Money and Banking Review Questions
Course Introduction
This course provides a comprehensive overview of the role of money and banking in modern economies. It examines the nature and functions of money, the structure and operations of financial institutions, and the mechanisms of money creation. Key topics include monetary policy, central banking, the regulation of banks, interest rate determination, and the relationship between financial markets and the broader economy. Through theoretical frameworks and real-world examples, students will gain an understanding of how money and banking systems impact economic activity, financial stability, and growth both domestically and globally.
Recommended Textbook
Economics of Money Banking and Financial Markets 12th Edition by Frederic S. Mishkin
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27 Chapters
2796 Verified Questions
2796 Flashcards
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Page 2
Chapter 1: Why Study Money, banking, and Financial Markets
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109 Verified Questions
109 Flashcards
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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) Financial institutions that accept deposits and make loans are called A)exchanges.
B)banks.
C)over-the-counter markets.
D)finance companies.
Answer: B
Q3) 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.
Page 3
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Chapter 2: An Overview of the Financial System
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143 Flashcards
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Sample Questions
Q1) Financial intermediaries are better equipped than individuals to screen out bad credit risks from good ones,thus reducing losses due to
A)adverse selection.
B)moral hazard.
C)free-riding.
D)economies of scope.
Answer: A
Q2) 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
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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Page 4
Chapter 3: What Is Money
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Sample Questions
Q1) As a means of payment,coins have the major drawback that they
A)are heavy and hard to transport.
B)are hard to counterfeit.
C)are not the most liquid assets.
D)must be backed by gold.
Answer: A
Q2) ________ 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
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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107 Flashcards
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Sample Questions
Q1) The ________ is the final amount that will be paid to the holder of a coupon bond.
A)discount value
B)coupon value
C)face value
D)present value
Q2) If a security pays $55 in one year and $133 in three years,its present value is $150 if the interest rate is
A)5 percent.
B)10 percent.
C)12.5 percent.
D)15 percent.
Q3) What is the return on a 5 percent coupon bond that initially sells for $1,000 and sells for $1,200 next year?
A)5 percent
B)10 percent
C)-5 percent
D)25 percent
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6
Chapter 5: The Behavior of Interest Rates
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Sample Questions
Q1) In the figure above, illustrates the effect of an increased rate of money supply growth at time period 0. From the figure, one can conclude that the
A)liquidity effect is smaller than the expected inflation effect and interest rates adjust quickly to changes in expected inflation.
B)liquidity effect is larger than the expected inflation effect and interest rates adjust quickly to changes in expected inflation.
C)liquidity effect is larger than the expected inflation effect and interest rates adjust slowly to changes in expected inflation.
D)liquidity effect is smaller than the expected inflation effect and interest rates adjust slowly to changes in expected inflation.
Q2) If the price of bonds is set ________ the equilibrium price,the quantity of bonds demanded exceeds the quantity of bonds supplied,a condition called excess
A)above;demand
B)above;supply
C)below;demand
D)below;supply
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Chapter 6: The Risk and Term Structure of Interest Rates
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Sample Questions
Q1) Which of the following statements is TRUE?
A)State and local governments cannot default on their bonds.
B)Bonds issued by state and local governments are called municipal bonds.
C)All government issued bonds-local,state,and federal-are federal income tax exempt.
D)The coupon payment on municipal bonds is usually higher than the coupon payment on Treasury bonds.
Q2) An inverted yield curve predicts that short-term interest rates
A)are expected to rise in the future.
B)will rise and then fall in the future.
C)will remain unchanged in the future.
D)will fall in the future.
Q3) Everything else held constant,if the tax-exempt status of municipal bonds were eliminated,then
A)the interest rates on municipal bonds would still be less than the interest rate on Treasury bonds.
B)the interest rate on municipal bonds would equal the rate on Treasury bonds.
C)the interest rate on municipal bonds would exceed the rate on Treasury bonds.
D)the interest rates on municipal,Treasury,and corporate bonds would all increase.
