Financial Markets and Institutions
Exam Practice Tests
Course Introduction
This course provides an in-depth understanding of the structure and functioning of financial markets and institutions. Students will explore the roles of major financial intermediaries, such as commercial banks, investment firms, insurance companies, and mutual funds, and examine the mechanisms through which capital flows between savers and borrowers. Key topics include the regulation of financial markets, risk management, interest rate determination, financial instruments, and the impact of global events on financial systems. Through case studies and real-world applications, students will gain practical insights into how financial institutions support economic growth and stability.
Recommended Textbook
Economics of Money Banking and Financial Markets 12th Edition by Frederic S. Mishkin
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Chapter 1: Why Study Money, banking, and Financial Markets
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Sample Questions
Q1) 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
Q2) 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
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Page 3
Chapter 2: An Overview of the Financial System
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Sample Questions
Q1) 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
Q2) ________ 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
Q3) 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.
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Chapter 3: What Is Money
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Sample Questions
Q1) 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
Q2) 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
Q3) 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.
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Chapter 4: The Meaning of Interest Rates
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Sample Questions
Q1) The dollar amount of the yearly coupon payment expressed as a percentage of the face value of the bond is called the bond's
A)coupon rate.
B)maturity rate.
C)face value rate.
D)payment rate.
Q2) The sum of the current yield and the rate of capital gain is called the A)rate of return.
B)discount yield.
C)perpetuity yield.
D)par value.
Q3) The ________ is below the coupon rate when the bond price is ________ its par value.
A)yield to maturity;above
B)yield to maturity;below
C)discount rate;above
D)discount rate;below
Q4) Would it make sense to buy a house when mortgage rates are 14% and expected inflation is 15%? Explain your answer.
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Chapter 5: The Behavior of Interest Rates
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Sample Questions
Q1) In the market for money,when the price level falls,the ________ curve for nominal money ________,and interest rates ________,everything else held constant.
A)demand;decreases;fall
B)demand;increases;rise
C)supply;increases;rise
D)supply;decreases;fall
Q2) An increase in the interest rate
A)increases the demand for money.
B)increases the quantity of money demanded.
C)decreases the demand for money.
D)decreases the quantity of money demanded.
Q3) Holding many risky assets and thus reducing the overall risk an investor faces is called
A)diversification.
B)foolishness.
C)risk acceptance.
D)capitalization.
Q4) Using the liquidity preference framework,show what happens to interest rates during a business cycle recession.
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Chapter 6: The Risk and Term Structure of Interest Rates
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Q1) Everything else held constant,an increase in marginal tax rates would likely have the effect of ________ the demand for municipal bonds,and ________ the demand for U.S. government bonds.
A)increasing;increasing
B)increasing;decreasing
C)decreasing;increasing
D)decreasing;decreasing
Q2) According to the liquidity premium theory of the term structure
A)bonds of different maturities are not substitutes.
B)if yield curves are downward sloping,then short-term interest rates are expected to fall by so much that,even when the positive term premium is added,long-term rates fall below short-term rates.
C)yield curves should never slope downward.
D)interest rates on bonds of different maturities do not move together over time.
Q3) Which of the following bonds are considered to be default-risk free?
A)municipal bonds
B)investment-grade bonds
C)U)S. Treasury bonds
D)junk bonds
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Page 8
Chapter 7: The Stock Market, the Theory of Rational
Expectations, and the Efficient Market Hypothesis
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Sample Questions
Q1) Investors tend to trade on their beliefs rather than on pure facts. This statement might explain why securities markets have ________ that the efficient market hypothesis does not predict.
A)such a large trading volume
B)short sales
C)a random walk
D)arbitrage
Q2) If a forecast is made using all available information,then economists say that the expectation formation is A)rational.
B)irrational.
C)adaptive.
D)reasonable.
Q3) Using the Gordon growth formula,if D1 is $2.00,ke is 12% or 0.12,and g is 10% or 0.10,then the current stock price is
A)$20.
B)$50.
C)$100.
D)$150.
