willing to accept their prices. An example of an over -the-counter market is the federal funds market. Ques Status: New

28 Mishkin · The Economics of Money, Banking, and Financial Markets, 9th Edition

2.3 Financial Market Instruments 1) Prices of money market instruments undergo the least price fluctuations because of A) the short terms to maturity for the securities. B) the heavy regulations in the industry. C) the price ceiling imposed by government regulators. D) the lack of competition in the market. Answer: A Ques Status: New

2) U.S. Treasury bills pay no interest but are sold at a purchase price than the amount you receive at maturity. A) premium B) collateral C) default D) discount

. That is, you will pay a lower

Answer: D Ques Status: Previous Edition

3) U.S. Treasury bills are considered the safest of all money market instruments because there is no risk of . A) defeat B) default C) desertion D) demarcation Answer: B Ques Status: Previous Edition

4) A debt instrument sold by a bank to its depositors that pays annual interest of a given amount and at maturity pays back the original purchase price is called A) commercial paper. B) a negotiable certificate of deposit. C) a municipal bond. D) federal funds. Answer: B Ques Status: Revised

5) A short-term debt instrument issued by well-known corporations is called A) commercial paper. B) corporate bonds. C) municipal bonds. D) commercial mortgages. Answer: A Ques Status: New

Chapter 2 An Overview of the Financial System 29

6)

are short-term loans in which Treasury bills serve as collateral. A) Repurchase agreements B) Negotiable certificates of deposit C) Federal funds D) U.S. government agency securities Answer: A Ques Status: New

7) Collateral is A) a liability B) an asset C) a present D) an offering

the lender receives if the borrower does not pay back the loan.

Answer: B Ques Status: Previous Edition

8) Federal funds are A) funds raised by the federal government in the bond market. B) loans made by the Federal Reserve System to banks. C) loans made by banks to the Federal Reserve System. D) loans made by banks to each other. Answer: D Ques Status: Previous Edition

9) The British Banker's Association average of interbank rates for dollar deposits in the London market is called the A) Libor rate. B) federal funds rate. C) prime rate. D) Treasury Bill rate. Answer: A Ques Status: New

10) Which of the following are short-term financial instruments? A) A repurchase agreement. B) A share of Walt Disney Corporation stock. C) A Treasury note with a maturity of four years. D) A residential mortgage. Answer: A Ques Status: Revised

11) Which of the following instruments are traded in a money market? A) State and local government bonds. B) U.S. Treasury bills. C) Corporate bonds. D) U.S. government agency securities. Answer: B Ques Status: Previous Edition

30 Mishkin · The Economics of Money, Banking, and Financial Markets, 9th Edition 12) Which of the following instruments are traded in a money market? A) Bank commercial loans. B) Commercial paper. C) State and local government bonds. D) Residential mortgages. Answer: B Ques Status: Revised

13) Which of the following instruments is not traded in a money market? A) Residential mortgages. B) U.S. Treasury Bills. C) Negotiable bank certificates of deposit. D) Commercial paper. Answer: A Ques Status: Revised

14) Bonds issued by state and local governments are called A) corporate B) Treasury C) municipal D) commercial

bonds.

Answer: C Ques Status: Previous Edition

15) Equity and debt instruments with maturities greater than one year are called instruments. A) capital B) money C) federal D) benchmark Answer: A Ques Status: New

16) Which of the following is a long-term financial instrument? A) A negotiable certificate of deposit. B) A repurchase agreement. C) A U.S. Treasury bond. D) A U.S. Treasury bill. Answer: C Ques Status: Revised

17) Which of the following instruments are traded in a capital market? A) U.S. Government agency securities. B) Negotiable bank CDs. C) Repurchase agreements. D) U.S. Treasury bills. Answer: A Ques Status: Revised

market

Chapter 2 An Overview of the Financial System 31

18) Which of the following instruments are traded in a capital market? A) Corporate bonds. B) U.S. Treasury bills. C) Negotiable bank CDs. D) Repurchase agreements. Answer: A Ques Status: Revised

19) Which of the following are not traded in a capital market? A) U.S. government agency securities. B) State and local government bonds. C) Repurchase agreements. D) Corporate bonds. Answer: C Ques Status: Previous Edition

2.4 Internationalization of Financial Markets 1) Equity of U.S. companies can be purchased by A) U.S. citizens only. B) foreign citizens only. C) U.S. citizens and foreign citizens. D) U.S. mutual funds only. Answer: C Ques Status: New

2) One reason for the extraordinary growth of foreign financial markets is A) decreased trade. B) increases in the pool of savings in foreign countries. C) the recent introduction of the foreign bond. D) slower technological innovation in foreign markets. Answer: B Ques Status: Revised

3) Bonds that are sold in a foreign country and are denominated in the country's currency in which they are sold are known as A) foreign bonds. B) Eurobonds. C) equity bonds. D) country bonds. Answer: A Ques Status: Previous Edition

32 Mishkin · The Economics of Money, Banking, and Financial Markets, 9th Edition 4) Bonds that are sold in a foreign country and are denominated in a currency other than that of the country in which it is sold are known as A) foreign bonds. B) Eurobonds. C) equity bonds. D) country bonds. Answer: B Ques Status: Previous Edition

5) If Microsoft sells a bond in London and it is denominated in dollars, the bond is a A) Eurobond B) foreign bond C) British bond D) currency bond

.