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Chapter
Expectations, and the Efficient Market
Hypothesis
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101 Verified Questions
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Sample Questions
Q1) If during the past decade the average rate of monetary growth has been 5% and the average inflation rate has been 5%,everything else held constant,when the Federal Reserve announces that the new rate of monetary growth will be 10%,the adaptive expectation forecast of the inflation rate is A)5%.
B)between 5 and 10%.
C)10%.
D)more than 10%.
Q2) The global financial crisis lead to a decline in stock prices because
A)of a lowered expected dividend growth rate.
B)of a lowered required return on investment in equity.
C)higher expected future stock prices.
D)higher current dividends.
Q3) What rights does ownership interest give stockholders?
Q4) 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.
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Chapter 8: An Economic Analysis of Financial Structure
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Sample Questions
Q1) One way of describing the solution that high net worth provides to the moral hazard problem is to say that it
A)collateralizes the debt contract.
B)makes the debt contract incentive compatible.
C)state verifies the debt contract.
D)removes all of the risk in the debt contract.
Q2) Of the sources of external funds for nonfinancial businesses in the United States,loans from banks and other financial intermediaries account for approximately ________ of the total.
A)6%
B)40%
C)56%
D)60%
Q3) Of the sources of external funds for nonfinancial businesses in the United States,stocks account for approximately ________ of the total.
A)2%
B)11%
C)20%
D)40%
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Page 10
Chapter 9: Banking and the Management of Financial Institutions
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Sample Questions
Q1) Of the following,which would be the last choice for a bank facing a reserve deficiency?
A)Call in loans.
B)Borrow from the Fed.
C)Sell securities.
D)Borrow from other banks.
Q2) For banks
A)return on assets exceeds return on equity.
B)return on assets equals return on equity.
C)return on equity exceeds return on assets.
D)return on equity is another name for net interest margin.
Q3) Banks' asset portfolios include state and local government securities because
A)they help to attract business from these government entities.
B)banks consider them helpful in attracting accounts of Federal employees.
C)the Federal Reserve requires member banks to buy securities from state and local governments located within their respective Federal Reserve districts.
D)there is no default-risk with state and local government securities.
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) Off-balance-sheet activities
A)generate fee income with no increase in risk.
B)increase bank risk but do not increase income.
C)generate fee income but increase a bank's risk.
D)generate fee income and reduce risk.
Q2) Regulations designed to provide information to the marketplace so that investors can make informed decisions are called
A)disclosure requirements.
B)efficient market requirements.
C)asset restrictions.
D)capital requirements.
Q3) FIRREA increased the core-capital leverage requirement for thrift institutions from 3% to
A)8%.
B)5%.
C)10%.
D)25%.
Q4) Banking crises have occurred throughout the world. What similarities do we find when we look at the different countries?
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Chapter 11: Banking Industry: Structure and Competition
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138 Flashcards
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Sample Questions
Q1) Adjustable rate mortgages
A)reduce the interest-rate risk for financial institutions.
B)benefit homeowners when interest rates rise.
C)generally have higher initial interest rates than conventional fixed-rate mortgages.
D)allow borrowers to avoid paying interest on portions of their mortgage loans.
Q2) Nationwide banking might reduce bank failures due to
A)reduced competition.
B)reduced lending to small businesses.
C)diversification of loan portfolios across state lines.
D)elimination of community banks.
Q3) In September 2008,the Reserve Primary Fund,a money market mutual fund,found itself in the situation know as "breaking the buck." This means that
A)they could no longer afford to redeem shares at the par value of $1.
B)they required shareholders to contribute a dollar more in fees each month.
C)shareholders were able to redeem shares for more than a $1.
D)shares earned more than a dollar in interest.
Q4) What financial innovations helped banks to get around the bank branching restrictions of the McFadden Act?
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Page 13
Chapter 12: Financial Crises
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Sample Questions
Q1) As "haircuts" increased during 2007-2009,financial institutions found that to borrow the same loan amount now required ________ collateral.