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Chapter 8: An Economic Analysis of Financial Structure
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Sample Questions
Q1) Which of the following is NOT a benefit to an individual purchasing a mutual fund?
A)reduced risk
B)lower transactions costs
C)free-riding
D)diversification
Q2) As a source of funds for nonfinancial businesses,stocks are relatively more important in
A)the United States.
B)Germany.
C)Japan.
D)Canada.
Q3) A venture capital firm protects its equity investment from moral hazard through which of the following means?
A)It places people on the board of directors to better monitor the borrowing firm's activities.
B)It writes contracts that prohibit the sale of an equity investment to the venture capital firm.
C)It prohibits the borrowing firm from replacing its management.
D)It requires a 50% stake in the company.
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Page 10
Chapter 9: Banking and the Management of Financial Institutions
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Sample Questions
Q1) Most of a bank's operating income results from A)interest on assets.
B)service charges on deposit accounts.
C)off-balance-sheet activities.
D)fees from standby lines of credit.
Q2) Measuring the sensitivity of bank profits to changes in interest rates by multiplying the gap for several maturity subintervals times the change in the interest rate is called
A)basic gap analysis.
B)the maturity bucket approach to gap analysis.
C)the segmented maturity approach to gap analysis.
D)the segmented maturity approach to interest-exposure analysis.
Q3) Through correspondent banking,large banks provide services to small banks,including A)loan guarantees.
B)foreign exchange transactions.
C)issuing stock.
D)debt reduction.
Q4) How can specializing in lending help to reduce the adverse selection problem in lending?
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Chapter 10: Economic Analysis of Financial Regulation
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Sample Questions
Q1) The major provisions of the Competitive Equality Banking Act of 1987 include
A)expanding the responsibilities of the FDIC,which is now the sole administrator of the federal deposit insurance system.
B)the establishment of the Resolution Trust Corporation to manage and resolve insolvent thrifts placed in conservatorship or receivership.
C)directing the Federal Home Loan Bank Board to continue to pursue regulatory forbearance.
D)prompt corrective action when a bank gets in trouble.
Q2) As in the United States,an important factor in the banking crises in Norway,Sweden,and Finland was the A)financial liberalization that occurred in the 1980s.
B)decline in real interest rates that occurred in the 1980s.
C)high inflation that occurred in the 1980s.
D)sluggish economic growth that occurred in the 1980s.
Q3) The government safety net creates both an adverse selection problem and a moral hazard problem. Explain.
Q4) Banking crises have occurred throughout the world. What similarities do we find when we look at the different countries?
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Page 12
Chapter 11: Banking Industry: Structure and Competition
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Sample Questions
Q1) Mutual savings banks are primarily regulated by
A)the states in which they are located.
B)the Federal Reserve.
C)the FDIC.
D)the National Credit Union Administration.
Q2) Sweep accounts
A)have made reserve requirements nonbinding for many banks.
B)sweep funds out of deposit accounts into long-term securities.
C)enable banks to avoid paying interest to corporate customers.
D)reduce banks' assets.
Q3) The FHLBS gives loans to S&Ls and thus performs a function similar to the ________ for commercial banks.
A)Federal Reserve
B)U)S. Treasury
C)Office of the Comptroller of the Currency
D)U)S. Mint
Q4) Why did the interest rate volatility of the 1970s spur financial innovation?
Q5) Discuss three ways in which U.S. banks can become involved in international banking.
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Chapter 12: Financial Crises
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Sample Questions
Q1) When housing prices began to decline after their peak in 2006,many subprime borrowers found that their mortgages were "underwater." This meant that
A)the value of the house fell below the amount of the mortgage.
B)the basement flooded since they could not afford to fix the leaky plumbing.
C)the roof leaked during a rainstorm.
D)the amount that they owed on their mortgage was less than the value of their house.
Q2) Macroprudential supervision policies try to prevent a leverage cycle by changing capital requirements so that they ________ during an expansion and ________ during a downturn.
A)increase;decrease
B)increase;increase
C)decrease;increase
D)decrease;decrease
Q3) The Volcker Rule addresses the off-balance-sheet problem involving A)trading risks.
