Exam (elaborations) TEST BANK ECONOMICS OF MONEY, BANKING AND FINANCIAL MARKETS 9TH EDITION FREDERIC S. MISHKIN

Exam (elaborations) TEST BANK ECONOMICS OF MONEY, BANKING AND FINANCIAL MARKETS 9TH EDITION FREDERIC S. MISHKIN Contents Chapter 1 Why Study Money, Banking, and Financial Markets?................................................1 Chapter 2 An Overview of the Financial System.........................................................................20 Chapter 3 What Is Money?..............................................................................................................43 Chapter 4 Understanding Interest Rates.......................................................................................60 Chapter 5 The Behavior of Interest Rates......................................................................................78 Chapter 6 The Risk and Term Structure of Interest Rates ........................................................111 Chapter 7 The Stock Market, the Theory of Rational Expectations, and the Efficient Market Hypothesis.........................................................................133 Chapter 8 An Economic Analysis of Financial Structure..........................................................150 Chapter 9 Financial Crises and the Subprime Meltdown.........................................................169 Chapter 10 Banking and the Management of Financial Institutions.........................................181 Chapter 11 Economic Analysis of Financial Regulation.............................................................208 Chapter 12 Banking Industry: Structure and Competition ........................................................229 Chapter 13 Central Banks and the Federal Reserve System.......................................................253 Chapter 14 The Money Supply Process ........................................................................................274 Chapter 15 Tools for Monetary Policy...........................................................................................319 Chapter 16 The Conduct of Monetary Policy: Strategy and Tactics..........................................343 Chapter 17 The Foreign Exchange Market ...................................................................................363 Chapter 18 The International Financial System ...........................................................................389 Chapter 19 The Demand for Money..............................................................................................418 Chapter 20 The ISLM Model...........................................................................................................440 Chapter 21 Monetary and Fiscal Policy in the ISLM Model.......................................................466 Chapter 22 Aggregate Demand and Supply Analysis ................................................................493 Chapter 23 Transmission Mechanisms of Monetary Policy: The Evidence .............................511 Chapter 24 Money and Inflation ....................................................................................................529 Chapter 25 Rational Expectations: Implications for Policy ........................................................549 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: Previous Edition 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: Previous Edition 3) Well-functioning financial markets promote A) inflation. B) deflation. C) unemployment. D) growth. Answer: D Ques Status: Previous Edition 4) A key factor in producing high economic growth is A) eliminating foreign trade. B) well-functioning financial markets. C) high interest rates. D) stock market volatility. Answer: B Ques Status: New 5) 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 2 Mishkin · The Economics of Money, Banking, and Financial Markets, 9th Edition 6) ________ 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: Previous Edition 7) Poorly performing financial markets can be the cause of A) wealth. B) poverty. C) financial stability. D) financial expansion. Answer: B Ques Status: Previous Edition 8) 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: Previous Edition 9) 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 10) 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 Chapter 1 Why Study Money, Banking, and Financial Markets? 3 11) 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 12) 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: Previous Edition 13) High interest rates might ________ purchasing a house or car but at the same time high interest rates might ________ saving. A) discourage; encourage B) discourage; discourage C) encourage; encourage D) encourage; discourage Answer: A Ques Status: New 14) 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: Previous Edition 15) 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: Previous Edition 4 Mishkin · The Economics of Money, Banking, and Financial Markets, 9th Edition 16) 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: Previous Edition 17) 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: Previous Edition 18) Stock prices are 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: Revised 19) A rising stock market index due to higher share prices A) increases peopleʹs wealth, but is unlikely to increase their willingness to spend. B) increases peopleʹs 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 peopleʹs wealth, but is unlikely to increase their willingness to spend. Answer: B Ques Status: Previous Edition 20) When stock prices fall A) an individualʹs 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 individualʹs wealth may decrease but their willingness to spend is not affected. D) an individualʹs wealth may decrease and their willingness to spend may decrease. Answer: D Ques Status: Previous Edition 21) Changes in stock prices A) do not affect peopleʹs wealth and their willingness to spend. B) affect firmsʹ decisions to sell stock to finance investment spending. C) occur in regular patterns. D) are unimportant to decision makers. Answer: B Ques Status: Previous Edition Chapter 1 Why Study Money, Banking, and Financial Markets? 