Test Bank for Money, Banking, and the Financial System, 4th edition Glenn, Anthony O'Brien by welldoneassistant

TEST BANK FOR Money, Banking, and the Financial System, 4th edition Glenn Hubbard, Anthony Patrick O'Brien Chapter 1 Introducing Money and the Financial System 1.1 Key Components of the Financial System 1) The financial system is primarily a means by which A) funds are transferred from savers to borrowers. B) money is put into circulation. C) the government puts into operation its plans for the economy. D) business firms distribute their goods. Answer: A Diff: 1 Page Ref: 4 Topic: financial system Objective: Identify the key components of the financial system *: Recurring AACSB: Reflective Thinking 2) Which of the following is NOT a financial asset? A) a bond issued by Google B) Wells Fargo Bank C) a home mortgage loan D) a certificate of deposit Answer: B Diff: 1 Page Ref: 2 Topic: financial assets Objective: Identify the key components of the financial system *: Recurring AACSB: Reflective Thinking 3) If you buy a bond issued by Intel, the bond is a(n) A) liability to Intel and an asset to you. B) liability to you and an asset to Intel. C) liability to both you and Intel. D) asset to both you and Intel. Answer: A Diff: 2 Page Ref: 4 Topic: financial assets Objective: Identify the key components of the financial system *: Recurring AACSB: Reflective Thinking

4) Which of the following forms the largest share of household holdings of financial assets? A) corporate stocks B) bonds C) pension entitlements D) equity in unincorporated businesses Answer: C Diff: 1 Page Ref: 9-10 Topic: financial assets Special Feature: Apply the Concept: What Do People Do with Their Savings? Objective: Identify the key components of the financial system AACSB: Reflective Thinking 5) From 1978 to 2019, the percentage of wealth held by households decreased for all of the following categories of assets EXCEPT A) corporate stocks. B) bonds. C) deposits. D) equity in unincorporated businesses. Answer: A Diff: 1 Page Ref: 9-10 Topic: financial assets Special Feature: Apply the Concept: What Do People Do with Their Savings? Objective: Identify the key components of the financial system AACSB: Reflective Thinking 6) Which of the following is NOT a key financial service provided by the financial system? A) risk sharing B) profitability C) liquidity D) information Answer: B Diff: 1 Page Ref: 12 Topic: financial system Objective: Identify the key components of the financial system *: Recurring AACSB: Reflective Thinking 7) Economists define risk as A) the difference between the interest rate borrowers pay and the interest rate lenders receive. B) the chance that the value of financial assets will change from what you expect. C) the ease with which an asset can be exchanged for other assets or for goods and services. D) the difference between the return on common stock and the return on corporate bonds. Answer: B Diff: 1 Page Ref: 13 Topic: financial system Objective: Identify the key components of the financial system *: Recurring AACSB: Reflective Thinking 2 Copyright © 2021 Pearson Education, Inc.

8) Economists define liquidity as A) the difference between the return on the asset and the return on a long-term U.S. Treasury bond. B) the fraction the asset makes up of an investor's portfolio. C) the ease with which an asset can be exchanged for money. D) the difference between the total demand for an asset and the total supply of the asset. Answer: C Diff: 1 Page Ref: 13 Topic: financial system Objective: Identify the key components of the financial system *: Recurring AACSB: Reflective Thinking 9) Which of the following assets is the most liquid? A) money market mutual fund B) computer C) washing machine D) U.S. Treasury bond Answer: A Diff: 2 Page Ref: 13 Topic: financial system Objective: Identify the key components of the financial system *: Recurring AACSB: Reflective Thinking 10) By providing and communicating information, the financial system A) reduces the difference between the return on three-month U.S. Treasury bills and the return on thirty-year U.S. Treasury bonds. B) relieves individual savers from the necessity of searching out individual borrowers. C) eliminates the risk in investing in the stock market. D) guarantees investors a reasonable return on their money. Answer: B Diff: 2 Page Ref: 14 Topic: financial system Objective: Identify the key components of the financial system *: Recurring AACSB: Reflective Thinking 11) Financial securities that represent partial ownership of a corporation are known as A) bonds. B) stocks. C) coupons. D) dividends. Answer: B Diff: 1 Page Ref: 3 Topic: financial assets Objective: Identify the key components of the financial system 3 Copyright © 2021 Pearson Education, Inc.

*: Recurring AACSB: Reflective Thinking 12) Securitization is the process of A) issuing stocks to finance capital spending. B) issuing bonds to finance purchases of equipment and structures. C) reducing risk by decreasing corporate debt loads. D) converting loans into securities. Answer: D Diff: 1 Page Ref: 4 Topic: financial assets Objective: Identify the key components of the financial system *: Recurring AACSB: Reflective Thinking 13) If a bank grants you a mortgage, the mortgage is A) an asset to you as well as an asset to the bank. B) an asset to you, but a liability to the bank. C) a liability to you, but an asset to the bank. D) a liability to you as well as a liability to the bank. Answer: C Diff: 2 Page Ref: 4 Topic: financial assets Objective: Identify the key components of the financial system *: Recurring AACSB: Reflective Thinking 14) Financial markets A) channel funds indirectly between borrowers and lenders. B) channel funds directly from lenders to borrowers. C) act as go-betweens by holding a portfolio of assets and issuing claims based on that portfolio to savers. D) generally provide lenders with lower returns than do financial intermediaries. Answer: B Diff: 2 Page Ref: 4 Topic: financial institutions Objective: Identify the key components of the financial system *: Recurring AACSB: Reflective Thinking 15) If you purchase a Treasury bond, the Treasury bond is A) an asset to you as well as an asset to the U.S. government. B) an asset to you, but a liability to the U.S. government. C) a liability to you, but an asset to the U.S. government. D) a liability to you as well as a liability to the U.S. government. Answer: B Diff: 2 Page Ref: 4 Topic: financial assets 4 Copyright © 2021 Pearson Education, Inc.

Objective: Identify the key components of the financial system *: Recurring AACSB: Reflective Thinking 16) Funds flow from lenders to borrowers A) indirectly through financial markets. B) directly through financial intermediaries. C) indirectly through financial intermediaries. D) primarily through government agencies. Answer: C Diff: 1 Page Ref: 4 Topic: financial institutions Objective: Identify the key components of the financial system *: Recurring AACSB: Reflective Thinking 17) Which of the following is NOT a financial intermediary? A) NASDAQ B) Allstate Insurance Company C) Bank of America D) Vanguard Total Stock Market Index Fund Answer: A Diff: 1 Page Ref: 4 Topic: financial institutions Objective: Identify the key components of the financial system *: Recurring AACSB: Reflective Thinking 18) Which of the following is NOT a financial intermediary? A) mutual fund B) bank C) stock exchange D) insurance company Answer: C Diff: 1 Page Ref: 4 Topic: financial institutions Objective: Identify the key components of the financial system *: Recurring AACSB: Reflective Thinking 19) The main role of financial intermediaries is to A) provide funds to the federal government to cover the budget deficit. B) borrow funds from savers and lend them to borrowers. C) provide advice to consumers on how they should handle their finances. D) help ensure that there is enough money in circulation. Answer: B Diff: 1 Page Ref: 4 Topic: financial institutions 5 Copyright © 2021 Pearson Education, Inc.

Objective: Identify the key components of the financial system *: Recurring AACSB: Reflective Thinking 20) Financial intermediaries A) include banks and other depository institutions. B) include the New York and American Stock exchanges. C) directly issue claims on individual borrowers to savers. D) are owned and operated by the federal government. Answer: A Diff: 1 Page Ref: 4 Topic: financial institutions Objective: Identify the key components of the financial system *: Recurring AACSB: Reflective Thinking 21) A "primary market" is a market A) for government securities. B) in which newly issued claims are sold to buyers by borrowers. C) in which newly issued claims are sold by savers to borrowers. D) for debt by large or "primary" corporations. Answer: B Diff: 1 Page Ref: 9 Topic: financial institutions Objective: Identify the key components of the financial system *: Recurring AACSB: Reflective Thinking 22) A bank lending depositors' money to a local business and a pension fund investing contributions in shares of a company are similar financial activities in that A) both involve the use of financial markets. B) both involve funds being channeled from savers to borrowers through financial intermediaries. C) both involve a reduction in the overall level of liquidity in the financial system. D) both involve in an increase in the overall level of risk in the financial system. Answer: B Diff: 2 Page Ref: 4, 8 Topic: financial system Objective: Identify the key components of the financial system *: Recurring AACSB: Reflective Thinking 23) The leading federal regulatory body for financial markets in the United States is the A) Federal Bureau of Investigation. B) Securities and Exchange Commission. C) Federal Financial Market Bureau. D) Investors Protection Agency. Answer: B 6 Copyright © 2021 Pearson Education, Inc.

Diff: 1 Page Ref: 11 Topic: financial institutions Objective: Identify the key components of the financial system *: Recurring AACSB: Reflective Thinking 24) Economists define money as A) cash in circulation. B) deposits in commercial banks. C) anything that people are willing to accept in payment for goods and services or to pay off debts. D) bonds issued by large corporations. Answer: C Diff: 1 Page Ref: 3 Topic: financial system Objective: Identify the key components of the financial system *: Recurring AACSB: Reflective Thinking 25) The Federal Reserve System A) is in charge of managing the New York Stock Exchange. B) is headed by the Secretary of the Treasury. C) is the central bank of the United States. D) is responsible for conducting fiscal policy for the United States. Answer: C Diff: 1 Page Ref: 11 Topic: Federal Reserve Objective: Identify the key components of the financial system *: Recurring AACSB: Reflective Thinking 26) Monetary policy refers to the government's A) decisions on how much money to spend. B) decisions on how much money to collect in taxes. C) plans for retiring the national debt. D) management of the money supply and interest rates to achieve macroeconomic objectives. Answer: D Diff: 1 Page Ref: 11 Topic: Federal Reserve Objective: Identify the key components of the financial system *: Recurring AACSB: Reflective Thinking 27) Diversification refers to the A) splitting of wealth into many assets. B) difference between the liquidity of an asset and its risk. C) difficulty of converting investments in common stocks into investments in bonds. D) difficulty of selling common stocks in a weak market. 7 Copyright © 2021 Pearson Education, Inc.