B)selling loans.
C)loan guarantees.
D)interest rate risks.
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Chapter 13: Central Banks and the Federal Reserve System
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Sample Questions
Q1) The majority of members of the Federal Open Market Committee are
A)Federal Reserve Bank presidents.
B)members of the Federal Advisory Council.
C)presidents of member banks.
D)the seven members of the Board of Governors.
Q2) Critics of the current system of Fed independence contend that
A)the current system is undemocratic.
B)voters have too much say about monetary policy.
C)the president has too much control over monetary policy on a day-to-day basis.
D)the Board of Governors is held responsible for policy missteps.
Q3) Explain two concepts of central bank independence. Is the Fed politically independent? Why do economists think central bank independence is important?
Q4) The theory of bureaucratic behavior suggests that the objective of a bureaucracy is to maximize
A)the public's welfare.
B)profits.
C)its own welfare.
D)conflict with the executive and legislative branches of government.
Q5) Make the case for and against an independent Federal Reserve.
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Chapter 14: The Money Supply Process
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Sample Questions
Q1) The monetary base consists of
A)currency in circulation and Federal Reserve notes.
B)currency in circulation and the U.S. Treasury's monetary liabilities.
C)currency in circulation and reserves.
D)reserves and Federal Reserve Notes.
Q2) An increase in U.S. Treasury deposits at the Fed reduces both ________ and the ________.
A)reserves;monetary base
B)Fed liabilities;money multiplier
C)Fed assets;monetary base
D)Fed assets;money multiplier
Q3) The monetary liabilities of the Federal Reserve include
A)securities and loans to financial institutions.
B)currency in circulation and reserves.
C)securities and reserves.
D)currency in circulation and loans to financial institutions.
Q4) Explain why the simple deposit multiplier overstates the true deposit multiplier.
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Chapter 15: Tools of Monetary Policy
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Sample Questions
Q1) The discount rate is
A)the interest rate the Fed charges on loans to banks.
B)the price the Fed pays for government securities.
C)the interest rate that banks charge their most preferred customers.
D)the price banks pay the Fed for government securities.
Q2) In the market for reserves,if the federal funds rate is between the discount rate and the interest rate paid on excess reserves,an increase in the reserve requirement ________ the demand of reserves and causes the federal funds interest rate to ________,everything else held constant.
A)decreases;fall
B)increases;fall
C)increases;rise
D)decreases;rise
Q3) After 2003,The Federal Reserve usually keeps the discount rate
A)above the target federal funds rate.
B)equal to the target federal funds rate.
C)below the target federal funds rate.
D)equal to zero.
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Chapter 16: The Conduct of Monetary Policy: Strategy and Tactics
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Sample Questions
Q1) The FOMC finally moved to ________ on January 25,2012,when it issued its "Statement on Long-Run Goals and Monetary Policy Strategy."
A)inflation targeting
B)zero inflation policy
C)"just do it" policy
D)monetary targeting
Q2) Which of the following criteria need NOT be satisfied for choosing a policy instrument?
A)The variable must be measurable.
B)The variable must be controllable.
C)The variable must be predictable.
D)The variable must be transportable.
Q3) Which of the following is NOT an operating instrument?
A)nonborrowed reserves
B)monetary base
C)federal funds interest rate
D)discount rate
Q4) Explain the time-inconsistency problem. What is the likely outcome of discretionary policy? What are the solutions to the time-inconsistency problem?
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Chapter 17: The Foreign Exchange Market
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Sample Questions
Q1) If the real exchange rate between the United States and Japan is ________,then it is cheaper to buy goods in Japan than in the United States.
A)greater than 1.0
B)greater than 0.5
C)less than 0.5
D)less than 1.0
Q2) The theory of PPP suggests that if one country's price level falls relative to another's,its currency should
A)depreciate.
B)appreciate.
C)float.
D)do none of the above.
Q3) According to the interest parity condition,if the domestic interest rate is 12 percent and the foreign interest rate is 10 percent,then the expected ________ of the foreign currency must be ________ percent.