A)less
B)no
C)more
D)default-free
Q2) Microprudential supervision focuses on the safety and soundness of
A)individual financial institutions.
B)the financial system as a whole.
C)the shadow banking system.
D)government credit agencies.
Q3) ________ is a process of bundling together smaller loans (like mortgages)into standard debt securities.
A)Securitization
B)Origination
C)Debt deflation
D)Distribution
Q4) Typically,the economy recovers fairly quickly from a recession. Why did this NOT happen in the United States during the Great Depression?
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Chapter 13: Central Banks and the Federal Reserve System
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Sample Questions
Q1) Recent research indicates that inflation performance (low inflation)has been found to be best in countries with
A)the most independent central banks.
B)political control of monetary policy.
C)money financing of budget deficits.
D)a policy of always keeping interest rates low.
Q2) Instrument independence is the ability of ________ to set monetary policy ________.
A)the central bank;goals
B)Congress;goals
C)Congress;instruments
D)the central bank;instruments
Q3) In the Governing Council,the decision of what policy to implement is made by
A)majority vote of the Executive Board members.
B)majority vote of the heads of the National Banks.
C)consensus.
D)majority vote of all members of the Governing Council.
Q4) Who are the voting members of the Federal Open Market Committee and why is this committee important? Where does the power lie within this committee?
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Chapter 14: The Money Supply Process
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218 Flashcards
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Sample Questions
Q1) Everything else held constant,an increase in the time deposit ratio will mean ________ in the M2 money multiplier and ________ in the M2 money supply.
A)an increase;an increase
B)an increase;a decrease
C)a decrease;an increase
D)a decrease;a decrease
Q2) A bank has no excess reserves and demand deposit liabilities of $100,000 when the required reserve ratio is 20 percent. If the reserve ratio is raised to 25 percent,the bank's excess reserves will now be
A)-$5,000.
B)-$1,000.
C)$1,000.
D)$5,000.
Q3) The money supply 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
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Page 16
Chapter 15: Tools of Monetary Policy
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Sample Questions
Q1) Which of the following statements is an example of the Fed's conditional commitment policy?
A)"In these circumstances,the Committee believes that policy accommodation can be maintained for a considerable period."
B)"The Committee anticipates that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time."
C)"Policy accommodation can be removed at a pace that is likely to be measured."
D)"The exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent,and inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee's 2 percent longer-run goal."
Q2) Everything else held constant,when the federal funds rate is ________ the interest rate paid on reserves,the quantity of reserves demanded rises when the federal funds rate ________.
A)above;rises
B)above;falls
C)below;rises
D)below;falls
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Chapter 16: The Conduct of Monetary Policy: Strategy and Tactics
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Sample Questions
Q1) Under Alan Greenspan and Ben Bernanke,the Federal Reserve was successful in pursuing a ________ policy.
A)preemptive
B)inflation targeting
C)exchange rate targeting
D)monetary targeting
Q2) If the Taylor Principle is not followed and nominal interest rates are increased by less than the increase in the inflation rate,then real interest rates will ________ and monetary policy will be too ________.
A)rise;tight
B)rise;loose
C)fall;tight
D)fall;loose
Q3) The Fed operating procedures employed between 1979 and 1982 resulted in ________ swings in the federal funds rate and ________ swings in the M1 growth rate.
A)increased;increased
B)increased;decreased
C)decreased;decreased
D)decreased;increased
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Chapter 17: The Foreign Exchange Market
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Sample Questions
Q1) If the Japanese yen appreciates from $0.01 per yen to $0.02 per yen,the U.S. dollar depreciates from ________ per dollar to ________ per dollar.
A)100¥;50¥
B)10¥;5¥
C)5¥;10¥
D)50¥;100¥
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) Exchange rates are determined in
A)the money market.
B)the foreign exchange market.
C)the stock market.
D)the capital market.
