Exam (elaborations) TEST BANK FOR The Economics of Money, Banking, and

Exam (elaborations) TEST BANK FOR The Economics of Money, Banking, and ) 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 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: Previous Edition 20) 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: Previous Edition 21) 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: Previous Edition Chapter 1 Why Study Money, Banking, and Financial Markets? 5 22) 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: 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 corporation's 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) "Terrible Tuesday" B) "Woeful Wednesday" C) "Freaky Friday" D) "Black Monday" 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 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: 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 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 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 borrower's 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 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 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 society's 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 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 government budget deficit. D) The aggregate price level is measured as the rate of change in the inflation rate. Answer: B Ques Status: Previous Edition 11) If ten years ago the prices of the items bought last month by the average consumer would have been 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: Previous Edition 12) From the price level in the United States increased more than ________. A) twofold B) threefold C) sixfold D) ninefold Answer: C Ques Status: Revised 13) 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 14) There is a ________ association between inflation and the growth rate of money ________. A) positive; demand B) positive; supply C) negative; demand D) negative; supply Answer: B Ques Status: New Chapter 1 Why Study Money, Banking, and Financial Markets? 11 15) 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 16) Countries that experience very high rates of inflation may also have A) balanced budgets. B) rapidly growing money supplies. C) falling money supplies. D) constant money supplies. Answer: B Ques Status: Revised 17) Between 1950 and 1980 in the U.S., interest rates trended upward. During this same time period, A) the rate of money growth declined. B) the rate of money growth increased. C) the government budget deficit (expressed as a percentage of GNP) trended downward. D) the aggregate price level declined quite dramatically. Answer: B Ques Status: Previous Edition 18) 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: Previous Edition 19) 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 Mishkin · The Economics of Money, Banking, and Financial Markets, 9th Edition 20) ________ policy involves decisions about government spending and taxation. A) Monetary B) Fiscal C) Financial D) Systemic Answer: B Ques Status: Previous Edition 21) When tax revenues are greater than government expenditures, the government has a budget ________. A) crisis B) deficit C) surplus D) revision Answer: C Ques Status: Previous Edition 22) A budget ________ occurs when government expenditures exceed tax revenues for a particular time period. A) deficit B) surplus C) surge D) surfeit Answer: A Ques Status: New 23) Budgets deficits can be a concern because they might A) ultimately lead to higher inflation. B) lead to lower interest rates. C) lead to a slower rate of money growth. D) lead to higher bond prices. Answer: A Ques Status: Previous Edition 24) Budget deficits are important because deficits A) cause bank failures. B) always cause interest rates to fall. C) can result in higher rates of monetary growth. D) always cause prices to fall. Answer: C Ques Status: Previous Edition 25) What happens to economic growth and unemployment during a business cycle recession? What is the relationship between the money growth rate and a business cycle recession? Answer: During a recession, output declines and unemployment increases. Prior to every recession in the U.S. the money growth rate has declined, however, not every decline is followed by a recession.