Financial Markets and Institutions
Test Bank
Course Introduction
Financial Markets and Institutions explores the structure, function, and role of financial markets and intermediaries in the global economy. The course examines various types of financial institutions, such as banks, insurance companies, and investment firms, and how they facilitate the flow of funds between savers and borrowers. Students will analyze the operation of capital and money markets, the impact of central banks and regulatory bodies, and the processes of financial innovation and risk management. By understanding the interplay between financial markets and institutions, students gain insights into the mechanisms that drive economic activity and influence financial stability.
Recommended Textbook
Economics of Money Banking and Financial Markets 12th Edition by Frederic S. Mishkin
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2796 Verified Questions
2796 Flashcards
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Chapter 1: Why Study Money, banking, and Financial Markets
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109 Verified Questions
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Sample Questions
Q1) 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
Q2) 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
Q3) 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.
Page 3
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Chapter 2: An Overview of the Financial System
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Sample Questions
Q1) A restriction on bank activities that was repealed in 1999 was
A)the prohibition of the payment of interest on checking deposits.
B)restrictions on credit terms.
C)minimum down payments on loans to purchase securities.
D)separation of commercial banking from the securities industries.
Answer: D
Q2) Money market mutual fund shares function like A)checking accounts that pay interest.
B)bonds.
C)stocks.
D)currency.
Answer: A
Q3) Corporations receive funds when their stock is sold in the primary market. Why do corporations pay attention to what is happening to their stock in the secondary market?
Answer: The existence of the secondary market makes their stock more liquid and the price in the secondary market sets the price that the corporation would receive if they choose to sell more stock in the primary market.
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Page 4
Chapter 3: What Is Money
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Sample Questions
Q1) A hyperinflation is
A)a period of extreme inflation generally greater than 50% per month.
B)a period of anxiety caused by rising prices.
C)an increase in output caused by higher prices.
D)impossible today because of tighter regulations.
Answer: A
Q2) Since it does not have to be converted into anything else to make purchases,________ is the most liquid asset.
A)money
B)stock
C)artwork
D)gold
Answer: A
Q3) Why are most of the U.S. dollars held outside of the United States?
Answer: Concern about high inflation eroding the value of their own currency causes many people in foreign countries to hold U.S. dollars as a hedge against inflation risk.
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Chapter 4: The Meaning of Interest Rates
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Sample Questions
Q1) All else equal,when interest rates ________,the duration of a coupon bond
A)rise;falls
B)rise;increases
C)falls;falls
D)falls;does not change
Q2) All of the following are examples of coupon bonds EXCEPT A)corporate bonds.
B)U)S. Treasury bills.
C)U)S. Treasury notes.
D)U)S. Treasury bonds.
Q3) All bonds that will not be held to maturity have interest rate risk which occurs because of the change in the price of the bond as a result of A)interest-rate changes.
B)changes in the coupon rate.
C)default of the borrower.
D)changes in the asset's maturity date.
Q4) Your favorite uncle advises you to purchase long-term bonds because their interest rate is 10%. Should you follow his advice?
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Chapter 5: The Behavior of Interest Rates
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Sample Questions
Q1) An increase in the interest rate
A)increases the demand for money.
B)increases the quantity of money demanded.
C)decreases the demand for money.
D)decreases the quantity of money demanded.
Q2) Holding everything else constant,if interest rates are expected to increase,the demand for bonds ________ and the demand curve shifts ________.
A)increases;right B)decreases;right C)increases;left D)decreases;left
Q3) When gold prices become more volatile,the ________ curve for gold shifts to the ________;________ the price of gold.
A)supply;right;increasing B)supply;left;increasing C)demand;right;decreasing D)demand;left;decreasing
Q4) Using the liquidity preference framework,show what happens to interest rates during a business cycle recession.
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Chapter 6: The Risk and Term Structure of Interest Rates
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Q1) If a higher inflation is expected,what would you expect to happen to the shape of the yield curve? Why?