Answer: A Diff: 1 Page Ref: 13 Topic: financial system Objective: Identify the key components of the financial system *: Recurring AACSB: Reflective Thinking 28) The purpose of diversification is to A) increase the liquidity of a financial portfolio. B) reduce the brokerage fees involved in managing a financial portfolio. C) reduce risk. D) reduce tax liability. Answer: C Diff: 1 Page Ref: 13 Topic: financial system Objective: Identify the key components of the financial system *: Recurring AACSB: Reflective Thinking 29) The financial system provides risk sharing by allowing A) borrowers to obtain funds either directly or indirectly. B) savers to earn interest tax-free. C) borrowers to convert liabilities into assets. D) savers to hold many assets. Answer: D Diff: 2 Page Ref: 13 Topic: financial system Objective: Identify the key components of the financial system *: Recurring AACSB: Reflective Thinking 30) Liquidity A) is the best available measure of the riskiness of an asset. B) is a characteristic of money, and of no other asset. C) is the ease with which an asset can be exchanged for money. D) was declining for many financial assets during the 1990s. Answer: C Diff: 1 Page Ref: 13 Topic: financial system Objective: Identify the key components of the financial system *: Recurring AACSB: Reflective Thinking 31) Which of the following assets is the least liquid? A) money market mutual fund B) stock C) treasury bond 8 Copyright © 2021 Pearson Education, Inc.

D) house Answer: D Diff: 1 Page Ref: 13 Topic: financial system Objective: Identify the key components of the financial system *: Recurring AACSB: Reflective Thinking 32) Increased liquidity in recent decades has reduced interest rates on which of the following assets (holding constant all other things that affect interest rates)? A) U.S. government bonds B) bonds issued by large corporations C) business loans D) bonds issued by state governments Answer: C Diff: 2 Page Ref: 13 Topic: financial system Objective: Identify the key components of the financial system *: Recurring AACSB: Reflective Thinking 33) The financial system performs the role of communicating information by A) constantly increasing the liquidity of most assets. B) constantly reducing the riskiness of most assets. C) incorporating all available information into the prices of financial assets. D) providing to investors for a nominal charge all government reports available about a particular company. Answer: C Diff: 2 Page Ref: 14 Topic: financial system Objective: Identify the key components of the financial system *: Recurring AACSB: Reflective Thinking 34) The distinguishing feature of a well-functioning financial market is the A) continual increase in the liquidity of most assets. B) continual reduction in the riskiness of most assets. C) increased ease of converting common stocks into bonds. D) incorporation of available information into asset prices. Answer: D Diff: 2 Page Ref: 14 Topic: financial system Objective: Identify the key components of the financial system *: Recurring AACSB: Reflective Thinking 35) In the United States, monetary policy is carried out by A) the Federal Reserve System. 9 Copyright © 2021 Pearson Education, Inc.

B) Congress. C) the President. D) Congress and the President acting together. Answer: A Diff: 1 Page Ref: 11 Topic: Federal Reserve Objective: Identify the key components of the financial system *: Recurring AACSB: Reflective Thinking 36) In the United States, the lender of last resort is A) Fannie Mae. B) the Federal Reserve. C) the Federal Deposit Insurance Corporation. D) the Securities and Exchange Commission. Answer: B Diff: 1 Page Ref: 11 Topic: Federal Reserve Objective: Identify the key components of the financial system *: Recurring AACSB: Reflective Thinking 37) A decline in bank lending has the most significant effect on A) small businesses. B) large businesses. C) state governments. D) the federal government. Answer: A Diff: 2 Page Ref: 6-7 Topic: financial institutions Special Feature: Apply the Concept: The Rise of Peer-to-Peer Lending and Fintech Objective: Identify the key components of the financial system AACSB: Reflective Thinking 38) As it became clear that the COVID-19 pandemic would cause a significant recession in the United States, all of the following took place EXCEPT A) the Federal Reserve took steps to stabilize the financial system. B) employment started to decline. C) many investors stopped buying financial assets. D) cities and school districts found it easier to use financial markets to borrow money. Answer: D Diff: 2 Page Ref: 1-2 Topic: financial crises of 2007-2009 and 2020 Special Feature: Chapter Opener: The Coronavirus, Financial Markets, and the Flow of Funds Objective: Provide an overview of the financial crises of 2007-2009 and 2020 AACSB: Reflective Thinking

39) The Consumer Financial Protection Bureau estimates that about ________ people in the United States lack credit scores. A) 800,000 B) 17 million C) 45 million D) 160 million Answer: C Diff: 1 Page Ref: 6-7 Topic: financial system Special Feature: Apply the Concept: The Rise of Peer-to-Peer Lending and Fintech Objective: Provide an overview of the financial crises of 2007-2009 and 2020 AACSB: Reflective Thinking 40) The funds for loans from peer-to-peer lenders come from three key sources. Which of the following is NOT one of those key sources? A) individuals B) government C) financial firms D) other businesses Answer: B Diff: 1 Page Ref: 6-7 Topic: financial institutions Special Feature: Apply the Concept: The Rise of Peer-to-Peer Lending and Fintech Objective: Identify the key components of the financial system AACSB: Reflective Thinking 41) The interest rate on loans made by peer-to-peer lenders tends to be A) lower than the interest rate on bonds and lower than the interest rate on credit cards. B) higher than the interest rate on bonds and higher than the interest rate on credit cards. C) lower than the interest rate on bonds and higher than the interest rate on credit cards. D) higher than the interest rate on bonds and lower than the interest rate on credit cards. Answer: D Diff: 1 Page Ref: 6-7 Topic: financial institutions Special Feature: Apply the Concept: The Rise of Peer-to-Peer Lending and Fintech Objective: Identify the key components of the financial system AACSB: Reflective Thinking 42) Peer-to-peer lenders make a profit by A) paying a lower interest rate to depositors than they charge to borrowers. B) charging borrowers a one-time fee and charging those who provide funds a fee for collecting payments from borrowers. C) charging borrowers quarterly interest rates, but paying the providers of funds on an annual basis. D) securitizing their loans and selling them to large financial institutions. Answer: B Diff: 1 Page Ref: 6-7 Topic: financial institutions 11 Copyright © 2021 Pearson Education, Inc.

Special Feature: Apply the Concept: The Rise of Peer-to-Peer Lending and Fintech Objective: Identify the key components of the financial system AACSB: Reflective Thinking 43) The process by which investment banks guarantee a certain price to a firm issuing stocks or bonds is known as A) underwriting. B) securitization. C) proprietary trading. D) peer-to-peer lending. Answer: A Diff: 2 Page Ref: 8 Topic: financial institutions Objective: Identify the key components of the financial system *: Recurring AACSB: Reflective Thinking 44) Until very recently, investment banks rarely engaged in which of the following? A) proprietary trading B) securitization C) lending to households D) underwriting Answer: C Diff: 2 Page Ref: 8 Topic: financial institutions Objective: Identify the key components of the financial system *: Recurring AACSB: Reflective Thinking 45) All of the following represent returns to savers EXCEPT A) dividends on stocks. B) fees on loans. C) interest payments on loans. D) coupon payments on bonds. Answer: B Diff: 1 Page Ref: 5 Topic: financial system Objective: Identify the key components of the financial system *: Recurring AACSB: Reflective Thinking 46) The role of the financial system is to A) channel funds from households and other savers to businesses. B) protect commercial banks from government regulation. C) ensure that investment banks remain profitable. D) provide loans from the Federal Reserve to households and businesses. Answer: A Diff: 1 Page Ref: 1-2 12 Copyright © 2021 Pearson Education, Inc.

Topic: financial system Special Feature: Chapter Opener: The Coronavirus, Financial Markets, and the Flow of Funds Objective: Identify the key components of the financial system AACSB: Reflective Thinking 47) Ordinary (non-securitized) loans cannot be resold after they have been granted by a bank or another lender. Therefore, these loans are A) financial assets but not financial securities. B) financial securities but not financial assets. C) both financial assets and financial securities. D) neither financial assets nor financial securities. Answer: A Diff: 2 Page Ref: 14-15 Topic: financial system Special Feature: Solved Problem: The Services That Securitized Loans Provide Objective: Identify the key components of the financial system AACSB: Reflective Thinking

48) Because securitized loans are loans that have been bundled with other loans and sold to investors, they are A) financial assets but not financial securities. B) financial securities but not financial assets. C) both financial assets and financial securities. D) neither financial assets nor financial securities. Answer: C Diff: 2 Page Ref: 14-15 Topic: financial system Special Feature: Solved Problem: The Services That Securitized Loans Provide Objective: Identify the key components of the financial system AACSB: Reflective Thinking 49) All of the following are true regarding securitized loans EXCEPT A) they provide risk sharing. B) they provide information. C) they provide liquidity. D) they cannot be resold. Answer: D Diff: 2 Page Ref: 14-15 Topic: financial system Special Feature: Solved Problem: The Services That Securitized Loans Provide Objective: Identify the key components of the financial system AACSB: Reflective Thinking 50) Briefly discuss three reasons why firms may borrow funds from a bank. Answer: Many firms rely on bank loans to meet their short-term needs for credit, such as funds to pay for inventories or to meet their payrolls. Many firms rely on bank loans to bridge the gap between the time they must pay for inventories or meet their payrolls and when they receive revenues from the sales of goods and services. Some firms also rely on bank loans to meet their long-term credit needs, such as funds they require to physically expand the firm. Diff: 2 Page Ref: 6 Topic: financial system Objective: Identify the key components of the financial system *: Recurring AACSB: Reflective Thinking 51) Briefly explain the process of securitizing mortgages. Answer: The mortgage lender sells the loan to a government-sponsored enterprise or financial firm that bundles the mortgage with mortgages from other lenders, providing the basis for a mortgage-backed security. Diff: 2 Page Ref: 4 Topic: financial assets Objective: Identify the key components of the financial system *: Recurring AACSB: Reflective Thinking 14 Copyright © 2021 Pearson Education, Inc.

