Test Bank - The Economics of Money, Banking, & Financial Markets 9th Edition
Test Bank
to accompany
Kathy Kelly Richard G. Stahl
University of Texas, Arlington Louisiana State University
Pearson Addison-Wesley
Boston San Francisco New York
London Toronto Sydney Tokyo Singapore Madrid
Mexico City Munich Paris Cape Town Hong Kong Montreal
, Test Bank - The Economics of Money, Banking, & Financial Markets 9th Edition
This work is protected by United States copyright laws and is provided solely
for the use of instructors in teaching their courses and assessing student
learning. Dissemination or sale of any part of this work (including on the
World Wide Web) will destroy the integrity of the work and is not permit-
ted. The work and materials from it should never be made available to
students except by instructors using the accompanying text in their
classes. All recipients of this work are expected to abide by these
restrictions and to honor the intended pedagogical purposes and the needs of
other instructors who rely on these materials.
Acquisitions Editor: Noel Kamm Seibert
Project Manager: Kerri McQueen
Production Editor: Alison Eusden
Manufacturing Buyer: Carol Melville
Copyright© 2010, 2007, 2004, 2001 Pearson Education, Inc., 75 Arlington Street, Boston, MA 02116.
Pearson Addison-Wesley. All rights reserved. Printed in the United States of America. This publication is
protected by copyright and permission should be obtained from the publisher prior to any prohibited
reproduction, storage in a retrieval system, or transmission in any form or by any means, electronic,
mechanical, photocopying, recording, or likewise. For information regarding permission(s), write to:
Rights and Permissions Department.
This work is protected by United States copyright laws and is provided solely for the use of instructors
in teaching their courses and assessing student learning. Dissemination or sale of any part of this work
(including on the World Wide Web) will destroy the integrity of the work and is not permitted. The work
and materials from it should never be made available to students except by instructors using the accompa-
nying text in their classes. All recipients of this work are expected to abide by these restrictions and to
honor the intended pedagogical purposes and the needs of other instructors who rely on these materials.
Pearson Addison-Wesley™ is a trademark of Pearson Education, Inc.
1 2 3 4 5 6 OPM 12 11 10 09
ISBN-13: 978-0-321-59981-0
ISBN-10: 0-321-59981-0
, Test Bank - The Economics of Money, Banking, & Financial Markets 9th Edition
TEST BANK
The Economics of Money, Banking, & Financial
Markets
Frederic S. Mishkin
9th Edition
, Test Bank - The Economics of Money, Banking, & Financial Markets 9th Edition
Table of Contents
1. Why Study Money, Banking, and Financial Markets?
2. An Overview of the Financial System
3. What Is Money?
4. Understanding Interest Rates
5. The Behavior of Interest Rates
6. The Risk and Term Structure of Interest Rates
7. The Stock Market, the Theory of Rational Expectations, and the Efficient Market Hypothesis
8. An Economic Analysis of Financial Structure
9. Financial Crises and the Subprime Debacle
10. Banking and the Management of Financial Institutions
11. Economic Analysis of Financial Regulation
12. Banking Industry: Structure and Competition
13. Structure of Central Banks and the Federal Reserve System
14. The Money Supply Process
15. Tools of Monetary Policy
16. What Should Central Banks Do? Monetary Policy Goals, Strategy, and Tactics
17. The Foreign Exchange Market
18. The International Financial System
19. The Demand for Money
20. The ISLM Model
21. Monetary and Fiscal Policy in the ISLM Model
22. Aggregate Demand and Supply Analysis
23. Transmission Mechanisms of Monetary Policy: The Evidence
24. Money and Inflation
25. Rational Expectations: Implications for Policy
, Test Bank - The Economics of Money, Banking, & Financial Markets 9th Edition
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
, Test Bank - The Economics of Money, Banking, & Financial Markets 9th Edition
2 Mishkin · The Economics of Money, Banking, and Financial Markets, 9 th 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
, Test Bank - The Economics of Money, Banking, & Financial Markets 9th 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
, Test Bank - The Economics of Money, Banking, & Financial Markets 9th Edition
4 Mishkin · The Economics of Money, Banking, and Financial Markets, 9 th 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
, Test Bank - The Economics of Money, Banking, & Financial Markets 9th 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
, Test Bank - The Economics of Money, Banking, & Financial Markets 9th Edition
6 Mishkin · The Economics of Money, Banking, and Financial Markets, 9 th 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
Test Bank
to accompany
Kathy Kelly Richard G. Stahl
University of Texas, Arlington Louisiana State University
Pearson Addison-Wesley
Boston San Francisco New York
London Toronto Sydney Tokyo Singapore Madrid
Mexico City Munich Paris Cape Town Hong Kong Montreal
, Test Bank - The Economics of Money, Banking, & Financial Markets 9th Edition
This work is protected by United States copyright laws and is provided solely
for the use of instructors in teaching their courses and assessing student
learning. Dissemination or sale of any part of this work (including on the
World Wide Web) will destroy the integrity of the work and is not permit-
ted. The work and materials from it should never be made available to
students except by instructors using the accompanying text in their
classes. All recipients of this work are expected to abide by these
restrictions and to honor the intended pedagogical purposes and the needs of
other instructors who rely on these materials.