5 22) An increase in stock prices ________ the size of peopleʹs 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: Previous Edition 23) Low stock market prices might ________ consumers willingness to spend and might ________ businesses willingness to undertake investment projects. A) increase; increase B) increase; decrease C) decrease; decrease D) decrease; increase Answer: C Ques Status: New 24) 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: Previous Edition 25) A share of common stock is a claim on a corporationʹs A) debt. B) liabilities. C) expenses. D) earnings and assets. Answer: D Ques Status: Revised 26) 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) ʺTerrible Tuesdayʺ B) ʺWoeful Wednesdayʺ C) ʺFreaky Fridayʺ D) ʺBlack Mondayʺ Answer: D Ques Status: Previous Edition 6 Mishkin · The Economics of Money, Banking, and Financial Markets, 9th Edition 27) The decline in stock prices from 2000 through 2002 A) increased individualsʹ willingness to spend. B) had no effect on individual spending. C) reduced individualsʹ willingness to spend. D) increased individual wealth. Answer: C Ques Status: Previous Edition 28) 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: Previous Edition 29) 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 firmʹs earnings/assets. Stocks are part of wealth, and changes in their value affect peopleʹs willingness to spend. Changes in stock prices affect a firmʹs ability to raise funds, and thus their investment. Ques Status: Previous Edition 30) Why is it important to understand the bond market? Answer: The bond market supports economic activity by enabling the government and corporations to borrow to undertake their projects and it is the market where interest rates are determined. Ques Status: New 1.2 Why Study Financial Institutions and Banking? 1) Channeling funds from individuals with surplus funds to those desiring funds when the saver does not purchase the borrowerʹs security is known as A) barter. B) redistribution. C) financial intermediation. D) taxation. Answer: C Ques Status: Previous Edition 2) A financial crisis is A) not possible in the modern financial environment. B) a major disruption in the financial markets. C) a feature of developing economies only. D) typically followed by an economic boom. Answer: B Ques Status: New Chapter 1 Why Study Money, Banking, and Financial Markets? 7 3) 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: Previous Edition 4) 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 societyʹs resources. C) can hurt the performance of the economy. D) hold very little of the average Americanʹs wealth. Answer: A Ques Status: Revised 5) 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 societyʹs resources. Answer: C Ques Status: Previous Edition 6) Financial institutions search for ________ has resulted in many financial innovations. A) higher profits B) regulations C) respect D) higher risk Answer: A Ques Status: New 7) 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: Previous Edition 8) 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: Previous Edition 8 Mishkin · The Economics of Money, Banking, and Financial Markets, 9th Edition 9) 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: Previous Edition 10) 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: Previous Edition 11) The delivery of financial services electronically is called ________. A) e-business B) e-commerce C) e-finance D) e-possible Answer: C Ques Status: Previous Edition 12) What crucial role do financial intermediaries perform in an economy? Answer: Financial intermediaries borrow funds from people who have saved and make loans to other individuals and businesses and thus improve the efficiency of the economy. 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) 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: Previous Edition Chapter 1 Why Study Money, Banking, and Financial Markets? 9 3) 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 4) During a recession, output declines resulting in A) lower unemployment in the economy. B) higher unemployment in the economy. C) no impact on the unemployment in the economy. D) higher wages for the workers. Answer: B Ques Status: New 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: Previous Edition 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) ________ 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: Previous Edition 8) 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: Previous Edition 10 Mishkin · The Economics of Money, Banking, and Financial Markets, 9th Edition 9) 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: Previous Edition 10) Which of the following is a true statement? A) Money or the