52) How are interest payments on mortgages distributed to investors who own mortgage-backed securities? Answer: The banks that grants, or originates, the original mortgages will still collect the interest paid by the borrowers and send those interest payments on to the government agency or financial firm to distribute to the investors who have bought the mortgage-backed security. Diff: 2 Page Ref: 4 Topic: financial assets Objective: Identify the key components of the financial system *: Recurring AACSB: Reflective Thinking 53) Briefly explain the difference in how banks and peer-to-peer lenders make profits on loans. Answer: Banks have traditionally earned profits on loans by paying a lower interest rate to depositors than they charge to borrowers. Peer-to-peer lenders make profits by charging borrowers a one-time fee and charging the people providing funds a fee for collecting the payments from borrowers. Diff: 2 Page Ref: 6-7 Topic: financial institutions Special Feature: Apply the Concept: The Rise of Peer-to-Peer Lending and Fintech Objective: Identify the key components of the financial system AACSB: Reflective Thinking 1.2 The Crises of 2007-2009 and 2020 1) Which president said, "We have now passed the worst ... and we shall rapidly recover"? A) Herbert Hoover near the start of the Great Depression B) Franklin Delano Roosevelt near the start of the Great Depression C) George W. Bush near the start of the Great Recession D) Donald Trump during the COVID-19 pandemic Answer: A Diff: 1 Page Ref: 15 Topic: financial crises of 2007-2009 and 2020 Objective: Provide an overview of the financial crises of 2007-2009 and 2020 *: Recurring AACSB: Reflective Thinking

2) What made the recession of 2007-2009 different than any other recession since the Great Depression? A) The government did not implement a fiscal stimulus. B) The Fed failed to reduce interest rates. C) It was accompanied by a financial crisis. D) The impact was primarily limited to the financial sector. Answer: C Diff: 2 Page Ref: 16 Topic: financial crises of 2007-2009 and 2020 Objective: Provide an overview of the financial crises of 2007-2009 and 2020 *: Recurring AACSB: Reflective Thinking 3) Fannie Mae and Freddie Mac both A) sell bonds to investors and use the funds to purchase mortgages. B) help regulate the banking system. C) directly lend funds to people seeking mortgages. D) reduce access to funds for mortgages by purchasing existing mortgages. Answer: A Diff: 2 Page Ref: 17 Topic: financial crisis Objective: Provide an overview of the financial crises of 2007-2009 and 2020 *: Recurring AACSB: Reflective Thinking 4) The Coronavirus Aid, Relief and Economic Security (CARES) Act provided all of the following EXCEPT A) direct payments to households. B) loans and grants to businesses under the Paycheck Protection Plan (PPP). C) direct payments to educational institutions to compensate for lower tax revenues. D) supplemental unemployment insurance payments. Answer: C Diff: 1 Page Ref: 18 Topic: financial crisis Objective: Provide an overview of the financial crises of 2007-2009 and 2020 *: Recurring AACSB: Reflective Thinking

5) Which of the following best describes a "bubble"? A) when the price of an asset reaches a new high B) an unsustainable increase in the price of a class of assets C) rapid increases in inflation D) when bond prices rise more quickly than stock prices Answer: B Diff: 1 Page Ref: 16 Topic: financial crisis Objective: Provide an overview of the financial crises of 2007-2009 and 2020 *: Recurring AACSB: Reflective Thinking 6) All of the following were significant changes in the mortgage market in the 2000s EXCEPT A) investment banks became significant participants in the secondary mortgage market. B) lenders loosened lending standards. C) mortgage-backed securities became more popular with investors. D) borrowers tended to increase the amount of their down payments. Answer: D Diff: 2 Page Ref: 17 Topic: financial crisis Objective: Provide an overview of the financial crises of 2007-2009 and 2020 *: Recurring AACSB: Reflective Thinking 7) In response to the COVID-19 pandemic, the Fed initiated the Main Street Lending Program to make loans to A) small businesses. B) medium-size firms. C) large corporations. D) charities and non-profit organizations. Answer: B Diff: 1 Page Ref: 17 Topic: financial crisis Objective: Provide an overview of the financial crises of 2007-2009 and 2020 *: Recurring AACSB: Reflective Thinking

8) The Troubled Asset Relief Program (TARP) allowed A) the Treasury to inject funds into commercial banks in return for stock in the banks. B) the Fed to provide funds to commercial banks in return for stock. C) the Treasury to insure bank deposits at major U.S. banks. D) the Fed to make loans to banks as the lender of last resort. Answer: A Diff: 1 Page Ref: 18 Topic: financial crisis Objective: Provide an overview of the financial crises of 2007-2009 and 2020 *: Recurring AACSB: Reflective Thinking 9) Which firm did the Treasury allow to fail during the financial crisis? A) J.P. Morgan B) Bear Stearns C) Lehman Brothers D) American International Group (AIG) Answer: C Diff: 1 Page Ref: 18 Topic: financial crisis Objective: Provide an overview of the financial crises of 2007-2009 and 2020 *: Recurring AACSB: Reflective Thinking 10) Alt-A borrowers were those who A) used mortgages to purchase apartments. B) chose adjustable-rate mortgages instead of fixed-rate mortgages. C) borrowed using "interest-only" mortgages. D) did not provide documentation of their income when applying for a mortgage. Answer: D Diff: 1 Page Ref: 17 Topic: financial crisis Objective: Provide an overview of the financial crises of 2007-2009 and 2020 *: Recurring AACSB: Reflective Thinking 11) The financial crisis of 2007-2009 worsened after the failure of which firm? A) General Motors B) Lehman Brothers C) Bear Stearns D) American International Group (AIG) Answer: B Diff: 1 Page Ref: 18 Topic: financial crisis Objective: Provide an overview of the financial crises of 2007-2009 and 2020 *: Recurring AACSB: Reflective Thinking 18 Copyright © 2021 Pearson Education, Inc.

12) All of the following occurred at the beginning of the financial crisis of 2007-2009 EXCEPT A) the value of mortgage-backed securities declined sharply. B) many borrowers defaulted on their mortgages. C) banks began to ease lending requirements to all borrowers. D) commercial and investment banks suffered heavy losses due to their holdings of mortgagebacked securities. Answer: C Diff: 2 Page Ref: 17 Topic: financial crisis Objective: Provide an overview of the financial crises of 2007-2009 and 2020 *: Recurring AACSB: Reflective Thinking 13) Borrowers with flawed credit histories are referred to as ________ borrowers. A) subprime B) alt-A C) adjustable-rate D) securitized Answer: A Diff: 1 Page Ref: 17 Topic: financial crises of 2007-2009 and 2020 Objective: Provide an overview of the financial crises of 2007-2009 and 2020 *: Recurring AACSB: Reflective Thinking 14) Which of the following was the largest fiscal policy action in U.S. history? A) the Coronavirus Aid, Relief and Economic Security (CARES) Act B) the Paycheck Protection Plan (PPP) C) the Troubled Asset Relief Program (TARP) D) the Affordable Care Act (ACA) Answer: A Diff: 1 Page Ref: 18 Topic: financial crisis Objective: Provide an overview of the financial crises of 2007-2009 and 2020 *: Recurring AACSB: Reflective Thinking

15) Why did some economists and policymakers criticize the Fed and Treasury for arranging the sale of Bear Stearns to JP Morgan Chase in 2008? Answer: The main concern was with the moral hazard problem, which is the possibility that managers of financial firms such as Bear Stearns might make riskier investments if they believe that the federal government will save them from bankruptcy. Diff: 2 Page Ref: 17 Topic: financial crisis Objective: Provide an overview of the financial crises of 2007-2009 and 2020 *: Recurring AACSB: Analytical Thinking 16) What are the four main provisions of the Coronavirus Aid, Relief and Economic Security (CARES) act? Answer: 1. Direct payments to households 2. Supplemental unemployment insurance payments 3. Funds to state governments to offset some of their costs from fighting the epidemic 4. Loans and grants to businesses under the Paycheck Protection Plan (PPP) Diff: 2 Page Ref: 18 Topic: financial crisis Objective: Provide an overview of the financial crises of 2007-2009 and 2020 *: Recurring AACSB: Reflective Thinking 17) How did securitization and the bursting of the housing bubble contribute to the Financial Crisis of 2007-2009? Answer: Many investment banks and other investors purchased mortgage-backed securities because they paid higher interest rates than securities of comparable default risk. When the housing bubble burst, the value of the mortgage-backed securities declined significantly, resulting in massive losses for those who owned them, including many investment banks. Diff: 2 Page Ref: 17 Topic: financial crisis Objective: Provide an overview of the financial crises of 2007-2009 and 2020 *: Recurring AACSB: Analytical Thinking

Money, Banking, and the Financial System, 4e (Hubbard/O'Brien) Chapter 2 Money and the Payments System 2.1 Do We Need Money? 1) An important reason why economies at an early stage of development tend to operate inefficiently is A) they tend to be dominated by the agricultural sector, where productivity is usually low. B) they tend to have authoritarian governments that stifle innovation. C) they tend to be plagued by superstitious beliefs that stifle innovation. D) the high transactions costs associated with barter. Answer: D Diff: 2 Page Ref: 26 Topic: barter Objective: Analyze the inefficiencies of a barter system *: Recurring AACSB: Reflective Thinking 2) By "specialization" economists mean a situation where A) individuals produce the goods or services for which they have relatively the best ability. B) goods are traded directly for goods and money is not used. C) individuals who produce goods do not also produce services and individuals who produce services do not also produce goods. D) individuals are assigned to occupations on the basis of tests that gauge their relative abilities. Answer: A Diff: 1 Page Ref: 27 Topic: specialization Objective: Analyze the inefficiencies of a barter system *: Recurring AACSB: Reflective Thinking 3) The most important economic benefit from specialization is that it A) makes it possible for an economy to begin using money. B) leads to an increase in the standard of living in an economy. C) makes barter possible. D) eliminates the need for financial markets. Answer: B Diff: 2 Page Ref: 27 Topic: specialization Objective: Analyze the inefficiencies of a barter system *: Recurring AACSB: Reflective Thinking