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Chapter 18: The International Financial System
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Sample Questions
Q1) Under the current managed float exchange rate regime,countries with ________ in their balance of payments frequently do not want to see their currencies ________ because it makes their goods more expensive abroad and foreign goods cheaper in their countries.
A)surpluses;depreciate B)deficits;depreciate C)surpluses;appreciate D)deficits;appreciate
Q2) A central bank ________ of domestic currency and corresponding ________ of foreign assets in the foreign exchange market leads to an equal increase in its international reserves and the monetary base,everything else held constant.
A)sale;purchase
B)sale;sale
C)purchase;sale
D)purchase;purchase
Q3) Assume that a fixed exchange rate is overvalued. Describe the situation of a speculative crisis against this currency. What can the central bank do to defend the currency? Why might the alternative of devaluation be preferable?
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Chapter 19: Quantity Theory, inflation and the Demand for Money
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Sample Questions
Q1) The reason that economists are so interested in the stability of velocity is because if the demand for money is not stable,then steady growth of the money supply
A)is going to promote price stability at the expense of low unemployment.
B)is going to promote low unemployment at the expense of price stability.
C)is an ineffective way to conduct monetary policy.
D)can still be used to conduct monetary policy if the goal is price stability.
Q2) Fisher's quantity theory of money suggests that the demand for money is purely a function of ________,and ________ no effect on the demand for money. A)income;interest rates have
B)interest rates;income has
C)government spending;interest rates have D)expectations;income has
Q3) In the early 1990s,M2 growth underwent a dramatic ________,which some researchers believe ________ be explained by traditional money demand functions.
A)surge;cannot B)surge;can
C)slowdown;cannot D)slowdown;can
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Chapter 20: The Is Curve
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Sample Questions
Q1) The negative relation between investment spending and the interest rate is what gives the ________ curve its ________ slope.
A)IS;upward
B)IS;downward
C)LM;downward
D)LM;upward
Q2) Planned investment spending is higher
A)when real interest rate is higher.
B)during financial frictions.
C)when businesses are optimistic.
D)all of the above.
E)A and C.
Q3) Keynes believed that unstable investment caused the Great Depression. Using the simple Keynesian model,explain how a fall in investment affects equilibrium output.
Q4) The IS curve shifts to the left when A)taxes increase.
B)government spending increases.
C)the money supply increases.
D)autonomous planned investment spending increases.
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Chapter 21: The Monetary Policy and Aggregate Demand
Curves
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Sample Questions
Q1) Based on the Taylor Principle,a central bank's endogenous response of decreasing interest rates when inflation falls
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.
Q2) When the financial crisis started in August 2007,inflation was rising and the Fed began an aggressive easing lowering of the federal funds rate,which indicated that
A)there was an upward movement along the monetary policy curve.
B)there was a downward movement along the monetary policy curve.
C)the monetary policy curve shifted upward.
D)the monetary policy curve shifted downward.
Q3) The upward slope of the MP curve indicates that
A)the central bank lowers real interest rates when inflation rises.
B)the central bank raises real interest rates when inflation falls.
C)the central bank raises nominal interest rates when inflation rises.
D)the central bank raises real interest rates when inflation rises.
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Page 23
Chapter 22: Aggregate Demand and Supply Analysis
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Sample Questions
Q1) If firms and households form their expectations about inflation by looking at past inflation,this form of expectations formation is known as ________ expectations.
A)adaptive
B)forward-looking
C)rational
D)perfect
Q2) An autonomous monetary policy easing reduces real interest rates and raises aggregate output ________ and the inflation rate rises ________.
A)temporarily;permanently
B)permanently;temporarily
C)permanently;permanently
D)temporarily;temporarily
Q3) Everything else held constant,if workers expect an increase in inflation,________ aggregate supply ________.
A)long-run;increases
B)long-run;decreases
C)short-run;decreases
D)short-run;increases
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24
Chapter 23: Monetary Policy Theory
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Sample Questions
Q1) Complete Milton Friedman's famous proposition: "Inflation is always and everywhere a ________ phenomenon."
