Chapter 1 Why Study Money, Banking, and Financial Markets? 1.1 Why Study Financial Markets?
1) Financial markets promote economic efficiency by A) channeling funds from investors to savers. B) creating inflation.
C) channeling funds from savers to investors. D) reducing investment. Answer: C Ques Status: Revised
2)Financial markets promote greater economic efficiency by channeling funds from ________ to ________. A) investors; savers B) borrowers; savers C) savers; borrowers D) savers; lenders
Answer: C Ques Status: New
3) Well-functioning financial markets promote A) inflation. B) deflation. C) unemployment. D) growth.
Answer: D Ques Status: Revised
4)Markets in which funds are transferred from those who have excess funds available to those
who have a shortage of available funds are called A) commodity markets. B) fund-available markets. C) derivative exchange markets. D) financial markets.
Answer: D Ques Status: Previous Edition
5)________ markets transfer funds from people who have an excess of available funds to people who have a shortage. A) Commodity B) Fund-available C) Financial
D) Derivative exchange Answer: C Ques Status: New
6) Poorly performing financial markets can be the cause of A) wealth. B) poverty. C) financial stability. D) financial expansion. Answer: B Ques Status: Revised
7) The bond markets are important because they are
A)easily the most widely followed financial markets in the United States.
B) the markets where foreign exchange rates are determined. C) the markets where interest rates are determined. D) the markets where all borrowers get their funds. Answer: C Ques Status: Revised
8)The price paid for the rental of borrowed funds (usually expressed as a percentage of the
rental of $100 per year) is commonly referred to as the A) inflation rate. B) exchange rate. C) interest rate. D) aggregate price level.
Answer: C Ques Status: Previous Edition
9)Compared to interest rates on long-term U.S. government bonds, interest rates on
three-month Treasury bills fluctuate ________ and are ________ on average. A) more; lower B) less; lower C) more; higher D) less; higher
Answer: A Ques Status: Previous Edition
10)The interest rate on Baa (medium quality) corporate bonds is ________, on average, than other
interest rates, and the spread between it and other rates became ________ in the 1970s. A) lower; smaller B) lower; larger C) higher; smaller D) higher; larger
Answer: D Ques Status: Previous Edition
11)Everything else held constant, a decline in interest rates will cause spending on housing to A) fall.
B) remain unchanged.
C) either rise, fall, or remain the same. D) rise.
Answer: D Ques Status: Revised
12)An increase in interest rates might ________ saving because more can be earned in interest income. A) encourage B) discourage C) disallow D) invalidate
Answer: A Ques Status: New
13)Everything else held constant, an increase in interest rates on student loans
A) increases the cost of a college education. B) reduces the cost of a college education. C) has no effect on educational costs. D) increases costs for students with no loans. Answer: A Ques Status: Revised
14)High interest rates might cause a corporation to ________ building a new plant that would provide more jobs. A) complete B) consider
C) postpone D) contemplate
Answer: C Ques Status: New
15) The stock market is important because it is A) where interest rates are determined.
B) the most widely followed financial market in the United States. C) where foreign exchange rates are determined. D) the market where most borrowers get their funds. Answer: B Ques Status: Revised
16) Stock prices since the 1950s have been
A) relatively stable trending upward at a steady pace. B) relatively stable trending downward at a moderate rate. C) extremely volatile.
D) unstable trending downward at a moderate rate. Answer: C Ques Status: Previous Edition
17) A rising stock market index due to higher share prices A) increases people?
s wealth, but is unlikely to increase their willingness to spend. B) increases people?
s wealth and as a result may increase their willingness to spend. C) decreases the amount of funds that business firms can raise by selling newly-issued stock. D) decreases people?
s wealth, but is unlikely to increase their willingness to spend. Answer: B Ques Status: Revised 18) When stock prices fall A) an individual?
s wealth is not affected nor is their willingness to spend.