4) When an economy relies on specialization A) the economy will generally produce only one product. B) the economy will usually be heavily agricultural. C) each individual in the economy produces the goods or services for which he or she has relatively the best ability. D) each individual will be assigned by the government to produce that good or service the government believes the economy should specialize in. Answer: C Diff: 2 Page Ref: 27 Topic: specialization Objective: Analyze the inefficiencies of a barter system *: Recurring AACSB: Reflective Thinking 5) Fundamentally, to reap the benefits of specialization, an economy must A) be heavily industrial. B) be heavily agricultural. C) have an extensive system of higher education. D) develop ways for individuals to trade goods with one another. Answer: D Diff: 2 Page Ref: 27 Topic: specialization Objective: Analyze the inefficiencies of a barter system *: Recurring AACSB: Reflective Thinking 6) Barter is A) another name for money. B) an exchange of goods and services directly for goods and services. C) the basis for economic specialization. D) the main system of exchange in the United States today. Answer: B Diff: 1 Page Ref: 26 Topic: barter Objective: Analyze the inefficiencies of a barter system *: Recurring AACSB: Reflective Thinking

7) Under a system of barter A) each individual trades output directly with another. B) only agricultural goods may be traded. C) goods may be traded for money, but money may not be traded for goods. D) currency is accepted for purchases, but personal checks are not. Answer: A Diff: 1 Page Ref: 26 Topic: barter Objective: Analyze the inefficiencies of a barter system *: Recurring AACSB: Reflective Thinking 8) Which of the following is an example of a barter transaction? A) An individual pays her electric bill with a check. B) An individual pays her electric bill with currency. C) An individual provides three light bulbs to her neighbor in exchange for two gallons of milk. D) An individual deposits three twenty-dollar bills in her checking account. Answer: C Diff: 1 Page Ref: 26 Topic: barter Objective: Analyze the inefficiencies of a barter system *: Recurring AACSB: Reflective Thinking 9) In a barter system individuals A) find it impossible to specialize. B) must be entirely self-sufficient. C) find it difficult to specialize, but may be able to do so. D) will almost invariably specialize. Answer: C Diff: 2 Page Ref: 26 Topic: barter Objective: Analyze the inefficiencies of a barter system *: Recurring AACSB: Reflective Thinking 10) A system of barter has substantial transactions costs because A) taxes under such a system are generally a large fraction of the value of output. B) traders must spend considerable time searching for trading partners. C) the uncertainties of trade result in high legal fees being incurred to draw up binding contracts. D) the uncertainties of trade result in high insurance premiums. Answer: B Diff: 2 Page Ref: 26 Topic: barter Objective: Analyze the inefficiencies of a barter system *: Recurring AACSB: Reflective Thinking 23 Copyright © 2021 Pearson Education, Inc.

11) Under a barter system A) each good has many prices. B) each good has a single price. C) no prices for goods exist. D) prices for goods are very stable. Answer: A Diff: 1 Page Ref: 26 Topic: barter Objective: Analyze the inefficiencies of a barter system *: Recurring AACSB: Reflective Thinking 12) How many prices would there be in a barter economy with 100 goods? A) 100 B) 1,000 C) 4,950 D) 10,000 Answer: C Diff: 1 Page Ref: 26 Topic: barter Objective: Analyze the inefficiencies of a barter system *: Recurring AACSB: Reflective Thinking 13) The problem of a double coincidence of wants refers to A) the insatiability of wants in a free market economy. B) poorly-managed companies producing what consumers want only by coincidence. C) the necessity in a barter system of each trading partner wanting what the other has to trade. D) the likelihood that needs will not be the same as wants. Answer: C Diff: 1 Page Ref: 26 Topic: barter Objective: Analyze the inefficiencies of a barter system *: Recurring AACSB: Reflective Thinking

14) Andy can't make a deal with Danny. Andy has an Alex Rodriguez baseball card and would like to trade it to Danny for Danny's Albert Pujols card, but Danny doesn't want an Alex Rodriguez card. Andy's problem illustrates the drawback to a barter system known as A) the specialization problem. B) the double coincidence of wants problem. C) the many prices problem. D) the transactions problem. Answer: B Diff: 2 Page Ref: 26 Topic: barter Objective: Analyze the inefficiencies of a barter system *: Recurring AACSB: Reflective Thinking 15) Which of the following is NOT a significant cost that a barter system imposes on an economy? A) Many prices must be maintained for each good. B) Only agricultural goods may be traded. C) Specialization of labor is hindered. D) The costs arising from the problem of finding two people who each want what the other produces. Answer: B Diff: 1 Page Ref: 26 Topic: barter Objective: Analyze the inefficiencies of a barter system *: Recurring AACSB: Reflective Thinking 16) Which of the following is the most efficient means of trade? A) barter B) money C) government rationing D) the combination of barter with some government rationing Answer: B Diff: 1 Page Ref: 26-27 Topic: barter Objective: Analyze the inefficiencies of a barter system *: Recurring AACSB: Reflective Thinking

17) In Moscow in 1989, what were taxi drivers using as a medium of exchange? A) Russian rubles B) Marlboro cigarettes C) gold coins D) caviar Answer: B Diff: 1 Page Ref: 27 Topic: barter Special Feature: Apply the Concept: What's Money? Ask a Taxi Driver in Moscow! Objective: Analyze the inefficiencies of a barter system AACSB: Reflective Thinking 18) Money eliminates the need for A) any government role in the economy. B) specialization. C) people to have a double coincidence of wants. D) the market system. Answer: C Diff: 1 Page Ref: 26 Topic: barter Objective: Analyze the inefficiencies of a barter system *: Recurring AACSB: Reflective Thinking 19) Using a good as a medium of exchange confers the benefit that A) the need to quote so many prices in trade is reduced. B) the need for a double coincidence of wants is greatly increased. C) the need for specialization is reduced. D) transactions costs are increased, but they now may be paid in money terms. Answer: A Diff: 2 Page Ref: 26 Topic: barter Objective: Analyze the inefficiencies of a barter system *: Recurring AACSB: Reflective Thinking 20) Commodity money can best be described as A) money used to purchase agricultural products. B) a good used as money that also has value independent of its use as money. C) standardized goods like gold that trade in a financial market. D) the form of money used in a barter system. Answer: B Diff: 2 Page Ref: 27 Topic: barter Objective: Analyze the inefficiencies of a barter system *: Recurring AACSB: Reflective Thinking 26 Copyright © 2021 Pearson Education, Inc.

21) Which of the following is NOT a problem with barter? A) each good has multiple prices B) high transactions costs C) the commodity money having value for other uses besides money D) lack of standardization of products exchanged Answer: C Diff: 2 Page Ref: 26 Topic: barter Objective: Analyze the inefficiencies of a barter system *: Recurring AACSB: Reflective Thinking 22) The introduction of money to an economy results in A) higher incomes. B) higher productivity. C) increased specialization. D) all of the above. Answer: D Diff: 2 Page Ref: 27 Topic: barter Objective: Analyze the inefficiencies of a barter system *: Recurring AACSB: Reflective Thinking 23) Money can BEST be described as A) anything that is generally accepted as payment for goods and services or in the settlement of debts. B) paper that can be used to purchase goods and services. C) commodities that have intrinsic value. D) any form of wealth possessed by consumers. Answer: A Diff: 1 Page Ref: 25 Topic: barter Objective: Analyze the inefficiencies of a barter system *: Recurring AACSB: Reflective Thinking 24) How does the existence of money affect economic growth? Answer: It reduces transactions costs and other efficiencies of barter. People can specialize, becoming far more productive than if they tried to produce all goods and services they consume themselves. Diff: 2 Page Ref: 27 Topic: barter Objective: Analyze the inefficiencies of a barter system *: Recurring AACSB: Analytical Thinking 27 Copyright © 2021 Pearson Education, Inc.

25) What are four inefficiencies of a barter system? Answer: Under a barter system, there are several inefficiencies. First, there must be a double coincidence of wants, resulting in high transaction costs. Second, there will be many prices for each good; one for each good for which it can be traded. Third, there is a lack of standardization in terms of the goods to be exchanged. Fourth, it will be difficult to accumulate wealth. Diff: 2 Page Ref: 26 Topic: barter Objective: Analyze the inefficiencies of a barter system *: Recurring AACSB: Analytical Thinking 2.2 The Key Functions of Money 1) Money is a medium of exchange in that A) money is generally accepted for buying and selling goods and services. B) currency may be exchanged for gold at any national bank. C) other assets may be better or worse in facilitating exchange than money. D) it must maintain most of its value over time. Answer: A Diff: 1 Page Ref: 28 Topic: functions of money Objective: List and describe the four key functions of money *: Recurring AACSB: Reflective Thinking 2) Money as a medium of exchange refers only to A) currency. B) gold coins. C) anything that is generally accepted as payment for goods and services. D) checks at commercial banks. Answer: C Diff: 1 Page Ref: 28 Topic: functions of money Objective: List and describe the four key functions of money *: Recurring AACSB: Reflective Thinking

3) When economists refer to the role of money as a unit of account, they mean that A) most accounting systems reflect that goods are purchased with currency. B) most accounting systems reflect that goods are purchased with checks. C) money gives traders a way of measuring value in the economy. D) money makes it possible for specialization to take place. Answer: C Diff: 1 Page Ref: 28 Topic: functions of money Objective: List and describe the four key functions of money *: Recurring AACSB: Reflective Thinking 4) When economists refer to the role of money as a store of value, they mean that A) money never loses its value, unlike other assets. B) money allows value to be stored easily. C) the value of money falls only when the quantity of money in circulation falls. D) the value of money falls only when the quantity of money in circulation rises. Answer: B Diff: 1 Page Ref: 28 Topic: functions of money Objective: List and describe the four key functions of money *: Recurring AACSB: Reflective Thinking 5) An asset is A) the same thing as a liability. B) a thing of value that can be owned. C) money, as opposed to stock or bonds. D) anything that never declines in value. Answer: B Diff: 1 Page Ref: 28 Topic: functions of money Objective: List and describe the four key functions of money *: Recurring AACSB: Reflective Thinking 6) The attribute that distinguishes money from other assets is that only money A) retains its value during times of inflation. B) is counted in determining the size of an individual's wealth. C) serves as a medium of exchange. D) may be used as collateral for a bank loan. Answer: C Diff: 1 Page Ref: 29 Topic: functions of money Objective: List and describe the four key functions of money *: Recurring AACSB: Reflective Thinking 29 Copyright © 2021 Pearson Education, Inc.