A)monetary
B)political
C)policy
D)budgetary
Q2) Which of the following is least likely to lead to inflationary monetary policy?
A)rising unemployment
B)expanding federal budget deficits
C)declining oil prices
D)conflict in the Middle East
Q3) Nonactivists of policies contend that a policy of shifting the aggregate ________ curve will be costly because it produces ________ volatility in both the price level and output.
A)supply;less
B)supply;more
C)demand;less
D)demand;more
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Chapter 24: The Role of Expectations in Monetary Policy
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Sample Questions
Q1) Suppose that there is a negative aggregate demand shock and the central bank commits to an inflation rate target. If the commitment is credible,then
A)the public's expected inflation will remain unchanged.
B)the short-run aggregate supply curve will rise.
C)over time inflation will fall.
D)all of the above.
E)both A and C.
Q2) Suppose that there is a positive aggregate demand shock and the central bank commits to an inflation rate target. But if the commitment is not credible,then
A)the public's expected inflation will remain unchanged.
B)the short-run aggregate supply curve will rise.
C)over time inflation will fall back down to the inflation target.
D)all of the above.
E)both A and B.
Q3) Lucas argues that when policies change,expectations will change thereby
A)changing the relationships in econometric models.
B)causing the government to abandon its discretionary stance.
C)forcing the Fed to keep its deliberations secret.
D)making it easier to predict the effects of policy changes.
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Page 26
Chapter 25: Transmission Mechanisms of Monetary Policy
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Sample Questions
Q1) From the earlier 1990s until 2012,the Japanese monetary was ________ and stock and real estate prices were ________.
A)tight;rising
B)easy;rising
C)tight;falling
D)easy;falling
Q2) Monetarists directly study the link between money and economic activity using A)structural models.
B)reduced-form models.
C)scientific models.
D)experimental models.
Q3) Explain the traditional interest-rate channel for expansionary monetary policy. Explain how a tight monetary policy affects the economy through this channel.
Q4) By the standard of low-grade bonds,interest rates were ________ and monetary policy was ________ during the Great Depression.
A)low;tight
B)low;easy
C)high;tight
D)high;easy
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Chapter 26: Financial Crises in Emerging Market Economies
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Sample Questions
Q1) Argentina's financial crisis was due to
A)poor supervision of the banking system.
B)a lending boom prior to the crisis.
C)fiscal imbalances.
D)lack of expertise in screening and monitoring borrowers at banking institutions.
Q2) The chaebols encouraged the Korean government to open up Korean financial markets to foreign capital. The Korean government responded by A)allowing unlimited short-term foreign borrowing but maintained quantity restrictions on long-term foreign borrowing by financial institutions.
B)allowing unlimited short-term and long-term foreign borrowing by financial institutions.
C)maintaining quantity restrictions on short-term foreign borrowing but allowing unlimited long-term foreign borrowing by financial institutions.
D)not allowing any foreign borrowing by financial institutions.
Q3) What two key factors trigger speculative attacks leading to currency cries in emerging market countries?
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Chapter 27: The ISLM Model
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Sample Questions
Q1) In the basic closed-economy ISLM model,the money market can be described by the
A)money demand function.
B)money supply.
C)money market equilibrium condition.
D)all of the above.
Q2) Show graphically and explain why targeting an interest rate is preferable when money demand is unstable and the IS curve is stable.
Q3) Everything else held constant,if aggregate output is to the ________ of the LM curve,then there is an excess ________ of money which will cause the interest rate to fall.
A)right;supply
B)right;demand
C)left;supply
D)left;demand
Q4) The LM curve will be vertical and fiscal policy ineffective when
A)the demand for money is unaffected by changes in the interest rate.
B)the demand for money is unaffected by changes in income.
C)investment is unaffected by changes in the interest rate.
D)investment is unaffected by changes in income.
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