Q2) The Obama administration increased the tax on the top income tax bracket from 35% to 39%. Supply and demand analysis predicts the impact of this change was a ________ interest rate on municipal bonds and a ________ interest rate on Treasury bonds,all else the same.
A)higher;lower
B)lower;lower
C)higher;higher
D)lower;higher
Q3) A decrease in the riskiness of corporate bonds will ________ the price of corporate bonds and ________ the price of Treasury bonds,everything else held constant.
A)increase;increase B)reduce;reduce
C)reduce;increase
D)increase;reduce
Q4) If the federal government where to raise the income tax rates,would this have any impact on a state's cost of borrowing funds? Explain.
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Chapter 7: The Stock Market, the Theory of Rational
Expectations,
and the Efficient Market Hypothesis
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Sample Questions
Q1) In rational expectations theory,the term "optimal forecast" is essentially synonymous with
A)correct forecast.
B)the correct guess.
C)the actual outcome.
D)the best guess.
Q2) Which of the following types of information most likely allows the exploitation of a profit opportunity?
A)financial analysts' published recommendations
B)technical analysis
C)hot tips from a stockbroker
D)insider information
Q3) For small investors,the best way to pursue a "buy and hold" strategy is to
A)buy and sell individual stocks frequently.
B)buy no-load mutual funds with high management fees.
C)buy no-load mutual funds with low management fees.
D)buy load mutual funds.
Q4) What rights does ownership interest give stockholders?
Page 9
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Chapter 8: An Economic Analysis of Financial Structure
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Sample Questions
Q1) Which of the following statements concerning external sources of financing for nonfinancial businesses in the United States are TRUE?
A)Stocks are a far more important source of finance than are bonds.
B)Stocks and bonds,combined,supply less than one-half of the external funds.
C)Financial intermediaries are the least important source of external funds for businesses.
D)Since 1970,more than half of the new issues of stock have been sold to American households.
Q2) The recent Enron and Tyco International scandals are an example of
A)the free-rider problem.
B)the adverse selection problem.
C)the principal-agent problem.
D)the "lemons problem."
Q3) Financial intermediaries' low transaction costs allow them to provide ________ services that make it easier for customers to conduct transactions.
A)liquidity
B)conduction
C)transcendental
D)equitable
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Page 10
Chapter 9: Banking and the Management of Financial Institutions
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Sample Questions
Q1) Which of the following are NOT reported as assets on a bank's balance sheet?
A)cash items in the process of collection
B)deposits with other banks
C)U)S. Treasury securities
D)checkable deposits
Q2) Banks earn profits from off-balance sheet loan sales
A)by foreclosing on delinquent accounts.
B)by selling the loans at discounted prices.
C)by selling existing loans for more than the original loan amount.
D)by calling-in loans before the maturity date.
Q3) Banks may borrow from or lend to another bank in the Federal Funds market. A loan of excess reserves from one bank to another bank is recorded as a(n)________ for the borrowing bank and a(n)________ for the lending bank.
A)asset;asset
B)asset;liability
C)liability;liability
D)liability;asset
Q4) How can specializing in lending help to reduce the adverse selection problem in lending?
Page 11
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Chapter 10: Economic Analysis of Financial Regulation
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Sample Questions
Q1) During the 1960s,1970s,and early 1980s,traditional bank profitability declined because of
A)financial innovation that increased competition from new financial institutions.
B)a decrease in interest rates to fight the inflation problem.
C)a decrease in deposit insurance.
D)increased regulation that prohibited banks from making risky real estate loans.
Q2) The Federal Deposit Insurance Corporation Improvement Act of 1991
A)increased the FDIC's ability to borrow from the Treasury to deal with failed banks.
B)increased the FDIC's ability to use the too-big-to-fail doctrine.
C)eliminated governmentally-administered deposit insurance.
D)eliminated restrictions on nationwide banking.
Q3) The ________ that required separation of commercial and investment banking was repealed in 1999.
A)the Federal Reserve Act.
B)the Glass-Steagall Act.