B)a business firm will be more likely to sell stock to finance investment spending. C) an individual?
s wealth may decrease but their willingness to spend is not affected. D) an individual?
s wealth may decrease and their willingness to spend may decrease. Answer: D Ques Status: New 19) Changes in stock prices
A) do not affect people?s wealth and their willingness to spend B) affect firms
? decisions to sell stock to finance investment spending. C) occur in regular patterns.
D) are unimportant to decision makers. Answer: B Ques Status: Revised
20) An increase in stock prices ________ the size of people?s wealth and may ________ their
willingness to spend, everything else held constant. A) increases; increase B) increases; decrease C) decreases; increase D) decreases; decrease
Answer: A Ques Status: New
21)Fear of a major recession causes stock prices to fall, everything else held constant, which in turn causes consumer spending to A) increase.
B) remain unchanged. C) decrease.
D) cannot be determined. Answer: C Ques Status: Revised
22) A common stock is a claim on a corporation?s A) debt. B) liabilities. C) expenses.
D) earnings and assets. Answer: D Ques Status: Revised
23)On ________, October 19, 1987, the market experienced its worst one-day drop in its entire
history with the DIJA falling by more than 500 points. A) ?Terrible Tuesday? B) ?Woeful Wednesday? C) ?Freaky Friday? D) ?Black Monday? Answer: D Ques Status: New
24) The decline in stock prices from 2000 through 2002 A) increased individuals? willingness to spend. B) had no effect on individual spending. C) reduced individuals? willingness to spend. D) increased individual wealth. Answer: C Ques Status: Revised
25)The Dow reached a peak of over 11,000 before the collapse of the ________ bubble in 2000. A) housing
B) manufacturing C) high-tech D) banking
Answer: C Ques Status: New
26) The price of one country?s currency in terms of another country?s currency is called the A) exchange rate. B) interest rate.
C) Dow Jones industrial average. D) prime rate.
Answer: A Ques Status: Revised
27)The market where one currency is converted into another currency is called the ________ market. A) stock B) bond C) derivatives D) foreign exchange Answer: D Ques Status: New
28) Everything else constant, a stronger dollar will mean that
A) vacationing in England becomes more expensive. B) vacationing in England becomes less expensive. C) French cheese becomes more expensive. D) Japanese cars become more expensive. Answer: B Ques Status: Previous Edition
29)Which of the following is most likely to result from a stronger dollar?
A)U.S. goods exported aboard will cost less in foreign countries, and so foreigners will buy more of them.
B)U.S. goods exported aboard will cost more in foreign countries and so foreigners will buy more of them.
C)U.S. goods exported abroad will cost more in foreign countries, and so foreigners will buy fewer of them.
D) Americans will purchase fewer foreign goods. Answer: C Ques Status: Previous Edition
30) Everything else held constant, a weaker dollar will likely hurt A) textile exporters in South Carolina.
B) wheat farmers in Montana that sell domestically.
C)automobile manufacturers in Michigan that use domestically produced inputs.
D) furniture importers in California. Answer: D Ques Status: Revised
31)Everything else held constant, a stronger dollar benefits ________ and hurts ________.
A) American businesses; American consumers B) American businesses; foreign businesses C) American consumers; American businesses D) foreign businesses; American consumers Answer: C Ques Status: Study Guide
32)From 1980 to early 1985 the dollar ________ in value, thereby benefiting American ________. A) appreciated; consumers B) appreciated, businesses C) depreciated; consumers D) depreciated, businesses
Answer: A Ques Status: Previous Edition
33)From 1980 to 1985 the dollar appreciated relative to the British pound. Holding everything else
constant, one would expect that, when compared to 1980, A) fewer Britons traveled to the United States in 1985. B) Britons imported more wine from California in 1985. C) Americans exported more wheat to England in 1985. D) more Britons traveled to the United States in 1985. Answer: A Ques Status: Previous Edition
34)When in 1985 a British pound cost approximately $1.30, a Shetland sweater that cost 100
British pounds would have cost $130. With a weaker dollar, the same Shetland sweater would have cost A) less than $130.
B) more than $130.