7) Wealth is A) the sum of the value of assets. B) equal to income. C) a flow variable. D) the sum of the value of assets minus the sum of the value of liabilities. Answer: D Diff: 2 Page Ref: 29 Topic: functions of money Objective: List and describe the four key functions of money *: Recurring AACSB: Reflective Thinking 8) The difference between money and income is that whereas income is an individual's A) flow of earnings over a period of time, money is an individual's stock of currency and currency substitutes. B) stock of all assets, money is an individual's stock of currency and currency substitutes. C) flow of earnings over a period of time, money is an individual's stock of all assets. D) stock of currency and currency substitutes, money is an individual's stock of all assets. Answer: A Diff: 2 Page Ref: 29 Topic: functions of money Objective: List and describe the four key functions of money *: Recurring AACSB: Reflective Thinking 9) In comparing money to shares of Apple stock, we can say that A) money is a store of value, but shares of Apple stock are not. B) shares of Apple stock are a store of value, but money is not. C) both money and shares of Apple stock are stores of value. D) neither money nor shares of Apple stock are stores of value. Answer: C Diff: 2 Page Ref: 28 Topic: functions of money Objective: List and describe the four key functions of money *: Recurring AACSB: Reflective Thinking

10) Why do individuals hold money when it does NOT provide the services that, say, a house does? A) Money is the most liquid asset. B) Money is the only form in which wealth may be held. C) Money increases in value faster than other assets. D) Money is useful in avoiding taxes on certain transactions. Answer: A Diff: 2 Page Ref: 29 Topic: functions of money Objective: List and describe the four key functions of money *: Recurring AACSB: Reflective Thinking 11) Other assets are inferior to money in the sense that A) they increase in value more slowly than does money. B) they have a lower overall return than money. C) they are more vulnerable to losing their real value as inflation increases. D) they generate transactions costs when they are exchanged for money. Answer: D Diff: 2 Page Ref: 29 Topic: functions of money Objective: List and describe the four key functions of money *: Recurring AACSB: Reflective Thinking 12) When economists refer to the role of money as a standard of deferred payment, they mean that A) payments by checks are usually deferred until the checks clear the bank. B) money earns interest while loan payments are deferred. C) money provides a standard for payments that will occur in the future. D) money today is worth less than money tomorrow. Answer: C Diff: 1 Page Ref: 29 Topic: functions of money Objective: List and describe the four key functions of money *: Recurring AACSB: Reflective Thinking

13) If prices increase rapidly A) money's usefulness as a store of value is diminished. B) money increases in value. C) deflation is likely. D) prices will decline to their normal level. Answer: A Diff: 2 Page Ref: 28 Topic: functions of money Objective: List and describe the four key functions of money *: Recurring AACSB: Reflective Thinking 14) Suppose $100 buys less in the year 2021 than in 2015. Then we can say that A) money's store of value has decreased. B) money's store of value has increased. C) the economy must have been growing rapidly between 2015 and 2021. D) the economy must have been growing slowly between 2015 and 2021. Answer: A Diff: 2 Page Ref: 28 Topic: functions of money Objective: List and describe the four key functions of money *: Recurring AACSB: Reflective Thinking 15) Which of the following is NOT an important criterion for whether a good will be usable as a medium of exchange? A) The good must be of standardized quality. B) The good must be valuable relative to its weight. C) The good must have value even if it were not being used as money. D) The good must be durable so that value is not lost through product spoilage. Answer: C Diff: 2 Page Ref: 29 Topic: functions of money Objective: List and describe the four key functions of money *: Recurring AACSB: Reflective Thinking

16) Which criterion for suitability as a medium of exchange do Federal Reserve Notes meet? A) They are of standardized quality. B) They are durable. C) They are acceptable to most traders. D) Federal Reserve Notes meet all of the criteria for suitability as a medium of exchange. Answer: D Diff: 1 Page Ref: 29-30 Topic: functions of money Objective: List and describe the four key functions of money *: Recurring AACSB: Reflective Thinking 17) What determines the acceptability of dollar bills as a medium of exchange? A) our society's willingness to use green paper notes issued by the Federal Reserve as money B) the willingness of the Federal Reserve to redeem dollar bills for gold C) the willingness of the U.S. Treasury to redeem dollar bills for gold D) the public's fear that failing to accept dollar bills will trigger a hyperinflation Answer: A Diff: 2 Page Ref: 30 Topic: functions of money Objective: List and describe the four key functions of money *: Recurring AACSB: Reflective Thinking 18) In what sense do self-fulfilling expectations determine the acceptability of a medium of exchange? A) People like to do what the government expects them to do. B) People value something as money only if they believe others will accept it from them as payment. C) People expect that money will never lose its value. D) People expect that eventually every country will use the same medium of exchange. Answer: B Diff: 2 Page Ref: 30 Topic: functions of money Objective: List and describe the four key functions of money *: Recurring AACSB: Reflective Thinking

19) Fiat money A) is money that would have no value if it were not usable as money. B) is illegal in most advanced, industrial countries. C) is usually some type of precious metal. D) will generally be accepted in trade for less than its face value. Answer: A Diff: 1 Page Ref: 30 Topic: fiat money Objective: List and describe the four key functions of money *: Recurring AACSB: Reflective Thinking 20) If money is declared to be legal tender, it must be A) minted from a precious metal. B) acceptable to citizens of foreign countries. C) possible to exchange it for an equivalent amount of precious metal. D) accepted to settle private transactions and it must be accepted for the payment of taxes. Answer: D Diff: 1 Page Ref: 30 Topic: fiat money Objective: List and describe the four key functions of money *: Recurring AACSB: Reflective Thinking 21) By designating Federal Reserve currency as legal tender, the federal government A) has ensured that Federal Reserve currency will serve as money. B) has guaranteed that Federal Reserve currency may be exchanged for an equivalent amount of gold or silver. C) has mandated that Federal Reserve currency be accepted for payment of debts. D) has mandated that Federal Reserve currency be accepted by citizens of foreign countries in exchange for their countries' currencies. Answer: C Diff: 1 Page Ref: 30 Topic: fiat money Objective: List and describe the four key functions of money *: Recurring AACSB: Reflective Thinking

22) What is the most important factor for Federal Reserve currency to be accepted as money? A) its acceptance by businesses and households in the United States in exchange for goods and services B) its designation as legal tender by the federal government C) the willingness of the federal government to accept it in exchange for an equivalent amount of gold or silver coins D) the willingness of foreign businesses and banks to accept it in exchange for goods and services Answer: A Diff: 2 Page Ref: 30 Topic: fiat money Objective: List and describe the four key functions of money *: Recurring AACSB: Reflective Thinking 23) Which function of money eliminates the need for multiple prices for each good as in a barter system? A) store of value B) standard of deferred payment C) unit of account D) valuable relative to its weight Answer: C Diff: 1 Page Ref: 28 Topic: functions of money Objective: List and describe the four key functions of money *: Recurring AACSB: Reflective Thinking 24) Which function of money allows for specialization to take place? A) medium of exchange B) unit of account C) store of value D) standard of deferred payment Answer: A Diff: 1 Page Ref: 28 Topic: functions of money Objective: List and describe the four key functions of money *: Recurring AACSB: Reflective Thinking

25) Which function of money enhances the ability of households to accumulate wealth? A) medium of exchange B) store of value C) valuable relative to its weight D) does not become worn out too quickly Answer: B Diff: 1 Page Ref: 28 Topic: functions of money Objective: List and describe the four key functions of money *: Recurring AACSB: Reflective Thinking 26) Money that has no value apart from its use as money A) is known as commodity money. B) is known as fiat money. C) will result in a return to a barter system. D) will result in rapid inflation. Answer: B Diff: 1 Page Ref: 30 Topic: functions of money Objective: List and describe the four key functions of money *: Recurring AACSB: Reflective Thinking 27) A person's earnings over a period of time is known as A) money. B) income. C) wealth. D) all of the above. Answer: B Diff: 1 Page Ref: 29 Topic: functions of money Objective: List and describe the four key functions of money *: Recurring AACSB: Reflective Thinking

28) In 2020, is was estimated that as much as ________ of U.S. currency was held outside of the United States. A) 10% B) 33% C) 50% D) 70% Answer: D Diff: 1 Page Ref: 30-32 Topic: monetary aggregates Special Feature: Apply the Concept: Say Goodbye to the Benjamins? Objective: Explain how the U.S. money supply is measured AACSB: Reflective Thinking 29) Since the year 2000, total currency in circulation A) has fallen by 20 percent. B) has remained essentially the same. C) has more than tripled. D) has increased tenfold. Answer: C Diff: 1 Page Ref: 30-32 Topic: monetary aggregates Special Feature: Apply the Concept: Say Goodbye to the Benjamins? Objective: Explain how the U.S. money supply is measured AACSB: Reflective Thinking 30) More than 80% of the value of all U.S. currency consists of A) $1 bills. B) $20 bills. C) $50 bills. D) $100 bills. Answer: D Diff: 1 Page Ref: 30-32 Topic: monetary aggregates Special Feature: Apply the Concept: Say Goodbye to the Benjamins? Objective: Explain how the U.S. money supply is measured AACSB: Reflective Thinking