Answer: A Ques Status: Previous Edition

6) U.S. dollar deposits in foreign banks outside the U.S. or in foreign branches of U.S. banks are called . A) Atlantic dollars B) Eurodollars C) foreign dollars D) outside dollars Answer: B Ques Status: Previous Edition

7) Distinguish between a foreign bond and a Eurobond. Answer: A foreign bond is sold in a foreign country and priced in that country's currency. A Eurobond is sold in a foreign country and priced in a currency that is not that country's currency. Ques Status: New

2.5 Function of Financial Intermediaries: Indirect Finance 1) The process of indirect finance using financial intermediaries is called A) direct lending. B) financial intermediation. C) resource allocation. D) financial liquidation. Answer: B Ques Status: Previous Edition

2) In the United States, loans from are securities markets. A) government agencies; more B) government agencies; less C) financial intermediaries; more D) financial intermediaries; less Answer: C Ques Status: Previous Edition

are far

important for corporate finance than

Chapter 2 An Overview of the Financial System 33

3) The time and money spent in carrying out financial transactions are called A) economies of scale. B) financial intermediation. C) liquidity services. D) transaction costs. Answer: D Ques Status: New

4) Economies of scale enable financial institutions to A) reduce transactions costs. B) avoid the asymmetric information problem. C) avoid adverse selection problems. D) reduce moral hazard. Answer: A Ques Status: Previous Edition

5) An example of economies of scale in the provision of financial services is A) investing in a diversified collection of assets. B) providing depositors with a variety of savings certificates. C) spreading the cost of borrowed funds over many customers. D) spreading the cost of writing a standardized contract over many borrowers. Answer: D Ques Status: Previous Edition

6) Financial intermediaries provide customers with liquidity services. Liquidity services A) make it easier for customers to conduct transactions. B) allow customers to have a cup of coffee while waiting in the lobby. C) are a result of the asymmetric information problem. D) are another term for asset transformation. Answer: A Ques Status: New

7) The process where financial intermediaries create and sell low-risk assets and use the proceeds to purchase riskier assets is known as A) risk sharing. B) risk aversion. C) risk neutrality. D) risk selling. Answer: A Ques Status: Previous Edition

8) The process of asset transformation refers to the conversion of A) safer assets into risky assets. B) safer assets into safer liabilities. C) risky assets into safer assets. D) risky assets into risky liabilities. Answer: C Ques Status: Previous Edition

34 Mishkin · The Economics of Money, Banking, and Financial Markets, 9th Edition 9) Reducing risk through the purchase of assets whose returns do not always move together is A) diversification. B) intermediation. C) intervention. D) discounting. Answer: A Ques Status: Previous Edition

10) The concept of diversification is captured by the statement A) don't look a gift horse in the mouth. B) don't put all your eggs in one basket. C) it never rains, but it pours. D) make hay while the sun shines. Answer: B Ques Status: Previous Edition

11) Risk sharing is profitable for financial institutions due to A) low transactions costs. B) asymmetric information. C) adverse selection. D) moral hazard. Answer: A Ques Status: Previous Edition

12) Typically, borrowers have superior information relative to lenders about the potential returns and risks associated with an investment project. The difference in information is called A) moral selection. B) risk sharing. C) asymmetric information. D) adverse hazard Answer: C Ques Status: Revised

13) If bad credit risks are the ones who most actively seek loans and, therefore, receive them from financial intermediaries, then financial intermediaries face the problem of A) moral hazard. B) adverse selection. C) free-riding. D) costly state verification. Answer: B

Ques Status: Previous Edition

14) The problem created by asymmetric information before the transaction occurs is called , while the problem created after the transaction occurs is called . A) adverse selection; moral hazard B) moral hazard; adverse selection C) costly state verification; free-riding D) free-riding; costly state verification Answer: A Ques Status: Previous Edition

Chapter 2 An Overview of the Financial System 35

15) Adverse selection is a problem associated with equity and debt contracts arising from A) the lender's relative lack of information about the borrower's potential returns and risks of his investment activities. B) the lender's inability to legally require sufficient collateral to cover a 100% loss if the borrower defaults. C) the borrower's lack of incentive to seek a loan for highly risky investments. D) the borrower's lack of good options for obtaining funds. Answer: A Ques Status: Previous Edition

16) An example of the problem of is when a corporation uses the funds raised from selling bonds to fund corporate expansion to pay for Caribbean cruises for all of its employees and their families. A) adverse selection B) moral hazard C) risk sharing D) credit risk Answer: B Ques Status: Previous Edition

