Financial Markets and Institutions
Test Questions
Course Introduction
This course provides a comprehensive overview of financial markets and institutions, exploring their roles in the global economy. Students will examine the structure and functioning of various financial markets including money, capital, and derivatives markets as well as the key types of financial institutions such as banks, insurance companies, investment firms, and regulatory bodies. Through analysis of financial instruments, risk management, and regulatory frameworks, the course emphasizes the interdependence between markets and institutions and highlights their impact on economic growth, stability, and the allocation of resources.
Recommended Textbook
The Economics of Money Banking and Financial Markets 9th Edition by Frederic S. Mishkin
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Page 2
Chapter 1: Why Study Money, Banking, and Financial Markets
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Sample Questions
Q1) 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
Q2) 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
Q3) 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
Page 3
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Chapter 2: An Overview of the Financial System
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Q1) 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
Q2) 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
Q3) 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
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Chapter 3: What Is Money
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Sample Questions
Q1) 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
Q2) 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
Q3) A disadvantage of ________ is that it is very heavy and hard to transport from one place to another.
A)commodity money
B)fiat money
C)electronic money
D)paper money
Answer: A
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Chapter 4: Understanding Interest Rates
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Sample Questions
Q1) If the interest rate is 5%,what is the present value of a security that pays you $1,050 next year and $1,102.50 two years from now? If this security sold for $2200,is the yield to maturity greater or less than 5%? Why?
Q2) A bond that is bought at a price below its face value and the face value is repaid at a maturity date is called a
A)simple loan.
B)fixed-payment loan.
C)coupon bond.
D)discount bond.
Q3) An increase in the time to the promised future payment ________ the present value of the payment.
A)decreases
B)increases
C)has no effect on D)is irrelevant to
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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Q1) You would be more willing to buy AT&T bonds (holding everything else constant)if
A)the brokerage commissions on bond sales become cheaper.
B)interest rates are expected to rise.
C)your wealth has decreased.
D)you expect diamonds to appreciate in value.
Q2) The economist Irving Fisher,after whom the Fisher effect is named,explained why interest rates ________ as the expected rate of inflation ________,everything else held constant.
A)rise; increases
B)rise; stabilizes
C)fall; stabilizes
D)fall; increases
Q3) When the interest rate changes,
A)the demand curve for bonds shifts to the right.
B)the demand curve for bonds shifts to the left.
C)the supply curve for bonds shifts to the right.
D)it is because either the demand or the supply curve has shifted.
Q4) Using the liquidity preference framework,what will happen to interest rates if the Fed increases the money supply?
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Chapter 6: The Risk and Term Structure of Interest Rates
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Q1) When yield curves are steeply upward sloping,
A)long-term interest rates are above short-term interest rates.
B)short-term interest rates are above long-term interest rates.
C)short-term interest rates are about the same as long-term interest rates.
D)medium-term interest rates are above both short-term and long-term interest rates.
Q2) According to this theory of the term structure,bonds of different maturities are not substitutes for one another.
A)Segmented markets theory
B)Expectations theory
C)Liquidity premium theory
D)Separable markets theory
Q3) A ________ yield curve predicts a future increase in inflation.
A)steeply upward sloping
B)slight upward sloping
C)flat
D)downward sloping
Q4) If the federal government where to raise the income tax rates,would this have any impact on a state's cost of borrowing funds? Explain.
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Chapter 7: The Stock Market, the Theory of Rational
Expectations,
and the Efficient Market Hypothesis
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Q1) Excessive volatility refers to the fact that
A)stock returns display mean reversion.
B)stock prices can be slow to react to new information.
C)stock price tend to rise in the month of January.
D)stock prices fluctuate more than is justified by dividend fluctuations.
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) A monetary expansion ________ stock prices due to a decrease in the ________ and an increase in the ________,everything else held constant.
A)reduces; future sales price; expected rate of return
B)reduces; current dividend; expected rate of return
C)increases; required rate of return; future sales price
D)increases; required rate of return; dividend growth rate
Q4) What rights does ownership interest give stockholders?
Page 9
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Chapter 8: An Economic Analysis of Financial Structure
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Sample Questions
Q1) Financial intermediaries' low transaction costs allow them to provide ________ services that make it easier for customers to conduct transactions.