31) If fiat money has no value apart from its use as money, how can it be used as a medium of exchange? Answer: The most important reason paper currency circulates as a medium of exchange is the confidence of consumers and firms that if they accept paper currency they will be able to pass it along when they need to buy goods and services. Also, the federal government has designated it to be legal tender, meaning the government accepts it in payment of taxes and requires it to be accepted in payment of debts. Diff: 2 Page Ref: 30 Topic: functions of money Objective: List and describe the four key functions of money *: Recurring AACSB: Reflective Thinking 32) Economic studies have shown that countries that have high inflation rates have lower rates of economic growth than do countries with low inflation rates. Explain what underlies this relationship between inflation and economic growth. Answer: In terms of the issues discussed in this chapter, inflation reduces the usefulness of currency as a store of value and as a standard of deferred payment. In extreme cases, high rates of inflation have led to a shift to a barter system or to the use of foreign currency as a medium of exchange. These effects would tend to reduce the efficiency of the economy and the rate of economic growth. Diff: 3 Page Ref: 28-29 Topic: functions of money Objective: List and describe the four key functions of money *: Recurring AACSB: Analytical Thinking 33) In what way are other assets less liquid than money? Answer: You incur transactions costs when you exchange other assets for money. Diff: 2 Page Ref: 29 Topic: functions of money Objective: List and describe the four key functions of money *: Recurring AACSB: Reflective Thinking 34) What is the difference between money, income, and wealth? Answer: Income is equal to a person's earnings over a period of time. Wealth is the sum of a person's assets minus the sum of a person's liabilities. Money is a medium of exchange and one component of a person's wealth. Diff: 2 Page Ref: 29 Topic: functions of money Objective: List and describe the four key functions of money *: Recurring AACSB: Reflective Thinking

35) What are the five characteristics that make an asset suitable to be used as a medium of exchange? Answer: It must be acceptable to most people; standardized in terms of quality; durable so that it doesn't become too worn out to be usable; valuable relative to its weight; divisible since prices of goods and services vary. Diff: 2 Page Ref: 29 Topic: functions of money Objective: List and describe the four key functions of money *: Recurring AACSB: Reflective Thinking 2.3 The Payments System 1) The payments system is A) the mechanism for conducting economic transactions. B) another name for the system of foreign exchange rates. C) the phrase used to describe how transactions are carried out in an economy that does not use money. D) the way in which economic transactions are carried out in a government-controlled economy, such as the former Soviet Union. Answer: A Diff: 1 Page Ref: 32 Topic: payments system Objective: Explain the role of the payments system in the economy *: Recurring AACSB: Reflective Thinking 2) Which of the following is an example of a commodity money? A) gold coins B) dollar bills C) British pound notes D) Japanese yen notes Answer: A Diff: 1 Page Ref: 32-33 Topic: payments system Objective: Explain the role of the payments system in the economy *: Recurring AACSB: Reflective Thinking

3) All of the following are problems associated with commodity money EXCEPT A) it is a cumbersome form of payments system. B) commodities tend to have little value in and of themselves. C) its value is dependent on its purity. D) costs are incurred in certifying the purity and weight of commodity money. Answer: B Diff: 2 Page Ref: 33 Topic: payments system Objective: Explain the role of the payments system in the economy *: Recurring AACSB: Reflective Thinking 4) Which of the following is an example of fiat money? A) a cowry shell used as money on a South Pacific island B) a gold coin used as money in nineteenth century England C) a Federal Reserve Note used as money in the twenty-first century United States D) a pound of salt used as money in medieval France Answer: C Diff: 1 Page Ref: 32-33 Topic: payments system Objective: Explain the role of the payments system in the economy *: Recurring AACSB: Reflective Thinking 5) Checks are A) not acceptable for settling transactions in most industrialized countries. B) less important than currency as a means of settling transactions. C) promises to pay, on demand, money deposited with a financial institution. D) promises to pay, on demand, coins minted from precious metals. Answer: C Diff: 1 Page Ref: 33 Topic: payments system Objective: Explain the role of the payments system in the economy *: Recurring AACSB: Reflective Thinking 6) Which of the following is NOT a step involved in using checks? A) The recipient must present the check to the bank. B) The bank must present the check to the checkwriter's bank. C) The funds must be transferred from the checkwriter's bank to the recipient's bank. D) The funds must be transferred from the recipient's bank to the checkwriter's bank. Answer: D Diff: 1 Page Ref: 33 Topic: payments system Objective: Explain the role of the payments system in the economy *: Recurring AACSB: Reflective Thinking 40 Copyright © 2021 Pearson Education, Inc.

7) The use of checks in transactions A) entails lower information costs than the use of currency. B) entails fewer steps than settling transactions with currency. C) avoids the cost of transporting currency back and forth. D) entails fewer steps and lower information costs than settling transactions with currency. Answer: C Diff: 2 Page Ref: 33 Topic: payments system Objective: Explain the role of the payments system in the economy *: Recurring AACSB: Reflective Thinking 8) Automatic teller machines and debit cards are examples of A) electronic funds transfer systems. B) commodity monies. C) legal tender in the United States. D) modern barter systems. Answer: A Diff: 1 Page Ref: 34 Topic: payments system Objective: Explain the role of the payments system in the economy *: Recurring AACSB: Reflective Thinking 9) All of the following are examples of electronic funds EXCEPT A) credit cards. B) debit cards. C) ACH transactions. D) e-money. Answer: A Diff: 1 Page Ref: 34 Topic: payments system Objective: Explain the role of the payments system in the economy *: Recurring AACSB: Reflective Thinking

10) All of the following are characteristics of debit cards EXCEPT A) payments are deferred until a later date. B) they can be used like checks. C) they eliminate the problem of trust since the bank's computer authorizes the transaction. D) when used at a store, the user's bank instantly credits the store's account with the amount and deducts it from the user's account. Answer: A Diff: 1 Page Ref: 34 Topic: payments system Objective: Explain the role of the payments system in the economy *: Recurring AACSB: Reflective Thinking 11) Which of the following statements about ACH transactions is FALSE? A) They reduce the likelihood of missed payments. B) They reduce transactions costs associated with check processing. C) They reduce the costs that lenders incur in notifying customers of missed payments. D) They typically involve digital cash. Answer: D Diff: 2 Page Ref: 34 Topic: payments system Objective: Explain the role of the payments system in the economy *: Recurring AACSB: Reflective Thinking 12) Which of the following is NOT on the Fed's list of the five most desirable outcomes for a payments system? A) inflation-proof B) security C) efficiency D) speed Answer: A Diff: 1 Page Ref: 33-34 Topic: payments system Objective: Explain the role of the payments system in the economy *: Recurring AACSB: Reflective Thinking

13) The banking systems in all of the following countries use a real-time payment system EXCEPT A) China. B) Japan. C) Mexico. D) the United States. Answer: D Diff: 1 Page Ref: 35-36 Topic: payments system Special Feature: Apply the Concept: Why Is the U.S. Payments System So Slow? Objective: Explain the role of the payments system in the economy AACSB: Reflective Thinking 14) Which of the following is a form of e-money? A) gold B) PayPal C) an American Express card D) traveler's checks Answer: B Diff: 1 Page Ref: 36 Topic: payments system Objective: Explain the role of the payments system in the economy *: Recurring AACSB: Reflective Thinking 15) Bitcoin is a form of A) commodity money. B) legal tender. C) e-money. D) all of the above. Answer: C Diff: 1 Page Ref: 36 Topic: payments system Objective: Explain the role of the payments system in the economy *: Recurring AACSB: Reflective Thinking

16) All of the following statements regarding bitcoin transactions are true EXCEPT A) no permanent record of bitcoin transactions exist. B) bitcoin transactions are now more prevalent than cash transactions. C) retailers pay a lower processing cost for bitcoin transactions than for credit card transactions. D) bitcoin transactions are final and unlike credit card transactions, cannot be disputed by the buyer. Answer: B Diff: 2 Page Ref: 37 Topic: payments system Objective: Explain the role of the payments system in the economy *: Recurring AACSB: Reflective Thinking 17) According to a Federal Reserve study, electronic payments now make up ________ of all noncash payments. A) 15 percent B) just under half C) more than 85 percent D) just under 97 percent Answer: C Diff: 1 Page Ref: 36 Topic: payments system Objective: Explain the role of the payments system in the economy *: Recurring AACSB: Reflective Thinking 18) In Sweden, cash accounts for ________ of transactions. A) only about 2 percent B) about 10 percent C) approximately 40 percent D) just under 90 percent Answer: A Diff: 1 Page Ref: 39 Topic: payments system Special Feature: Apply the Concept: Will Sweden Become the First Cashless Society? Objective: Explain the role of the payments system in the economy AACSB: Reflective Thinking

19) All of the following are true in Sweden EXCEPT A) many branches of Sweden's banks do not accept cash deposits. B) some stores have stopped accepting cash payments. C) many churches encourage parishioners to make donations using a mobile banking app. D) the government no longer issues paper currency. Answer: D Diff: 1 Page Ref: 39 Topic: payments system Special Feature: Apply the Concept: Will Sweden Become the First Cashless Society? Objective: Explain the role of the payments system in the economy AACSB: Reflective Thinking 20) According to the Fed, what are the five most desirable outcomes for a payments system? Answer: Speed, Security, Efficiency, Smooth international transactions, and Effective collaboration among participants in the system Diff: 2 Page Ref: 33-34 Topic: payments system Objective: Explain the role of the payments system in the economy *: Recurring AACSB: Reflective Thinking 21) Why does the payments system continue to change over time? Answer: New forms of payments are introduced that increase the efficiency of the payments system by reducing transactions costs. Diff: 2 Page Ref: 32-34 Topic: payments system Objective: Explain the role of the payments system in the economy *: Recurring AACSB: Analytical Thinking 2.4 Measuring the Money Supply 1) As of January 2020, the amount of money as measured by M2 was about A) $985 billion. B) $3.9 trillion. C) $15.4 trillion. D) $17.2 trillion. Answer: C Diff: 1 Page Ref: 41 Topic: monetary aggregates Objective: Explain how the U.S. money supply is measured *: Recurring AACSB: Reflective Thinking

2) The M2 aggregate A) includes M1 plus short-term investment accounts. B) includes M1 plus large-denomination time deposits. C) equals currency plus checking account deposits at commercial banks. D) is the best definition of money purely as a medium of exchange. Answer: A Diff: 1 Page Ref: 40 Topic: monetary aggregates Objective: Explain how the U.S. money supply is measured *: Recurring AACSB: Reflective Thinking 3) Which of the following is NOT included in M2? A) currency B) savings bonds C) money market deposit accounts D) checking account deposits Answer: B Diff: 1 Page Ref: 40 Topic: monetary aggregates Objective: Explain how the U.S. money supply is measured *: Recurring AACSB: Reflective Thinking 4) Which of the following statements is TRUE about M2? A) Its total value is smaller than that of M1. B) Apart from those assets also included in M1, it includes no assets that offer check-writing features. C) Its total value is about four times as large as M1. D) It includes large-denomination time deposits. Answer: C Diff: 1 Page Ref: 41 Topic: monetary aggregates Objective: Explain how the U.S. money supply is measured *: Recurring AACSB: Reflective Thinking