17) Studies of the major developed countries show that when businesses go looking for funds to finance their activities they usually obtain these funds from A) government agencies. B) equities markets. C) financial intermediaries. D) bond markets. Answer: C Ques Status: Previous Edition

18) The countries that have made the least use of securities markets are and ; in these two countries finance from financial intermediaries has been almost ten times greater than that from securities markets. A) Germany; Japan B) Germany; Great Britain C) Great Britain; Canada D) Canada; Japan Answer: A Ques Status: Previous Edition

19) Although the dominance of over is clear in all countries, the relative importance of bond versus stock markets differs widely. A) financial intermediaries; securities markets B) financial intermediaries; government agencies C) government agencies; financial intermediaries D) government agencies; securities markets Answer: A Ques Status: Previous Edition

36 Mishkin · The Economics of Money, Banking, and Financial Markets, 9th Edition 20) Because there is an imbalance of information in a lending situation, we must deal with the problems of adverse selection and moral hazard. Define these terms and explain how financial intermediaries can reduce these problems. Answer: Adverse selection is the asymmetric information problem that exists before the transaction occurs. For lenders, it is the difficulty in judging a good credit risk from a bad credit risk. Moral hazard is the asymmetric information problem that exists after the transaction occurs. For lenders, it is the difficulty in making sure the borrower uses the funds appropriately. Financial intermediaries can reduce adverse selection through intensive screening and can reduce moral hazard by monitoring the borrower. Ques Status: Previous Edition

2.6 Types of Financial Intermediaries 1) Financial institutions that accept deposits and make loans are called A) investment B) contractual savings C) depository D) underwriting Answer: C Ques Status: Previous Edition

2) Thrift institutions include A) banks, mutual funds, and insurance companies. B) savings and loan associations, mutual savings banks, and credit unions. C) finance companies, mutual funds, and money market funds. D) pension funds, mutual funds, and banks. Answer: B Ques Status: Previous Edition

3) Which of the following is a depository institution? A) A life insurance company B) A credit union C) A pension fund D) A mutual fund Answer: B Ques Status: Previous Edition

4) Which of the following is a depository institution? A) A life insurance company B) A mutual savings bank C) A pension fund D) A finance company Answer: B Ques Status: Previous Edition

institutions.

Chapter 2 An Overview of the Financial System 37

5) Which of the following financial intermediaries is not a depository institution? A) A savings and loan association B) A commercial bank C) A credit union D) A finance company Answer: D Ques Status: Previous Edition

6) The primary assets of credit unions are A) municipal bonds. B) business loans. C) consumer loans. D) mortgages. Answer: C Ques Status: Previous Edition

7) The primary liabilities of a commercial bank are A) bonds. B) mortgages. C) deposits. D) commercial paper. Answer: C Ques Status: Previous Edition

8) The primary liabilities of depository institutions are A) premiums from policies. B) shares. C) deposits. D) bonds. Answer: C Ques Status: Previous Edition

9)

institutions are financial intermediaries that acquire funds at periodic intervals on a contractual basis. A) Investment B) Contractual savings C) Thrift D) Depository Answer: B Ques Status: Previous Edition

10) Which of the following is a contractual savings institution? A) A life insurance company B) A credit union C) A savings and loan association D) A mutual fund Answer: A Ques Status: Previous Edition

38 Mishkin · The Economics of Money, Banking, and Financial Markets, 9th Edition 11) Contractual savings institutions include A) mutual savings banks. B) money market mutual funds. C) commercial banks. D) life insurance companies. Answer: D Ques Status: Previous Edition

12) Which of the following are not contractual savings institutions? A) Life insurance companies B) Credit unions C) Pension funds D) State and local government retirement funds Answer: B Ques Status: Previous Edition

13) Which of the following is not a contractual savings institution? A) A life insurance company B) A pension fund C) A savings and loan association D) A fire and casualty insurance company Answer: C Ques Status: Previous Edition

14) The primary assets of a pension fund are A) money market instruments. B) corporate bonds and stock. C) consumer and business loans. D) mortgages. Answer: B Ques Status: Previous Edition

15) Which of the following are investment intermediaries? A) Life insurance companies B) Mutual funds C) Pension funds D) State and local government retirement funds Answer: B Ques Status: Previous Edition

16) An investment intermediary that lends funds to consumers is A) a finance company. B) an investment bank. C) a finance fund. D) a consumer company. Answer: A Ques Status: New

Chapter 2 An Overview of the Financial System 39

17) The primary assets of a finance company are A) municipal bonds. B) corporate stocks and bonds. C) consumer and business loans. D) mortgages. Answer: C Ques Status: Previous Edition

18)

are financial intermediaries that acquire funds by selling shares to many individuals and using the proceeds to purchase diversified portfolios of stocks and bonds. A) Mutual funds B) Investment banks C) Finance companies D) Credit unions Answer: A Ques Status: New