A)liquidity
B)conduction
C)transcendental
D)equitable
Q2) If bad credit risks are the ones who most actively seek loans then financial intermediaries face the problem of A)moral hazard.
B)adverse selection.
C)free-riding.
D)costly state verification.
Q3) Professional athletes often have contract clauses prohibiting risky activities such as skiing and motorcycle riding.These clauses are A)limited-liability clauses.
B)risk insurance.
C)restrictive covenants.
D)illegal.
Q4) Explain the principal-agent problem as it pertains to equity contracts.
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Chapter 9: Financial Crises and the Subprime Meltdown
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Q1) 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
Q2) Many 19th century U.S.financial crises were started by A)spikes in interest rates.
B)financial innovation.
C)onerous financial regulations.
D)a strong improvement in banks' balance sheets.
Q3) 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.
Q4) How can asymmetric information lead to a bank panic?
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Chapter 10: Banking and the Management of Financial Institutions
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Sample Questions
Q1) ________ may antagonize customers and thus can be a very costly way of acquiring funds to meet an unexpected deposit outflow.
A)Selling securities
B)Selling loans
C)Calling in loans
D)Selling negotiable CDs
Q2) If a bank has ________ rate-sensitive assets than liabilities,then ________ in interest rates will increase bank profits.
A)more; a decline
B)more; an increase
C)fewer; an increase
D)fewer; a surge
Q3) Secondary reserves include
A)deposits at Federal Reserve Banks.
B)deposits at other large banks.
C)short-term Treasury securities.
D)state and local government securities.
Q4) How can specializing in lending help to reduce the adverse selection problem in lending?
Chapter 11: Economic Analysis of Financial Regulation
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Q1) Under the Basel Accord,assets and off-balance sheet activities were sorted according to ________ categories with each category assigned a different weight to reflect the amount of ________.
A)2; adverse selection
B)2; credit risk
C)4; adverse selection
D)4; credit risk
Q2) The Depository Institutions Deregulation and Monetary Control Act of 1980
A)restricted thrift institutions to making loans for home mortgages.
B)restricted the use of ATS accounts.
C)imposed restrictive interest-rate ceilings on large agricultural loans.
D)increased deposit insurance from $40,000 to $100,000.
Q3) Federal deposit insurance covers deposits up to $100,000,but as part of a doctrine called "too-big-to-fail" the FDIC sometimes ends up covering all deposits to avoid disrupting the financial system.When the FDIC does this,it uses the A)"payoff" method.
B)"purchase and assumption" method.
C)"inequity" method.
D)"Basel" method.
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Chapter 12: Banking Industry: Structure and Competition
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Q1) Both ________ and ________ were financial innovations that occurred because of interest rate risk volatility.
A)adjustable-rate mortgages; commercial paper
B)adjustable-rate mortgages; financial derivatives
C)sweep accounts; financial derivatives
D)sweep accounts; commercial paper
Q2) An essential characteristic of credit unions is that
A)they are typically large.
B)branching across state lines is prohibited.
C)their lending is primarily for mortgage loans.
D)they are organized for individuals with a common bond.
Q3) Thrift institutions include
A)commercial banks.
B)brokerage firms
C)insurance companies.
D)mutual savings banks.
Q4) Why did the interest rate volatibility 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 13: Central Banks and the Federal Reserve System
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Q1) Price stability is desirable because
A)inflation creates uncertainty,making it difficult to plan for the future.
B)everyone is better off when prices are stable.
C)price stability increases the profitability of the Fed.
D)it guarantees full employment.
Q2) While the discount rate is "established" by the regional Federal Reserve Banks,in truth,the rate is determined by
A)Congress.
B)the president of the United States.
C)the Senate.
D)the Board of Governors.
Q3) The time-inconsistency problem in monetary policy can occur when the central bank conducts policy
A)using a nominal anchor.
B)using a strict and inflexible rule.
C)on a discretionary,day-by-day basis.
D)using a flexible,discretionary rule.
Q4) Make the case for and against an independent Federal Reserve.
Q5) Why does the Federal Reserve Bank of New York play a special role within the Federal Reserve System?
Page 15
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Chapter 14: The Money Supply Process
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Q1) An increase in which of the following leads to a decline in the monetary base?
A)Float
B)Discount loans
C)Foreign deposits at the Fed
D)SDRs
Q2) Total Reserves minus vault cash equals
A)bank deposits with the Fed.