5) Which of the following is included in M2, but not in M1? A) currency B) checking account deposits C) small time deposits D) Everything in M2 is in M1. Answer: C Diff: 1 Page Ref: 41 Topic: monetary aggregates Objective: Explain how the U.S. money supply is measured *: Recurring AACSB: Reflective Thinking 6) Money market mutual fund shares are included in A) only M1. B) only M2. C) M1 and M2. D) neither M1 nor M2. Answer: B Diff: 1 Page Ref: 40 Topic: monetary aggregates Objective: Explain how the U.S. money supply is measured *: Recurring AACSB: Reflective Thinking 7) Which of the following makes up the largest share of M2? A) M1 B) savings deposits C) small time deposits D) money market mutual fund shares Answer: B Diff: 2 Page Ref: 41 Topic: monetary aggregates Objective: Explain how the U.S. money supply is measured *: Recurring AACSB: Reflective Thinking 8) The Fed's current position towards the existing monetary aggregates is A) it is convinced that M1 is the best measure of the money supply. B) it is convinced that M2 is the best measure of the money supply. C) it is an issue of ongoing research. D) it is reverting to considering currency alone as the best measure of the money supply. Answer: C Diff: 2 Page Ref: 42 Topic: monetary aggregates Objective: Explain how the U.S. money supply is measured *: Recurring AACSB: Reflective Thinking 47 Copyright © 2021 Pearson Education, Inc.

9) In January 2020, what was the total value of U.S. currency in circulation? A) $6.8 billion B) $1,719 billion C) $2,233 billion D) $3,952 billion Answer: B Diff: 1 Page Ref: 41 Topic: monetary aggregates Objective: Explain how the U.S. money supply is measured *: Recurring AACSB: Reflective Thinking 10) A monetary aggregate is a measure of A) the inflation rate. B) the total economic activity of the country. C) money broader than currency. D) definitive money. Answer: C Diff: 1 Page Ref: 40 Topic: monetary aggregates Objective: Explain how the U.S. money supply is measured *: Recurring AACSB: Reflective Thinking 11) The narrowest money measure is A) currency plus non-interest bearing checking accounts. B) currency plus all checking accounts. C) currency plus all deposits at financial institutions. D) definitive money. Answer: B Diff: 2 Page Ref: 40 Topic: monetary aggregates Objective: Explain how the U.S. money supply is measured *: Recurring AACSB: Reflective Thinking

12) Which of the following is the largest measure of money in the United States? A) Federal Reserve notes B) definitive money C) M1 D) M2 Answer: D Diff: 1 Page Ref: 40 Topic: monetary aggregates Objective: Explain how the U.S. money supply is measured *: Recurring AACSB: Reflective Thinking 13) Which of the following is NOT included in M1? A) currency B) savings account deposits C) checking account deposits D) traveler's checks Answer: B Diff: 1 Page Ref: 40 Topic: monetary aggregates Objective: Explain how the U.S. money supply is measured *: Recurring AACSB: Reflective Thinking 14) Which of the following is the largest component of M1? A) money market mutual fund shares B) savings deposits C) checking account deposits D) currency Answer: C Diff: 1 Page Ref: 41 Topic: monetary aggregates Objective: Explain how the U.S. money supply is measured *: Recurring AACSB: Reflective Thinking 15) Which of the following describes the behavior of M1 in recent decades? A) Its growth rate soared during the recessions of 1990-91, 2001, and 2007-2009. B) It tended to grow more rapidly than M2. C) Its growth rate was more stable than the growth rate of M2. D) It has not declined since the 1970s. Answer: A Diff: 1 Page Ref: 41 Topic: monetary aggregates Objective: Explain how the U.S. money supply is measured *: Recurring AACSB: Reflective Thinking 49 Copyright © 2021 Pearson Education, Inc.

16) Why has M2 grown more quickly than M1 in recent decades? A) Currency in circulation has declined. B) People own more shares of stock than in the past. C) The amount of funds in CDs and money market mutual funds shares has grown faster than currency or checking deposits. D) Most people use debit cards instead of checking accounts. Answer: C Diff: 2 Page Ref: 41 Topic: monetary aggregates Objective: Explain how the U.S. money supply is measured *: Recurring AACSB: Reflective Thinking 17) What criteria should be used in deciding the best definition of the money supply? Answer: The answer depends on the purpose of the measurement. Economists are primarily interested in the relation between monetary aggregates and other economic variables, such as output, the price level, and interest rates. In this respect, a monetary aggregate is most useful when it is most closely related to these economic variables. Until the 1980s, M1 was the most widely accepted measure of the money supply. In the 1980s and 1990s, M2 has been most widely accepted. Diff: 2 Page Ref: 41-42 Topic: monetary aggregates Objective: Explain how the U.S. money supply is measured *: Recurring AACSB: Analytical Thinking 2.5 The Quantity Theory of Money: A First Look at the Link Between Money and Prices 1) Suppose the GDP implicit price deflator was 112.7 in 2019 and 116.0 in 2020. Therefore, the inflation rate in 2020 would be A) 2.8%. B) 2.9%. C) 3.3%. D) 16%. Answer: B Diff: 2 Page Ref: 43 Topic: equation of exchange and quantity theory Objective: Use the quantity theory of money to analyze the relationship between money and prices in the long run *: Recurring AACSB: Analytical Thinking

2) A hyperinflation occurs when A) inflation persists for more than two years. B) inflation persists for more than five years. C) the inflation rate exceeds 50% per year. D) the inflation rate exceeds 50% per month. Answer: D Diff: 1 Page Ref: 46 Topic: equation of exchange and quantity theory Objective: Use the quantity theory of money to analyze the relationship between money and prices in the long run *: Recurring AACSB: Reflective Thinking 3) When prices rise, the purchasing power of money A) rises. B) falls. C) is unaffected. D) may rise, fall, or be unaffected depending upon circumstances. Answer: B Diff: 2 Page Ref: 42 Topic: equation of exchange and quantity theory Objective: Use the quantity theory of money to analyze the relationship between money and prices in the long run *: Recurring AACSB: Reflective Thinking 4) The purchasing power of money A) rises when prices fall. B) rises when prices rise. C) is set by the Fed in January of each year. D) is constant. Answer: A Diff: 2 Page Ref: 42 Topic: equation of exchange and quantity theory Objective: Use the quantity theory of money to analyze the relationship between money and prices in the long run *: Recurring AACSB: Reflective Thinking

5) The velocity of money can best be described as A) how quickly prices are increasing. B) how quickly output is increasing. C) the number of times each dollar in the money supply is used to buy goods and services included in GDP. D) the growth rate of the money supply. Answer: C Diff: 1 Page Ref: 43 Topic: equation of exchange and quantity theory Objective: Use the quantity theory of money to analyze the relationship between money and prices in the long run *: Recurring AACSB: Reflective Thinking 6) According to the equation of exchange, the money supply times the velocity of money equals the A) price level. B) growth rate of the money supply. C) real GDP. D) nominal GDP. Answer: D Diff: 2 Page Ref: 43 Topic: equation of exchange and quantity theory Objective: Use the quantity theory of money to analyze the relationship between money and prices in the long run *: Recurring AACSB: Reflective Thinking 7) According to the quantity theory of money, the growth rate of which of the following is zero? A) money supply B) velocity C) real GDP D) price level Answer: B Diff: 2 Page Ref: 43 Topic: equation of exchange and quantity theory Objective: Use the quantity theory of money to analyze the relationship between money and prices in the long run *: Recurring AACSB: Reflective Thinking

8) Suppose nominal GDP is $14 trillion and the money supply is $2 trillion. What is the velocity of money? A) 0.143 B) 7 C) 12 D) 28 Answer: B Diff: 2 Page Ref: 43 Topic: equation of exchange and quantity theory Objective: Use the quantity theory of money to analyze the relationship between money and prices in the long run *: Recurring AACSB: Analytical Thinking 9) According to the quantity theory of money, if the long-run economic growth rate is 2.5%, by how much should the Fed increase the money supply if it wants inflation to be 2%? A) 0.5% B) 1.25% C) 4.5% D) 5% Answer: C Diff: 3 Page Ref: 43 Topic: equation of exchange and quantity theory Objective: Use the quantity theory of money to analyze the relationship between money and prices in the long run *: Recurring AACSB: Analytical Thinking 10) According to the equation of exchange, how can national income grow even though the amount of money does NOT? A) Price level increases. B) Real GDP decreases. C) Velocity increases. D) Velocity decreases. Answer: C Diff: 2 Page Ref: 43 Topic: equation of exchange and quantity theory Objective: Use the quantity theory of money to analyze the relationship between money and prices in the long run *: Recurring AACSB: Reflective Thinking

11) Hyperinflations are usually caused by large budget deficits financed by A) selling bonds to private investors. B) selling bonds to the central bank. C) raising taxes. D) borrowing from commercial banks. Answer: B Diff: 3 Page Ref: 46-47 Topic: equation of exchange and quantity theory Objective: Use the quantity theory of money to analyze the relationship between money and prices in the long run *: Recurring AACSB: Reflective Thinking 12) Which country experienced hyperinflation of almost 15 billion percent in 2008? A) Argentina B) Canada C) Iceland D) Zimbabwe Answer: D Diff: 1 Page Ref: 24-25 Topic: equation of exchange and quantity theory Special Feature: Chapter Opener: The Federal Reserve: Good for Main Street or Wall Street-or Both? Objective: Use the quantity theory of money to analyze the relationship between money and prices in the long run AACSB: Reflective Thinking 13) Research has shown that nations with highly independent central banks tend to have low A) inflation. B) interest rates. C) economic growth. D) unemployment. Answer: A Diff: 3 Page Ref: 48 Topic: equation of exchange and quantity theory Special Feature: Key Issue and Question Objective: Use the quantity theory of money to analyze the relationship between money and prices in the long run AACSB: Reflective Thinking