19) Money market mutual fund shares function like A) checking accounts that pay interest. B) bonds. C) stocks. D) currency. Answer: A Ques Status: Previous Edition

20) An important feature of money market mutual fund shares is A) deposit insurance. B) the ability to write checks against shareholdings. C) the ability to borrow against shareholdings. D) claims on shares of corporate stock. Answer: B Ques Status: Previous Edition

21) The primary assets of money market mutual funds are A) stocks. B) bonds. C) money market instruments. D) deposits. Answer: C Ques Status: Previous Edition

22) An investment bank helps issue securities. A) a corporation B) the United States government C) the SEC D) foreign governments Answer: A Ques Status: New

40 Mishkin · The Economics of Money, Banking, and Financial Markets, 9th Edition 23) An investment bank purchases securities from a corporation at a predetermined price and then resells them in the market. This process is called A) underwriting. B) underhanded. C) understanding. D) undertaking. Answer: A Ques Status: New

2.7 Regulation of the Financial System 1) Which of the following is not a goal of financial regulation? A) Ensuring the soundness of the financial system B) Reducing moral hazard C) Reducing adverse selection D) Ensuring that investors never suffer losses Answer: D Ques Status: Previous Edition

2) Increasing the amount of information available to investors helps to reduce the problems of and in the financial markets. A) adverse selection; moral hazard B) adverse selection; risk sharing C) moral hazard; transactions costs D) adverse selection; economies of scale Answer: A Ques Status: New

3) A goal of the Securities and Exchange Commission is to reduce problems arising from A) competition. B) banking panics. C) risk. D) asymmetric information. Answer: D Ques Status: Previous Edition

4) The purpose of the disclosure requirements of the Securities and Exchange Commission is to A) increase the information available to investors. B) prevent bank panics. C) improve monetary control. D) protect investors against financial losses. Answer: A Ques Status: Previous Edition

Chapter 2 An Overview of the Financial System 41

5) Government regulations to reduce the possibility of financial panic include all of the following except A) transactions costs. B) restrictions on assets and activities. C) disclosure. D) deposit insurance. Answer: A Ques Status: New

6) Which of the following do not provide charters? A) The Office of the Comptroller of the Currency B) The Federal Reserve System C) The National Credit Union Administration D) State banking and insurance commissions Answer: B Ques Status: Previous Edition

7) A restriction on bank activities that was repealed in 1999 was A) the prohibition of the payment of interest on checking deposits. B) restrictions on credit terms. C) minimum down payments on loans to purchase securities. D) separation of commercial banking from the securities industries. Answer: D Ques Status: Revised

8) In order to reduce risk and increase the safety of financial institutions, commercial banks and other depository institutions are prohibited from A) owning municipal bonds. B) making real estate loans. C) making personal loans. D) owning common stock. Answer: D Ques Status: Previous Edition

9) The primary purpose of deposit insurance is to A) improve the flow of information to investors. B) prevent banking panics. C) protect bank shareholders against losses. D) protect bank employees from unemployment. Answer: B Ques Status: Previous Edition

10) The agency that was created to protect depositors after the banking failures of 1930 -1933 is the A) Federal Reserve System. B) Federal Deposit Insurance Corporation. C) Treasury Department. D) Office of the Comptroller of the Currency. Answer: B Ques Status: Previous Edition

42 Mishkin · The Economics of Money, Banking, and Financial Markets, 9th Edition 11) Savings and loan associations are regulated by the A) Federal Reserve System. B) Securities and Exchange Commission. C) Office of the Comptroller of the Currency. D) Office of Thrift Supervision. Answer: D Ques Status: Previous Edition

12) The regulatory agency that sets reserve requirements for all banks is A) the Federal Reserve System. B) the Federal Deposit Insurance Corporation. C) the Office of Thrift Supervision. D) the Securities and Exchange Commission. Answer: A Ques Status: New

13) Asymmetric information is a universal problem. This would suggest that financial regulations A) in industrial countries are an unqualified failure. B) differ significantly around the world. C) in industrialized nations are similar. D) are unnecessary. Answer: C Ques Status: Previous Edition

14) How do regulators help to ensure the soundness of financial intermediaries? Answer: Regulators restrict who can set up a financial intermediary, conduct regular examinations, restrict assets, and provide insurance to help ensure the soundness of financial intermediaries. Ques Status: Previous Edition

Chapter 3 What Is Money?