B)excess reserves.
C)required reserves.
D)currency in circulation.
Q3) The excess reserves ratio is ________ related to expected deposit outflows,and is ________ related to the market interest rate.
A)negatively; negatively
B)negatively; positively
C)positively; negatively
D)positively; positively
Q4) Explain why the simple deposit multiplier overstates the true deposit multiplier.
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Chapter 15: Tools for Monetary Policy
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Q1) If the Fed wants to temporarily inject reserves into the banking system,it will engage in
A)a repurchase agreement.
B)a matched sale-purchase transaction.
C)a reverse repurchase agreement.
D)an open market sale.
Q2) When the Fed acts as a lender of last resort,the type of lending it provides is
A)primary credit.
B)seasonal credit.
C)secondary credit.
D)installment credit.
Q3) The Federal Reserve will engage in a matched sale-purchase transaction when it wants to ________ reserves ________ in the banking system.
A)increase; permanently
B)increase; temporarily
C)decrease; temporarily
D)decrease; permanently
Q4) Explain the Fed's three tools of monetary policy and how each is used to change the money supply.Does each tool affect the monetary base or the money multiplier?
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Chapter 16: The Conduct of Monetary Policy: Strategy and Tactics
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Q1) The Fed accidentally discovered open market operations in the early A)1920s.
B)1910s.
C)1900s.
D)1890s.
Q2) Large fluctuations in money supply growth and smaller fluctuations in the federal funds rate between October 1982 and the early 1990s indicate that the Fed had shifted to ________ as an operating target.
A)borrowed reserves
B)nonborrowed reserves
C)excess reserves
D)required reserves
Q3) Which of the following is not a disadvantage to inflation targeting?
A)There is a delayed signal about achievement of the target.
B)Inflation targets could impose a rigid rule on policymakers.
C)There is potential for larger output fluctuations.
D)There is a lack of transparency.
Q4) Explain and demonstrate graphically how targeting the federal funds rate can result in fluctuations in nonborrowed reserves.
18
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Chapter 17: The Foreign Exchange Market
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Q1) The theory of purchasing power parity states that exchange rates between any two currencies will adjust to reflect changes in
A)the trade balances of the two countries.
B)the current account balances of the two countries.
C)fiscal policies of the two countries.
D)the price levels of the two countries.
Q2) When the exchange rate for the Mexican peso changes from 10 pesos to the U.S dollar to 9 pesos to the U.S.dollar,then the Mexican peso has ________ and the U.S.dollar has ________.
A)appreciated; appreciated
B)depreciated; appreciated
C)appreciated; depreciated
D)depreciated; depreciated
Q3) ________ in the domestic interest rate causes the demand for domestic assets to ________ and the domestic currency to depreciate,everything else held constant.
A)An increase; increase
B)An increase; decrease
C)A decrease; increase
D)A decrease; decrease
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Chapter 18: The International Financial System
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Q1) An emerging market country that successfully used exchange-rate targeting to lower its inflation from above 100 percent in 1988 to below 10 percent in 1994 (before devaluation)was
A)Thailand.
B)Mexico.
C)The Philippines.
D)Indonesia.
Q2) Under exchange-rate targeting,the central bank in the targeting country ________ lose the ability to pursue its own independent monetary policy and any shocks to the anchor country is ________ transmitted to the targeting country.
A)does; directly
B)does not; directly
C)does; not directly
D)does not; not directly
Q3) The East Asia currency crisis in 1997 started in A)Japan.
B)Thailand.
C)South Korea.
D)the Philippines.
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Chapter 19: The Demand for Money
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Sample Questions
Q1) In the liquidity trap,the money demand curve ________.
A)is horizontal
B)is vertical
C)is negatively sloped
D)is positively sloped
Q2) In a liquidity trap,monetary policy has ________ effect on aggregate spending because a change in the money supply has ________ effect on interest rates.
A)no; no
B)no; a large
C)no; a small
D)a large; a large
Q3) The equation of exchange states that the quantity of money multiplied by the number of times this money is spent in a given year must equal
A)nominal income.
B)real income.
C)real gross national product.
D)velocity.
Q4) Describe what the liquidity trap is.Explain how it can be problematic for monetary policymakers.
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Chapter 20: The Islm Model
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Q1) Macroeconomic equilibrium requires ________.