A)appreciation;4
B)appreciation;2
C)depreciation;2
D)depreciation;4
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Page 19
Chapter 18: The International Financial System
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Sample Questions
Q1) The Policy Trilemma states that a country or a monetary union can't pursue the following three policies at the same time
A)capital control,a fixed exchange rate,and an independent monetary policy.
B)free capital mobility,a fixed exchange rate,and an independent monetary policy.
C)free capital mobility,a flexible exchange rate,and an independent monetary policy.
D)capital control,a flexible exchange rate,and an independent monetary policy.
Q2) An international lender of last resort creates a serious moral hazard problem because ________ and other ________ of banking institutions expect that they will be protected if a crisis occurs.
A)depositors;debtors
B)depositors;creditors
C)borrowers;debtors
D)borrowers;creditors
Q3) Which of the following is NOT a disadvantage of exchange-rate targeting?
A)It relies on a stable money-inflation relationship.
B)The targeting country gives up an independent monetary policy.
C)The targeting country is left open for a speculative attack.
D)It can weaken the accountability of policymakers.
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Page 20
Chapter 19: Quantity Theory, inflation and the Demand for Money
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Sample Questions
Q1) In the Baumol-Tobin analysis of transactions demand,scale economies imply that an increase in real income increases the quantity of money demanded ________,while an increase in the price level increases the quantity of money demanded ________.
A)proportionately;less than proportionately
B)more than proportionately;proportionately
C)less than proportionately;proportionately
D)proportionately;more than proportionately
Q2) The theory of portfolio choice indicates that factors affecting the demand for money include
A)income.
B)nominal interest rate.
C)riskiness of money.
D)all the above.
Q3) Because Treasury bills pay a higher return than money and have no risk
A)the transactions demand for money may be zero.
B)the precautionary demand for money may be zero.
C)the speculative demand for money may be zero.
D)all three of the above motives for holding money will be zero.
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Chapter 20: The Is Curve
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Sample Questions
Q1) Planned investment spending,a component of aggregate demand,is equal to
A)fixed investment plus actual inventory investment.
B)fixed investment plus unplanned inventory investment.
C)fixed investment.
D)fixed investment plus planned inventory investment.
Q2) Everything else held constant,if aggregate output is to the left of the IS curve,then there is an excess ________ of goods which will cause aggregate output to ________.
A)supply;fall
B)supply;rise
C)demand;fall
D)demand;rise
Q3) In the Keynesian cross diagram,a decline in autonomous consumer expenditure causes the aggregate demand function to shift down,the equilibrium level of aggregate output to ________,and the IS curve to shift to the ________,everything else held constant.
A)rise;left
B)rise;right
C)fall;left
D)fall;right
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Chapter 21: The Monetary Policy and Aggregate Demand
Curves
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Q1) Everything else held constant,a decrease in autonomous planned investment spending will cause the IS curve to shift to the ________ and aggregate demand will
A)right;increase
B)right;decrease
C)left;increase
D)left;decrease
Q2) The aggregate demand curve is downward sloping because a higher inflation rate leads the central bank to raise ________ interest rates,thereby ________ the level of equilibrium aggregate output. ,everything else held constant.
A)real;lowering
B)real;raising
C)nominal;lowering
D)nominal;raising
Q3) An autonomous tightening of monetary policy
A)causes an upward movement along the monetary policy curve.
B)causes a downward movement along the monetary policy curve.
C)shifts the monetary policy curve upward.
D)shifts the monetary policy curve downward.
23
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Chapter 22: Aggregate Demand and Supply Analysis
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Q1) According to aggregate demand and supply analysis,America's involvement in the Vietnam War had the effect of
A)increasing aggregate output,lowering unemployment,and raising the inflation.
B)decreasing aggregate output,lowering unemployment,and lowering the inflation.
C)increasing aggregate output,raising unemployment,and raising the inflation.
D)decreasing aggregate output,raising unemployment,and lowering the inflation.
Q2) A permanent negative supply shock leads to ________ output ________.