3.1 Meaning of Money 1) To an economist, is anything that is generally accepted in payment for goods and services or in the repayment of debt. A) wealth B) income C) money D) credit Answer: C Ques Status: Previous Edition

2) Money is A) anything that is generally accepted in payment for goods and services or in the repayment of debt. B) a flow of earnings per unit of time. C) the total collection of pieces of property that are a store of value. D) always based on a precious metal like gold or silver. Answer: A Ques Status: Previous Edition

3) Currency includes A) paper money and coins. B) paper money, coins, and checks. C) paper money and checks. D) paper money, coins, checks, and savings deposits. Answer: A Ques Status: Previous Edition

4) Even economists have no single, precise definition of money because A) money supply statistics are a state secret. B) the Federal Reserve does not employ or report different measures of the money supply. C) the "moneyness" or liquidity of an asset is a matter of degree. D) economists find disagreement interesting and refuse to agree for ideological reasons. Answer: C Ques Status: Revised

5) The total collection of pieces of property that serve to store value is a person's A) wealth. B) income. C) money. D) credit. Answer: A Ques Status: New

44 Mishkin · The Economics of Money, Banking, and Financial Markets, 9th Edition 6) A person's house is part of her A) money. B) income. C) liabilities. D) wealth. Answer: D Ques Status: Previous Edition

7)

is used to make purchases while that serve to store value. A) Money; income B) Wealth; income C) Income; money D) Money; wealth

is the total collection of pieces of property

Answer: D Ques Status: Previous Edition

8)

is a flow of earnings per unit of time. A) Income B) Money C) Wealth D) Currency Answer: A Ques Status: Previous Edition

9) An individual's annual salary is her A) money. B) income. C) wealth. D) liabilities. Answer: B Ques Status: Previous Edition

10) When we say that money is a stock variable, we mean that A) the quantity of money is measured at a given point in time. B) we must attach a time period to the measure. C) it is sold in the equity market. D) money never loses purchasing power. Answer: A Ques Status: New

11) The difference between money and income is that A) money is a flow and income is a stock. B) money is a stock and income is a flow. C) there is no difference—money and income are both stocks. D) there is no difference—money and income are both flows. Answer: B Ques Status: Previous Edition

Chapter 3 What Is Money? 45

12) Which of the following is a true statement? A) Money and income are flow variables. B) Money is a flow variable. C) Income is a flow variable. D) Money and income are stock variables. Answer: C Ques Status: Revised

13) Which of the following statements uses the economists' definition of money? A) I plan to earn a lot of money over the summer. B) Betsy is rich—she has a lot of money. C) I hope that I have enough money to buy my lunch today. D) The job with New Company gave me the opportunity to earn more money. Answer: C Ques Status: Previous Edition

3.2 Functions of Money 1) Of money's three functions, the one that distinguishes money from other assets is its function as a A) store of value. B) unit of account. C) standard of deferred payment. D) medium of exchange. Answer: D Ques Status: Previous Edition

2) If peanuts serve as a medium of exchange, a unit of account, and a store of value, then peanuts are A) bank deposits. B) reserves. C) money. D) loanable funds. Answer: C Ques Status: Previous Edition

3)

are the time and resources spent trying to exchange goods and services. A) Bargaining costs. B) Transaction costs. C) Contracting costs. D) Barter costs. Answer: B Ques Status: Previous Edition

46 Mishkin · The Economics of Money, Banking, and Financial Markets, 9th Edition 4) Compared to an economy that uses a medium of exchange, in a barter economy A) transaction costs are higher. B) transaction costs are lower. C) liquidity costs are higher. D) liquidity costs are lower. Answer: A Ques Status: Previous Edition

5) When compared to exchange systems that rely on money, disadvantages of the barter system include: A) the requirement of a double coincidence of wants. B) lowering the cost of exchanging goods over time. C) lowering the cost of exchange to those who would specialize. D) encouraging specialization and the division of labor. Answer: A Ques Status: Previous Edition

6) The conversion of a barter economy to one that uses money A) increases efficiency by reducing the need to exchange goods and services. B) increases efficiency by reducing the need to specialize. C) increases efficiency by reducing transactions costs. D) does not increase economic efficiency. Answer: C Ques Status: Previous Edition

7) Which of the following statements best explains how the use of money in an economy increases economic efficiency? A) Money increases economic efficiency because it is costless to produce. B) Money increases economic efficiency because it discourages specialization. C) Money increases economic efficiency because it decreases transactions costs. D) Money cannot have an effect on economic efficiency. Answer: C Ques Status: Previous Edition

8) When economists say that money promotes specialization and the division of labor. A) bargaining B) contracting C) efficiency D) greed

, they mean that money encourages

Answer: C Ques Status: Previous Edition

9) Money transaction costs, allowing people to specialize in what they do best. A) reduces B) increases C) enhances D) eliminates Answer: A Ques Status: Previous Edition

Chapter 3 What Is Money? 47

10) For a commodity to function effectively as money it must be A) easily standardized, making it easy to ascertain its value. B) difficult to make change. C) deteriorate quickly so that its supply does not become too large. D) hard to carry around. Answer: A Ques Status: Previous Edition

11) All of the following are necessary criteria for a commodity to function as money except A) it must deteriorate quickly. B) it must be divisible. C) it must be easy to carry. D) it must be widely accepted. Answer: A Ques Status: New