14) Evidence indicates that there is a strong relationship between money and inflation in A) both the short and long run. B) neither the short nor the long run. C) the short run, but not the long run. D) the long run, but not the short run. Answer: D Diff: 2 Page Ref: 45 Topic: equation of exchange and quantity theory Objective: Use the quantity theory of money to analyze the relationship between money and prices in the long run *: Recurring AACSB: Reflective Thinking 15) In quantity theory terms, during a hyperinflation A) money supply increases rapidly, but velocity does not. B) velocity increases rapidly, but money supply does not. C) both the money supply and velocity increase rapidly. D) neither the money supply nor velocity increase rapidly. Answer: C Diff: 2 Page Ref: 46 Topic: equation of exchange and quantity theory Objective: Use the quantity theory of money to analyze the relationship between money and prices in the long run *: Recurring AACSB: Reflective Thinking 16) According to the equation of exchange, if nominal GDP increases then A) the quantity of money must also increase. B) the velocity of money must also increase. C) both the quantity of money and the velocity of money must also increase. D) either the quantity of money and/or the velocity of money must also increase. Answer: D Diff: 2 Page Ref: 44 Topic: equation of exchange and quantity theory Special Feature: Solved Problem: Relationship Between Money and Income Objective: Use the quantity theory of money to analyze the relationship between money and prices in the long run AACSB: Reflective Thinking

17) According to the equation of exchange, if the quantity of money decreases and the velocity of money remains constant, then A) the level of real GDP must decrease. B) the level of nominal GDP must decrease. C) the price level must decrease. D) the level of inflation must increase. Answer: B Diff: 2 Page Ref: 44 Topic: equation of exchange and quantity theory Special Feature: Solved Problem: Relationship Between Money and Income Objective: Use the quantity theory of money to analyze the relationship between money and prices in the long run AACSB: Reflective Thinking 18) The American Civil War lasted from the spring of 1861 to the spring of 1865. During the war the Confederate government issued substantial amounts of fiat paper currency. What do you think happened to the price level (measured in Confederate dollars) in the Confederate states during the final months of the war? Answer: During the final months of the war, the imminent demise of the Confederate government greatly reduced the willingness of people to hold Confederate currency. The usefulness of Confederate currency as a store of value and as a standard of deferred payment declined sharply. Those attempting to buy goods and services with the currency had to offer increasing amounts of it in order to find anyone willing to accept it. Or, put another way, the price level rose dramatically, measured in Confederate dollars. Diff: 2 Page Ref: 46 Topic: equation of exchange and quantity theory Objective: Use the quantity theory of money to analyze the relationship between money and prices in the long run *: Recurring AACSB: Analytical Thinking 19) Make use of the quantity theory of money to solve the following problem. If the Fed has an inflation target of 2% and the velocity of money is constant, by how much should it increase the money supply each year if economic growth is expected to average 3%? Answer: Since the percent change in the money supply equals the percent change in real GDP plus inflation, the money supply should grow by 2% + 3% = 5%. Diff: 2 Page Ref: 43 Topic: equation of exchange and quantity theory Objective: Use the quantity theory of money to analyze the relationship between money and prices in the long run *: Recurring AACSB: Analytical Thinking

20) Make use of the quantity equation to answer the following problem. If the Fed increases the money supply by 4%, velocity increases by 1%, and economic growth is 3%, by how much will the price level increase? Answer: Since the percent change in the money supply plus the percent change in velocity equals the percent change in real GDP plus the percent change in the price level, the price level will increase by 2% (4% + 1% - 3%). Diff: 2 Page Ref: 43 Topic: equation of exchange and quantity theory Objective: Use the quantity theory of money to analyze the relationship between money and prices in the long run *: Recurring AACSB: Analytical Thinking 21) Make use of the quantity equation to answer the following problem. If the Fed increases the money supply by 6%, economic growth is 2%, and inflation is 2%, what is happening to the velocity of money? Be specific. Answer: Since the percent change in the money supply plus the percent change in velocity equals the percent change in real GDP plus the percent change in the price level, velocity is declining by 2%. Diff: 2 Page Ref: 43 Topic: equation of exchange and quantity theory Objective: Use the quantity theory of money to analyze the relationship between money and prices in the long run *: Recurring AACSB: Analytical Thinking 22) What is normally the ultimate cause of hyperinflation? Answer: The ultimate cause of hyperinflation is usually governments spending more than they collect in taxes, which results in government budget deficits. Governments that can't sell bonds to private investors will often sell them to their central banks. In paying for the bonds, the central bank increases the country's money supply. Excessive increases in the money supply result in hyperinflation. Diff: 2 Page Ref: 46-47 Topic: equation of exchange and quantity theory Objective: Use the quantity theory of money to analyze the relationship between money and prices in the long run *: Recurring AACSB: Analytical Thinking

23) What does research suggest as to the relationship between the independence of the central bank and inflation? What is the rationale for this relationship? Answer: Research indicates that the more independent a central bank is from the rest of the government, the lower the country's inflation rate will be. The reason is that an independent central bank is better able to resist political pressures to increase the money supply. Diff: 2 Page Ref: 47-48 Topic: equation of exchange and quantity theory Special Feature: Key Issue and Question Objective: Use the quantity theory of money to analyze the relationship between money and prices in the long run AACSB: Analytical Thinking Money, Banking, and the Financial System, 4e (Hubbard/O'Brien) Chapter 3 Interest Rates and Rates of Return 3.1 The Interest Rate, Present Value, and Future Value 1) Suppose Matt's New Cars issues a bond in which they'll need to pay $10,000 in one year, which includes 4% interest. How much will they receive for the bond? A) $9,600 B) $9,615 C) $10,000 D) $10,400 Answer: B Diff: 2 Page Ref: 60 Topic: present value and future value Objective: Explain how to use the interest rate in calculating present values and future values *: Recurring AACSB: Analytical Thinking 2) Though Treasury bonds may have little default risk, what type of risk exists when current interest rates are low? A) price risk B) refinancing risk C) interest-rate risk D) present value risk Answer: C Diff: 1 Page Ref: 54-55 Topic: present value and future value Special Feature: Chapter Opener: Are Treasury Bonds a Risky Investment? Objective: Explain how to use the interest rate in calculating present values and future values AACSB: Reflective Thinking 3) In mid-2020, 30-year U.S. Treasury bonds had an interest rate of A) 0%. B) less than 1.5%. C) 5.25%. 58 Copyright © 2021 Pearson Education, Inc.

D) 15%. Answer: B Diff: 1 Page Ref: 54-55 Topic: present value and future value Special Feature: Chapter Opener: Are Treasury Bonds a Risky Investment? Objective: Explain how to use the interest rate in calculating present values and future values AACSB: Reflective Thinking

4) Which of the following will lead to a higher interest rate on a loan? A) lower inflation B) lower opportunity cost C) increased perceived risk of default D) reduced likelihood of borrower not paying the loan Answer: C Diff: 2 Page Ref: 56 Topic: present value and future value Objective: Explain how to use the interest rate in calculating present values and future values *: Recurring AACSB: Reflective Thinking 5) The key to present value calculations is that they A) are appropriate only for funds in the same time period. B) provide a common unit for measuring funds at different times. C) provide accurate answers only in a low-inflation environment. D) provide accurate answers only in a high-inflation environment. Answer: B Diff: 2 Page Ref: 61 Topic: present value and future value Objective: Explain how to use the interest rate in calculating present values and future values *: Recurring AACSB: Reflective Thinking 6) Compounding refers to A) the calculation of interest rates after the compounding effect of taxes has been allowed for. B) the paying back of both interest and principal during the life of a fixed-payment loan. C) the process of earning interest on the principal of an investment and on the interest earned. D) the increased value of an investment that arises from the payment of periodic interest. Answer: C Diff: 2 Page Ref: 57 Topic: present value and future value Objective: Explain how to use the interest rate in calculating present values and future values *: Recurring AACSB: Reflective Thinking

7) If you deposit $500 in a savings account at an annual interest rate of 5%, how much will you have in the account at the end of five years? A) $392 B) $550 C) $625 D) $638 Answer: D Diff: 2 Page Ref: 58-59 Topic: present value and future value Special Feature: Solved Problem: Using Compound Interest to Select a Bank CD Objective: Explain how to use the interest rate in calculating present values and future values AACSB: Analytical Thinking 8) If you deposit $10,000 in a savings account at an annual interest rate of 6%, how much will you have in the account at the end of three years? A) $8,396 B) $10,600 C) $11,800 D) $11,910 Answer: D Diff: 2 Page Ref: 58-59 Topic: present value and future value Special Feature: Solved Problem: Using Compound Interest to Select a Bank CD Objective: Explain how to use the interest rate in calculating present values and future values AACSB: Analytical Thinking 9) $1 received n years from now has a value today of A) ($1 + i) / i. B) $1 / (1 + i). C) ($1 + i)n / i. D) $1 / (1 + i)n. Answer: D Diff: 2 Page Ref: 60 Topic: present value and future value Objective: Explain how to use the interest rate in calculating present values and future values *: Recurring AACSB: Reflective Thinking

10) At an interest rate of 6%, how much will need to be invested today to have $10,000 in 5 years? A) $5,000 B) $7,473 C) $10,000 D) $13,382 Answer: B Diff: 2 Page Ref: 60 Topic: present value and future value Objective: Explain how to use the interest rate in calculating present values and future values *: Recurring AACSB: Analytical Thinking 11) At an interest rate of 3%, what is the present value of $1,000 to be received five years from now? A) $850 B) $863 C) $1,159 D) $1,667 Answer: B Diff: 2 Page Ref: 60 Topic: present value and future value Objective: Explain how to use the interest rate in calculating present values and future values *: Recurring AACSB: Analytical Thinking 12) If the annual interest rate is 8%, what would you expect to pay for a bond paying a lump sum of $10,000 in ten years? A) $4,632 B) $9,259 C) $10,000 D) $21,589 Answer: A Diff: 2 Page Ref: 60 Topic: present value and future value Objective: Explain how to use the interest rate in calculating present values and future values *: Recurring AACSB: Analytical Thinking