C)$130, since the exchange rate does not affect the prices that American consumers pay for foreign goods.
D)$130, since the demand for Shetland sweaters will decrease to prevent an increase in price due to the stronger dollar. Answer: B Ques Status: Previous Edition
35)Everything else held constant, a decrease in the value of the dollar relative to all foreign
currencies means that the price of foreign goods purchased by Americans A) increases B) decreases. C) remains unchanged.
D) either increases, decreases, or remains unchanged. Answer: A Ques Status: Revised
36) American farmers who sell beef to Europe benefit most from A) a decrease in the dollar price of euros. B) an increase in the dollar price of euros. C) a constant dollar price for euros.
D) a European ban on imports of American beef. Answer: B Ques Status: Revised
37)If the price of a euro (the European currency) increases from $1.00 to $1.10, then, everything else held constant, A) a European vacation becomes less expensive. B) a European vacation becomes more expensive. C) the cost of a European vacation is not affected. D) foreign travel becomes impossible. Answer: B Ques Status: Revised
38)Everything else held constant, Americans who love French wine benefit most from
A) a decrease in the dollar price of euros. B) an increase in the dollar price of euros. C) a constant dollar price for euros. D) a ban on imports from Europe. Answer: A Ques Status: Revised
39) What is a stock? How do stocks affect the economy? Answer:
A stock represents a share of ownership of a corporation, or a claim on a firm?s
earnings/assets. Stocks are part of wealth, and changes in their value affect people?s
willingness to spend. Changes in stock prices affect a firm?s ability to raise funds, and thus their investment. Ques Status: Previous Edition
1.2 Why Study Banking and Financial Institutions?
1)Channeling funds from individuals with surplus funds to those desiring funds when the saver does not purchase the borrower?s security is known as A) barter.
B) redistribution.
C) financial intermediation. D) taxation.
Answer: C Ques Status: Revised
2)Banks are important to the study of money and the economy because they
A) channel funds from investors to savers. B) have been a source of rapid financial innovation.
C) are the only important financial institution in the U.S. economy. D) create inflation.
Answer: B Ques Status: Revised
3)Economists group commercial banks, savings and loan associations, credit unions, mutualfunds, mutual savings banks, insurance companies, pension funds, and finance companiestogether under the heading financial intermediaries. Financial intermediaries
A)provide a channel for linking those who want to save with those who want to invest.
B) produce nothing of value and are therefore a drain on society?s resources.
C) can hurt the performance of the economy. D) hold very little of the average American?s wealth. Answer: A Ques Status: Revised
4)Banks, savings and loan associations, mutual savings banks, and credit unions
A) are no longer important players in financial intermediation. B) since deregulation now provide services only to small depositors. C)have been adept at innovating in response to changes in the regulatory environment.
D) produce nothing of value and are therefore a drain on society?s resources.
Answer: C Ques Status: Revised
5)Banks and other financial institutions engage in financial intermediation, which
A) can hurt the performance of the economy. B) can benefit economic performance. C) has no effect on economic performance.
D) involves borrowing from investors and lending to savers. Answer: B Ques Status: Revised
6)Financial institutions that accept deposits and make loans are called ________. A) exchanges B) banks
C) over-the-counter markets D) finance companies Answer: B Ques Status: New
7)The financial intermediaries that the average person interacts with most frequently are ________.
A) exchanges B) over-the-counter markets C) finance companies
D) banks
Answer: D Ques Status: New
8) Which of the following is not a financial institution? A) a life insurance company B) a pension fund C) a credit union D) a business college Answer: D Ques Status: New
9)The delivery of financial services electronically is called ________. A) e-business B) e-commerce C) e-finance D) e-possible Answer: C Ques Status: New
1.3 Why Study Money and Monetary Policy? 1) Money is defined as A) bills of exchange.
B)anything that is generally accepted in payment for goods and services or in the repayment of debt.