12) Whatever a society uses as money, the distinguishing characteristic is that it must A) be completely inflation proof. B) be generally acceptable as payment for goods and services or in the repayment of debt. C) contain gold. D) be produced by the government. Answer: B Ques Status: Previous Edition

13) All but the most primitive societies use money as a medium of exchange, implying that A) the use of money is economically efficient. B) barter exchange is economically efficient. C) barter exchange cannot work outside the family. D) inflation is not a concern. Answer: A Ques Status: Previous Edition

14) Kevin purchasing concert tickets with his debit card is an example of the money. A) medium of exchange B) unit of account C) store of value D) specialization

function of

Answer: A Ques Status: Previous Edition

15) When money prices are used to facilitate comparisons of value, money is said to function as a A) unit of account. B) medium of exchange. C) store of value. D) payments-system ruler. Answer: A

Ques Status: Previous Edition

48 Mishkin · The Economics of Money, Banking, and Financial Markets, 9th Edition 16) A problem with barter exchange when there are many goods is that in a barter system A) transactions costs are minimized. B) there exists a multiple number of prices for each good. C) there is only one store of value. D) exchange of services is impossible. Answer: B Ques Status: Previous Edition

17) In a barter economy the number of prices in an economy with N goods is A) [N(N - 1)]/2. B) N(N/2). C) 2N. D) N(N/2) - 1. Answer: A

Ques Status: Previous Edition

18) If there are five goods in a barter economy, one needs to know ten prices in order to exchange one good for another. If, however, there are ten goods in a barter economy, then one needs to know prices in order to exchange one good for another. A) 20 B) 25 C) 30 D) 45 Answer: D

Ques Status: Previous Edition

19) If there are four goods in a barter economy, then one needs to know exchange one good for another. A) 8 B) 6 C) 5 D) 4

prices in order to

Answer: B

Ques Status: Previous Edition

20) Because it is a unit of account, money A) increases transaction costs. B) reduces the number of prices that need to be calculated. C) does not earn interest. D) discourages specialization. Answer: B Ques Status: Previous Edition

21) Dennis notices that jackets are on sale for $99. In this case money is functioning as a A) medium of exchange B) unit of account C) store of value D) payments-system ruler Answer: B Ques Status: Previous Edition

.

Chapter 3 What Is Money? 49

22) As a store of value, money A) does not earn interest. B) cannot be a durable asset. C) must be currency. D) is a way of saving for future purchases. Answer: D Ques Status: Revised

23) Patrick places his pocket change into his savings bank on his desk each evening. By his actions, Patrick indicates that he believes that money is a A) medium of exchange. B) unit of account. C) store of value. D) unit of specialization. Answer: C Ques Status: Revised

24)

is the relative ease and speed with which an asset can be converted into a medium of exchange. A) Efficiency B) Liquidity C) Deflation D) Specialization Answer: B Ques Status: Previous Edition

25) Increasing transactions costs of selling an asset make the asset A) more valuable. B) more liquid. C) less liquid. D) more moneylike. Answer: C Ques Status: Previous Edition

26) Since it does not have to be converted into anything else to make purchases, most liquid asset. A) money B) stock C) artwork D) gold Answer: A Ques Status: New

27) Of the following assets, the least liquid is A) stocks. B) traveler's checks. C) checking deposits. D) a house. Answer: D Ques Status: Previous Edition

is the

50 Mishkin · The Economics of Money, Banking, and Financial Markets, 9th Edition 28) Ranking assets from most liquid to least liquid, the correct order is A) savings bonds; house; currency. B) currency; savings bonds; house. C) currency; house; savings bonds. D) house; savings bonds; currency. Answer: B Ques Status: Previous Edition

29) People hold money even during inflationary episodes when other assets prove to be better stores of value. This can be explained by the fact that money is A) extremely liquid. B) a unique good for which there are no substitutes. C) the only thing accepted in economic exchange. D) backed by gold. Answer: A Ques Status: Previous Edition

30) If the price level doubles, the value of money A) doubles. B) more than doubles, due to scale economies. C) rises but does not double, due to diminishing returns. D) falls by 50 percent. Answer: D Ques Status: Previous Edition

31) A fall in the level of prices A) does not affect the value of money. B) has an uncertain effect on the value of money. C) increases the value of money. D) reduces the value of money. Answer: C Ques Status: Previous Edition

32) A hyperinflation is A) a period of extreme inflation generally greater than 50% per month. B) a period of anxiety caused by rising prices. C) an increase in output caused by higher prices. D) impossible today because of tighter regulations. Answer: A Ques Status: New

33) During hyperinflations, A) the value of money rises rapidly. B) money no longer functions as a good store of value and people may resort to barter transactions on a much larger scale. C) middle-class savers benefit as prices rise. D) money's value remains fixed to the price level; that is, if prices double so does the value of money. Answer: B Ques Status: Previous Edition