A)equilibrium in the goods market
B)equilibrium in the money market
C)equilibrium in both the goods and money markets
D)equilibrium in neither the goods nor the money market
Q2) If the consumption function is expressed as C = a + mpc × Y<sub>D</sub>,then "mpc" represents
A)autonomous consumer expenditure.
B)the marginal propensity to consume.
C)the expenditure multiplier.
D)disposable income.
Q3) Keynes was especially concerned with explaining the
A)recession of 1920-21.
B)low levels of output and employment during the Great Depression.
C)strong economic growth of the 1920s.
D)high unemployment in Great Britain during the 1920s.
Q4) The Federal Reserve increases interest rates when it wants to reduce aggregate demand to fight inflation.How do increases in the interest rate reduce aggregate demand?
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Chapter 21: Monetary and Fiscal Policy in the ISLM Model
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Q1) In the Keynesian cross diagram,an increase in investment spending because companies become more optimistic about investment profitability causes the aggregate demand function to shift up,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
Q2) In the Keynesian cross diagram,a decrease in investment spending because companies become more pessimistic about investment profitability 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
Q3) Show graphically and explain why targeting an interest rate is preferable when money demand is unstable and the IS curve is stable.
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Chapter 22: Aggregate Demand and Supply Analysis
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Q1) A decrease in the availability of raw materials that increases the price level is called a ________ shock
A)negative demand
B)positive demand
C)negative supply
D)positive supply
Q2) Everything else held constant,a decrease in net exports ________ aggregate
A)increases; demand
B)decreases; demand
C)decreases; supply D)increases; supply
Q3) Everything else held constant,a decrease in net taxes ________ aggregate
A)increases; demand
B)decreases; demand C)decreases; supply D)increases; supply
Q4) Explain and demonstrate graphically the effects of a negative supply shock in both the short-run and long-run.
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Chapter 23: Transmission Mechanisms of Monetary Policy:
The Evidence
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Q1) According to the household liquidity effect,higher stock prices lead to increased consumption expenditures because consumers
A)feel more secure about their financial position.
B)want to sell stocks and spend the proceeds before stock prices fall.
C)believe that their wages will increase due to increased profitability of firms.
D)can now afford more expensive imports.
Q2) If monetary policy can influence ________ prices and conditions in ________ markets,then it can affect spending through channels other than the traditional interest-rate channel.
A)asset; labor
B)asset; credit
C)commodity; labor
D)commodity; credit
Q3) Monetarists assert that monetary policy may affect aggregate demand through
A)only an interest rate channel.
B)only an exchange rate channel.
C)only two channels: interest rates and exchange rates.
D)many channels.
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Chapter 24: Money and Inflation
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Q1) Advocates of discretionary policy usually view ________ policy as having a shorter effectiveness lag than ________ policy,but there is substantial uncertainty about how long this lag is.
A)fiscal; incomes
B)fiscal; monetary
C)monetary; incomes
D)monetary; fiscal
Q2) If the Fed responds by increasing the money supply in response to a successful wage push by workers,monetary policy is said to be
A)accomplishing.
B)nonaccommodating.
C)nonaccomplishing.
D)accommodating.
Q3) The finance of government spending through a Treasury sale of bonds which are then purchased by the Fed
A)causes both reserves and the monetary base to rise.
B)causes both reserves and the monetary base to decline.
C)causes reserves to rise,but the monetary base to decline.
D)has no net effect on the monetary base.
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Chapter 25: Rational Expectations: Implications for Policy
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Q1) According to the new classical model,
A)unanticipated policy has no effect on the business cycle.
B)only anticipated policy can influence the business cycle.
C)anticipated policy has no effect on the business cycle.
D)unanticipated policy may or may not have an effect on the business cycle.
Q2) The policy ineffectiveness proposition
A)asserts that anticipated changes in monetary policy cannot affect real aggregate output.
B)rules out output effects from policy surprises.
C)implies that an anticipated contractionary monetary policy cannot reduce the rate of inflation.
D)implies that an anticipated expansionary monetary policy will not cause the price level to rise.
Q3) In the new classical model,an unanticipated increase in the money supply causes
A)aggregate demand increases along a stationary aggregate supply curve.
B)both aggregate demand and supply increase.
C)aggregate demand increases as aggregate supply decreases.
D)both aggregate demand and supply decrease.
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