C)the Bank Holding Company Act.
D)the Monetary Control Act.
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Chapter 11: Banking Industry: Structure and Competition
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Sample Questions
Q1) Financial innovations occur because of financial institutions search for A)profits.
B)fame.
C)stability.
D)recognition.
Q2) The belief that bank failures were regularly caused by fraud or the lack of sufficient bank capital explains,in part,the passage of
A)the National Bank Charter Amendments of 1918.
B)the Garn-St. Germain Act of 1982.
C)the National Bank Act of 1863.
D)Federal Reserve Act of 1913.
Q3) Under the Gramm-Leach-Bliley Act states retain regulatory authority over A)bank holding companies.
B)securities activities.
C)insurance activities.
D)bank subsidiaries engaged in securities underwriting.
Q4) Discuss three ways in which U.S. banks can become involved in international banking.
Q5) Why did the interest rate volatility of the 1970s spur financial innovation?
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Chapter 12: Financial Crises
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Sample Questions
Q1) In order to ensure that borrowers have an ability to repay residential mortgages,the new consumer protection legislation requires lenders to do all of the following EXCEPT
A)verify the income of the borrower.
B)verify the borrower's job status.
C)check the credit history of the borrower.
D)verify that the borrower can read and understand a loan contract.
Q2) During the "Great Recession" unemployment rates in the United States increased to A)over 10%.
B)over 25%.
C)7.5%.
D)5%.
Q3) Typically,the economy recovers fairly quickly from a recession. Why did this NOT happen in the United States during the Great Depression?
Q4) A serious consequence of a financial crisis is
A)a contraction in economic activity.
B)an increase in asset prices.
C)financial engineering.
D)financial globalization.
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Chapter 13: Central Banks and the Federal Reserve System
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Sample Questions
Q1) While the discount rate is "established" by the regional Federal Reserve Banks,in truth,the rate is determined by A)Congress.
B)the president of the United States.
C)the Senate.
D)the Board of Governors.
Q2) Explain two concepts of central bank independence. Is the Fed politically independent? Why do economists think central bank independence is important?
Q3) Critics of the current system of Fed independence contend that A)the current system is undemocratic.
B)voters have too much say about monetary policy.
C)the president has too much control over monetary policy on a day-to-day basis.
D)the Board of Governors is held responsible for policy missteps.
Q4) Each Fed bank president attends FOMC meetings;although only ________ Fed bank presidents vote on policy,all ________ provide input.
A)three;ten
B)five;ten
C)three;twelve
D)five;twelve
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Chapter 14: The Money Supply Process
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Sample Questions
Q1) Suppose that from a new checkable deposit,First National Bank holds two million dollars in vault cash,nine million dollars in excess reserves,and faces a required reserve ratio of ten percent. Given this information,we can say First National Bank has ________ million dollars in required reserves.
A)one
B)two
C)eight
D)ten
Q2) The two most important categories of assets on the Fed's balance sheet are ________ and ________ because they earn interest.
A)discount loans;coins
B)securities;discount loans
C)gold;coins
D)cash items in the process of collection;SDR certificate accounts
Q3) Which is the most important category of Fed assets?
A)securities
B)discount loans
C)gold and SDR certificates
D)cash items in the process of collection
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Chapter 15: Tools of Monetary Policy
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Sample Questions
Q1) If Treasury deposits at the Fed are predicted to fall,the manager of the trading desk at the New York Fed bank will likely conduct ________ open market operations to ________ reserves.
A)defensive;inject
B)defensive;drain
C)dynamic;inject
D)dynamic;drain
Q2) The interest rate for primary credit is usually set ________ basis points ________ the federal funds rate. In March 2008,this gap was changed to ________ basis points.
A)50;below;100
B)100;above;25
C)100;below;50
D)50;above;25
Q3) The interest rate on secondary credit is set ________ basis points ________ the primary credit rate.
