THE ECONOMICS OF
MONEY, BANKING, AND
FINANCIAL MARKETS, 9E
,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
Q6. Which markets transfer funds from people who have an excess of funds to those with a shortage?
A) Commodity markets
B) Fund-available markets
C) Financial markets
D) Derivative exchange markets
Answer: C – Financial markets
Rationale: Financial markets are designed to bridge savers (surplus funds) with borrowers (funds
needed). They grease the wheels of the economy by ensuring capital flows efficiently to its best use. Without
them, money would sit idle instead of fueling growth.
Q7. Poorly performing financial markets can be the cause of:
A) Wealth
B) Poverty
C) Financial stability
D) Financial expansion
Answer: B – Poverty
Rationale: Weak or mismanaged financial markets choke off investment opportunities, leading to slower
growth and poverty. For example, during financial crises, weak markets amplify economic downturns instead
of stabilizing them.
Q8. Why are bond markets especially important in the economy?
A) They are the most widely followed markets in the U.S.
B) They determine foreign exchange rates.
C) They determine interest rates.
D) They provide all borrowers with funds.
Answer: C – They determine interest rates
Rationale: Bond markets set interest rates, which directly influence borrowing costs for consumers,
firms, and governments. Since interest rates guide investment and spending decisions, the bond market is a
central “thermometer” of economic health.
Q9. The price paid for the rental of borrowed funds (expressed as a percentage) is called the:
A) Inflation rate
B) Exchange rate
C) Interest rate
D) Aggregate price level
Downloaded by Collins Mwaniki ()
MONEY, BANKING, AND
FINANCIAL MARKETS, 9E
,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
Q6. Which markets transfer funds from people who have an excess of funds to those with a shortage?
A) Commodity markets
B) Fund-available markets
C) Financial markets
D) Derivative exchange markets
Answer: C – Financial markets
Rationale: Financial markets are designed to bridge savers (surplus funds) with borrowers (funds
needed). They grease the wheels of the economy by ensuring capital flows efficiently to its best use. Without
them, money would sit idle instead of fueling growth.
Q7. Poorly performing financial markets can be the cause of:
A) Wealth
B) Poverty
C) Financial stability
D) Financial expansion
Answer: B – Poverty
Rationale: Weak or mismanaged financial markets choke off investment opportunities, leading to slower
growth and poverty. For example, during financial crises, weak markets amplify economic downturns instead
of stabilizing them.
Q8. Why are bond markets especially important in the economy?
A) They are the most widely followed markets in the U.S.
B) They determine foreign exchange rates.
C) They determine interest rates.
D) They provide all borrowers with funds.
Answer: C – They determine interest rates
Rationale: Bond markets set interest rates, which directly influence borrowing costs for consumers,
firms, and governments. Since interest rates guide investment and spending decisions, the bond market is a
central “thermometer” of economic health.
Q9. The price paid for the rental of borrowed funds (expressed as a percentage) is called the:
A) Inflation rate
B) Exchange rate
C) Interest rate
D) Aggregate price level
Downloaded by Collins Mwaniki ()