A)higher;in both the short and long runs
B)higher;in the short run but not in the long run
C)lower;in both the short and long runs
D)lower;in the short run but not in the long run
Q3) The Phillips curve indicates that when the labor market is ________,production costs will ________ and aggregate supply increases.
A)easy;rise
B)easy;fall
C)tight;fall
D)tight;rise
Q4) Using the aggregate demand-aggregate supply model,explain and demonstrate graphically the short-run and long-run effects of an increase in the money supply.
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Chapter 23: Monetary Policy Theory
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Q1) The existence of lags prevents the instantaneous adjustment of the economy to policies changing aggregate demand,thereby strengthening the case for
A)supply-side policy.
B)nonactivists.
C)activists.
D)demand-management policy.
Q2) In the period 1965 through the 1970s,policymakers pursued ________ policies in order to achieve ________.
A)expansionary;high employment
B)expansionary;low inflation
C)contractionary;high employment
D)contractionary;low inflation
Q3) If policymakers set a target for unemployment that is too low because it is less than the natural rate of unemployment,this can set the stage for a higher rate of money growth and
A)cost-push inflation.
B)demand-pull inflation.
C)cost-pull inflation.
D)demand-push inflation.
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Page 25
Chapter 24: The Role of Expectations in Monetary Policy
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Q1) Approaches to establishing central bank credibility include
A)inflation targeting.
B)exchange rate targeting.
C)central bank independence.
D)appointment of a more conservative central banker.
E)all of the above.
Q2) The argument that econometric policy evaluation is likely to be misleading if policymakers assume stable economic relationships is known as
A)the monetarist revolution.
B)the Lucas critique.
C)public choice theory.
D)new Keynesian theory.
Q3) ________ imposes a conceptual structure and inherent discipline on policy makers,but without eliminating all flexibility.
A)Constrained discretion
B)A policy rule
C)A discretionary policy
D)The Taylor rule
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Chapter 25: Transmission Mechanisms of Monetary Policy
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Q1) The channels through which monetary policy affects economic activity are called the ________ of monetary policy.
A)transmission mechanisms
B)flow mechanisms
C)distribution mechanisms
D)allocational mechanisms
Q2) During the Great Depression,real interest rates
A)rose to unprecedentedly high levels.
B)rose only slightly above the long-run trend.
C)fell to unprecedentedly low levels.
D)fell only slightly below the long-run trend.
Q3) Predicting the impact of institutional change on the effectiveness of monetary policy is best done with a
A)structural model.
B)reduced-form model.
C)black-box model.
D)scientific model.
Q4) Explain the traditional interest-rate channel for expansionary monetary policy. Explain how a tight monetary policy affects the economy through this channel.
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Chapter 26: Financial Crises in Emerging Market Economies
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Q1) The economic hardship resulting from a financial crises is severe,however,there are also social consequences such as
A)increased crime.
B)difficulty getting a loan.
C)currency devaluations.
D)loss of output.
Q2) At the time of the South Korean financial crisis,the government allowed many chaebol owned finance companies to convert to merchant banks. Finance companies ________ allowed to borrow abroad and merchant banks ________.
A)were not;could borrow abroad
B)were not;could not borrow abroad
C)were;could borrow abroad
D)were;could not borrow abroad
Q3) The mismanagement of financial liberalization in emerging market countries can be understood as a severe
A)principal/agent problem.
B)asymmetric information problem.
C)lemons problem.
D)free-rider problem.
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Page 28
Chapter 27: The ISLM Model
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Q1) If the quantity of money demanded is not affected by changes in the interest rate,the LM curve is ________ and fiscal policy will be ________.
A)horizontal;very effective
B)horizontal;ineffective
C)vertical;ineffective
D)vertical;very effective
Q2) If the economy is on the IS curve,but is to the left of the LM curve,aggregate output will ________ and the interest rate will ________.
A)rise;rise
B)rise;fall
C)fall;rise
D)fall;fall
Q3) Crowding out will be more pronounced the closer to vertical is the A)IS curve.
B)LM curve.
C)consumption function.
D)aggregate demand function.
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