Chapter 3 What Is Money? 51

34) Because inflation in Germany after World War I sometimes exceeded 1,000 % per month, one can conclude that the German economy suffered from A) deflation. B) disinflation. C) hyperinflation. D) superdeflation. Answer: C Ques Status: Revised

35) If merchants in the country Zed choose to close their doors, preferring to be stuck with rotting merchandise rather than worthless currency, then one can conclude that Zed is experiencing a A) superdeflation. B) hyperdeflation. C) disinflation. D) hyperinflation. Answer: D Ques Status: Previous Edition

36) Explain how cigarettes could be called "money" in prisoner-of-war camps of World War II. Answer: The cigarettes performed the three functions of money. They served as the medium of exchange because individuals did exchange items for cigarettes. They served as a unit of account because prices were quoted in terms of the number of cigarettes required for the exchange. They served as a store of value because an individual would be willing to save their cigarettes even if they did not smoke because they believed that they could exchange the cigarettes for something that they did want at some time in the future. Ques Status: Previous Edition

3.3 Evolution of the Payments System 1) The payments system is A) the method of conducting transactions in the economy. B) used by union officials to set salary caps. C) an illegal method of rewarding contracts. D) used by your employer to determine salary increases. Answer: A Ques Status: New

2) As the payments system evolves from barter to a monetary system, A) commodity money is likely to precede the use of paper currency. B) transaction costs increase. C) the number of prices that need to be calculated increase rather dramatically. D) specialization decreases. Answer: A Ques Status: Previous Edition

52 Mishkin · The Economics of Money, Banking, and Financial Markets, 9th Edition 3) A disadvantage of another. A) commodity money B) fiat money C) electronic money D) paper money

is that it is very heavy and hard to transport from one place to

Answer: A Ques Status: Previous Edition

4) Paper currency that has been declared legal tender but is not convertible into coins or precious metals is called money. A) commodity B) fiat C) electronic D) funny Answer: B Ques Status: Previous Edition

5) When paper currency is decreed by governments as legal tender, legally it must be A) paper currency backed by gold B) a precious metal such as gold or silver C) accepted as payment for debts D) convertible into an electronic payment

.

Answer: C Ques Status: Previous Edition

6) The evolution of the payments system from barter to precious metals, then to fiat money, then to checks can best be understood as a consequence of the fact that A) paper is more costly to produce than precious metals. B) precious metals were not generally acceptable. C) precious metals were difficult to carry and transport. D) paper money is less accepted than checks. Answer: C Ques Status: Previous Edition

7) Compared to checks, paper currency and coins have the major drawbacks that they A) are easily stolen. B) are hard to counterfeit. C) are not the most liquid assets. D) must be backed by gold. Answer: A Ques Status: Previous Edition

Chapter 3 What Is Money? 53

8) Introduction of checks into the payments system reduced the costs of exchanging goods and services. Another advantage of checks is that A) they provide convenient receipts for purchases. B) they can never be stolen. C) they are more widely accepted than currency. D) the funds from a deposited check are available for use immediately. Answer: A Ques Status: New

9) The evolution of the payments system from barter to precious metals, then to fiat money, then to checks can best be understood as a consequence of A) government regulations designed to improve the efficiency of the payments system. B) government regulations designed to promote the safety of the payments system. C) innovations that reduced the costs of exchanging goods and services. D) competition among firms to make it easier for customers to purchase their products. Answer: C Ques Status: Previous Edition

10) Compared to an electronic payments system, a payments system based on checks has the major drawback that A) checks are less costly to process. B) checks take longer to process, meaning that it may take several days before the depositor can get her cash. C) fraud may be more difficult to commit when paper receipts are eliminated. D) legal liability is more clearly defined. Answer: B Ques Status: Previous Edition

11) Which of the following sequences accurately describes the evolution of the payments system? A) Barter, coins made of precious metals, paper currency, checks, electronic funds transfers B) Barter, coins made of precious metals, checks, paper currency, electronic funds transfers C) Barter, checks, paper currency, coins made of precious metals, electronic funds transfers D) Barter, checks, paper currency, electronic funds transfers Answer: A Ques Status: Previous Edition

12) During the past two decades an important characteristic of the modern payments system has been the rapidly increasing use of A) checks and decreasing use of currency. B) electronic fund transfers. C) commodity monies. D) fiat money. Answer: B Ques Status: Previous Edition

54 Mishkin · The Economics of Money, Banking, and Financial Markets, 9th Edition 13) Which of the following is not a form of e-money? A) a debit card B) a credit card C) a stored-value card D) a smart card Answer: B

Ques Status: Previous Edition

14) A smart card is the equivalent of A) cash. B) savings bonds. C) savings deposits. D) certificates of deposit. Answer: A Ques Status: Previous Edition

15) An electronic payments system has not completely replaced the paper payments system because of all of the following reasons except A) expensive equipment is necessary to set up the system. B) security concerns. C) privacy concerns. D) transportation costs. Answer: D Ques Status: Revised