C) a risk-free repository of spending power. D) the unrecognized liability of governments. Answer: B Ques Status: Previous Edition
2)Evidence from the United States and other foreign countries indicates that
A)there is a strong positive association between inflation and growth rate of money over long periods of time. B) there is little support for the assertion that ?
inflation is always and everywhere a monetary phenomenon.? C)countries with low monetary growth rates tend to experience higher rates of inflation, all else being constant. D) money growth is clearly unrelated to inflation. Answer: A Ques Status: Previous Edition
3)The upward and downward movement of aggregate output produced in the economy is referred to as the ________. A) roller coaster B) see saw C) business cycle D) shock wave
Answer: C Ques Status: New
4)Sustained downward movements in the business cycle are referred to as A) inflation. B) recessions.
C) economic recoveries. D) expansions.
Answer: B Ques Status: Previous Edition
5) Prior to all recessions since 1900, there has been a drop in A) inflation. B) the money stock.
C) the growth rate of the money stock. D) interest rates.
Answer: C Ques Status: Revised
6)Evidence from business cycle fluctuations in the United States indicates that
A)a negative relationship between money growth and general economic activity exists.
B)recessions have been preceded by declines in share prices on the stock exchange.
C) recessions have been preceded by dollar depreciation.
D)recessions have been preceded by a decline in the growth rate of money.
Answer: D Ques Status: Previous Edition
7)A sharp increase in the growth of the money supply is likely followed by A) a recession. B) a depression.
C) an increase in the inflation rate. D) no change in the economy. Answer: C Ques Status: Revised 8) It is true that inflation is a
A) continuous increase in the money supply. B) continuous fall in prices. C) decline in interest rates. D) continually rising price level. Answer: D Ques Status: Revised
9)________ theory relates changes in the quantity of money to changes in aggregate economic activity and the price level. A) Monetary B) Fiscal C) Financial D) Systemic
Answer: A Ques Status: New
10)The management of money and interest rates is called ________ policy and is conducted by a nation?s ________ bank. A) monetary; superior B) fiscal; superior C) fiscal; central D) monetary; central Answer: D Ques Status: New
11)The organization responsible for the conduct of monetary policy in the United States is the A) Comptroller of the Currency. B) U.S. Treasury.
C) Federal Reserve System. D) Bureau of Monetary Affairs. Answer: C Ques Status: Previous Edition 12) Which of the following is a true statement?
A) Money or the money supply is defined as Federal Reserve notes. B)The average price of goods and services in an economy is called the aggregate price level.
C)The inflation rate is measured as the rate of change in the federal g
overnment budget deficit.
D)The aggregate price level is measured as the rate of change in the inflation rate.
Answer: B Ques Status: Revised
13)If ten years ago the prices of the items bought last month by the average consumer would havebeen much higher, then one can likely conclude that
A) the aggregate price level has declined during this ten-year period. B) the average inflation rate for this ten-year period has been positive. C)the average rate of money growth for this ten-year period has been positive.
D) the aggregate price level has risen during this ten-year period. Answer: A Ques Status: Revised
14)From 1950-2005 the price level in the United States increased more than ________. A) twofold B) threefold C) sixfold D) ninefold
Answer: C Ques Status: New
15)One likely explanation for the relatively high rates of inflation experienced in many Latin American countries is the
A) relatively slow growth in the money supply in these countries. B) relatively rapid growth in the money supply in these countries. C) decline in the prices of basic commodities in these countries. D) budget surpluses maintained in these countries. Answer: B Ques Status: Revised
16) Complete Milton Friedman?s famous statement, ?Inflation is always and everywhere a ________ phenomenon.? A) recessionary B) discretionary C) repressionary D) monetary
Answer: D Ques Status: Previous Edition
17) Countries that experience very high rates of inflation have A) balanced budgets.
B) rapidly growing money supplies. C) falling money supplies. D) constant money supplies. Answer: B Ques Status: Revised
18)________ policy involves decisions about government spending and taxation. A) Monetary B) Fiscal C) Financial D) Systemic
Answer: B Ques Status: New
19)When tax revenues are greater than government expenditures, the government has a budget ________.