Acquisitions Editor: Noel Kamm Seibert
Project Manager: Kerri McQueen
Production Editor: Alison Eusden
Manufacturing Buyer: Carol Melville
Copyright© 2010, 2007, 2004, 2001 Pearson Education, Inc., 75 Arlington Street, Boston, MA 02116.
Pearson Addison-Wesley. All rights reserved. Printed in the United States of America. This publication is
protected by copyright and permission should be obtained from the publisher prior to any prohibited
reproduction, storage in a retrieval system, or transmission in any form or by any means, electronic,
mechanical, photocopying, recording, or likewise. For information regarding permission(s), write to:
Rights and Permissions Department.
This work is protected by United States copyright laws and is provided solely for the use of instructors
in teaching their courses and assessing student learning. Dissemination or sale of any part of this work
(including on the World Wide Web) will destroy the integrity of the work and is not permitted. The work
and materials from it should never be made available to students except by instructors using the accompa-
nying text in their classes. All recipients of this work are expected to abide by these restrictions and to
honor the intended pedagogical purposes and the needs of other instructors who rely on these materials.
Pearson Addison-Wesley™ is a trademark of Pearson Education, Inc.
1 2 3 4 5 6 OPM 12 11 10 09
ISBN-13: 978-0-321-59981-0
ISBN-10: 0-321-59981-0
, Test Bank - The Economics of Money, Banking, & Financial Markets 9th Edition
TEST BANK
The Economics of Money, Banking, & Financial
Markets
Frederic S. Mishkin
9th Edition
, Test Bank - The Economics of Money, Banking, & Financial Markets 9th Edition
Table of Contents
1. Why Study Money, Banking, and Financial Markets?
2. An Overview of the Financial System
3. What Is Money?
4. Understanding Interest Rates
5. The Behavior of Interest Rates
6. The Risk and Term Structure of Interest Rates
7. The Stock Market, the Theory of Rational Expectations, and the Efficient Market Hypothesis
8. An Economic Analysis of Financial Structure
9. Financial Crises and the Subprime Debacle
10. Banking and the Management of Financial Institutions
11. Economic Analysis of Financial Regulation
12. Banking Industry: Structure and Competition
13. Structure of Central Banks and the Federal Reserve System
14. The Money Supply Process
15. Tools of Monetary Policy
16. What Should Central Banks Do? Monetary Policy Goals, Strategy, and Tactics
17. The Foreign Exchange Market
18. The International Financial System
19. The Demand for Money
20. The ISLM Model
21. Monetary and Fiscal Policy in the ISLM Model
22. Aggregate Demand and Supply Analysis
23. Transmission Mechanisms of Monetary Policy: The Evidence
24. Money and Inflation
25. Rational Expectations: Implications for Policy
, Test Bank - The Economics of Money, Banking, & Financial Markets 9th Edition
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
, Test Bank - The Economics of Money, Banking, & Financial Markets 9th Edition
2 Mishkin · The Economics of Money, Banking, and Financial Markets, 9 th 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
, Test Bank - The Economics of Money, Banking, & Financial Markets 9th 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
, Test Bank - The Economics of Money, Banking, & Financial Markets 9th Edition
4 Mishkin · The Economics of Money, Banking, and Financial Markets, 9 th 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
, Test Bank - The Economics of Money, Banking, & Financial Markets 9th 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
, Test Bank - The Economics of Money, Banking, & Financial Markets 9th Edition
6 Mishkin · The Economics of Money, Banking, and Financial Markets, 9 th 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