16) In explaining the evolution of money A) government regulation is the most important factor. B) commodity money, because it is valued more highly, tends to drive out paper money. C) new forms of money evolve to lower transaction costs. D) paper money is always backed by gold and therefore more desirable than checks. Answer: C Ques Status: Previous Edition

17) What factors have slowed down the movement to a system where all payments are made electronically? Answer: The equipment necessary to set up the system is expensive, security of the information, and privacy concerns are issues that need to be addressed before an electronic payments system will be widely accepted. Ques Status: Previous Edition

3.4 Measuring Money 1) Recent financial innovation makes the Federal Reserve's job of conducting monetary policy A) easier, since the Fed now knows what to consider money. B) more difficult, since the Fed now knows what to consider money. C) easier, since the Fed no longer knows what to consider money. D) more difficult, since the Fed no longer knows what to consider money. Answer: D Ques Status: Previous Edition

Chapter 3 What Is Money? 55

2) Defining money becomes A) less; quickens B) more; quickens C) more; slows D) more; stops

difficult as the pace of financial innovation

Answer: B Ques Status: Previous Edition

3) Monetary aggregates are A) measures of the money supply reported by the Federal Reserve. B) measures of the wealth of individuals. C) never redefined since "money" never changes. D) reported by the Treasury Department annually. Answer: A Ques Status: New

4)

A) M0 B) M1 C) M2 D) M3

is the narrowest monetary aggregate that the Fed reports.

Answer: B

Ques Status: Previous Edition

5) The currency component includes paper money and coins held in A) bank vaults B) ATMs C) the hands of the nonbank public D) the central bank

.

Answer: C Ques Status: Previous Edition

6) The components of the U.S. M1 money supply are demand and checkable deposits plus A) currency. B) currency plus savings deposits. C) currency plus travelers checks. D) currency plus travelers checks plus money market deposits. Answer: C Ques Status: Previous Edition

7) The M1 measure of money includes A) small denomination time deposits. B) traveler's checks. C) money market deposit accounts. D) money market mutual fund shares. Answer: B Ques Status: Previous Edition

.

56 Mishkin · The Economics of Money, Banking, and Financial Markets, 9th Edition 8) Which of the following is not included in the measure of M1? A) NOW accounts. B) Demand deposits. C) Currency. D) Savings deposits. Answer: D Ques Status: Previous Edition

9) Which of the following is not included in the M1 measure of money but is included in the M2 measure of money? A) Currency B) Traveler's checks C) Demand deposits D) Small-denomination time deposits Answer: D Ques Status: Previous Edition

10) Which of the following is included in both M1 and M2? A) Currency B) Savings deposits C) Small-denomination time deposits D) Money market deposit accounts Answer: A

Ques Status: Previous Edition

11) Which of the following is not included in the monetary aggregate M2? A) Currency B) Savings bonds C) Traveler's checks D) Checking deposits Answer: B Ques Status: Previous Edition

12) Which of the following is included in M2 but not in M1? A) NOW accounts B) Demand deposits C) Currency D) Money market mutual fund shares (retail) Answer: D Ques Status: Previous Edition

13) Of the following, the largest is A) money market deposit accounts. B) demand deposits. C) M1. D) M2. Answer: D

Ques Status: Previous Edition

Chapter 3 What Is Money? 57

14) If an individual redeems a U.S. savings bond for currency A) M1 stays the same and M2 decreases. B) M1 increases and M2 increases. C) M1 increases and M2 stays the same. D) M1 stays the same and M2 stays the same. Answer: B Ques Status: Previous Edition

15) If an individual moves money from a small -denomination time deposit to a demand deposit account, A) M1 increases and M2 stays the same. B) M1 stays the same and M2 increases. C) M1 stays the same and M2 stays the same. D) M1 increases and M2 decreases. Answer: A Ques Status: Previous Edition

16) If an individual moves money from a demand deposit account to a money market deposit account, A) M1 decreases and M2 stays the same. B) M1 stays the same and M2 increases. C) M1 stays the same and M2 stays the same. D) M1 increases and M2 decreases. Answer: A Ques Status: Previous Edition

17) If an individual moves money from a savings deposit account to a money market deposit account, A) M1 decreases and M2 stays the same. B) M1 stays the same and M2 increases. C) M1 stays the same and M2 stays the same. D) M1 increases and M2 decreases. Answer: C Ques Status: Previous Edition

18) If an individual moves money from currency to a demand deposit account, A) M1 decreases and M2 stays the same. B) M1 stays the same and M2 increases. C) M1 stays the same and M2 stays the same. D) M1 increases and M2 stays the same. Answer: C Ques Status: Previous Edition

19) If an individual moves money from a money market deposit account to currency, A) M1 increases and M2 stays the same. B) M1 stays the same and M2 increases. C) M1 stays the same and M2 stays the same. D) M1 increases and M2 decreases. Answer: A Ques Status: Previous Edition