A)100;above
B)100;below
C)50;above
D)50;below
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Chapter 16: The Conduct of Monetary Policy: Strategy and Tactics
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Sample Questions
Q1) The Fed was committed to keeping interest rates low to assist Treasury financing of budget deficits
A)only during World War I.
B)during the Great Depression.
C)during World War I and World War II.
D)throughout the entire existence of the Fed.
Q2) Real interest rates are difficult to measure because
A)data on them are not available in a timely manner.
B)real interest rates depend on the hard-to-determine expected inflation rate.
C)they fluctuate too often to be accurate.
D)they cannot be controlled by the Fed.
Q3) Since the early 1990s,the Fed has conducted monetary policy by setting a target for the
A)level of borrowed reserves.
B)monetary base.
C)federal funds rate.
D)inflation rate.
Q4) Explain what inflation targeting is. What are the advantages and disadvantages of this type of monetary policy strategy?
Page 18
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Chapter 17: The Foreign Exchange Market
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Sample Questions
Q1) ________ in the foreign interest rate causes the demand for domestic assets to shift to the left and the domestic currency to ________,everything else held constant.
A)An increase;appreciate
B)An increase;depreciate
C)A decrease;appreciate
D)A decrease;depreciate
Q2) If the interest rate is 7 percent on euro-denominated assets and 5 percent on dollar-denominated assets,and if the dollar is expected to appreciate at a 4 percent rate,the expected return on ________-denominated assets in terms of ________ percent.
A)dollar;dollars is 7
B)euro;dollars is 1
C)dollar;euros is 1
D)euro;euros is 7
Q3) Explain the law of one price and the theory of purchasing power parity. Why doesn't purchasing power parity explain all exchange rate movements in the short run? What factors determine long-run exchange rates?
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19
Chapter 18: The International Financial System
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Sample Questions
Q1) To keep from running out of international reserves under the Bretton Woods system,a country had to implement ________ monetary policy to ________ its currency.
A)expansionary;strengthen
B)expansionary;weaken
C)contractionary;strengthen
D)contractionary;weaken
Q2) A foreign exchange intervention with an offsetting open market operation that leaves the monetary base unchanged is called
A)an unsterilized foreign exchange intervention.
B)a sterilized foreign exchange intervention.
C)an exchange rate feedback rule.
D)a money neutral foreign exchange intervention.
Q3) Under a fixed exchange rate regime,a central bank that does not want to acquire international reserves to keep its currency from ________ will decide to ________ its currency.
A)depreciating;revalue
B)depreciating;devalue
C)appreciating;revalue
D)appreciating;devalue
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Page 20
Chapter 19: Quantity Theory, inflation and the Demand for Money
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Sample Questions
Q1) Tobin's model of the speculative demand for money shows that people can reduce their ________ by ________ their asset holdings.
A)wealth;diversifying B)risk;specializing C)return;diversifying D)risk;diversifying
Q2) ________ quantity theory of money suggests that the demand for money is purely a function of income,and interest rates have no effect on the demand for money. A)Keynes's B)Fisher's C)Friedman's D)Tobin's
Q3) The classical economists' contention that prices double when the money supply doubles is predicated on the belief that in the short run velocity is ________ and real GDP is ________.
A)constant;constant B)constant;variable C)variable;variable D)variable;constant
21
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Chapter 20: The Is Curve
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Sample Questions
Q1) Keynes mentioned two factors that influenced planned investment spending
A)interest rates and disposable income.
B)interest rates and business expectations about the future.
C)disposable income and business expectations about the future.
D)interest rates and business expectations about inflation.
Q2) If aggregated demand is less than actual output,unplanned inventory ________ will cause output to ________.
A)accumulation;rise
B)depletion;fall
C)depletion;rise
D)accumulation;fall
Q3) In the Keynesian framework,as long as output is below the equilibrium level,unplanned inventory investment will remain ________ and firms will continue to ________ production.
A)negative;lower
B)negative;raise
C)positive;lower
D)positive;raise
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22
Chapter 21: The Monetary Policy and Aggregate Demand
Curves
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Sample Questions
Q1) An autonomous tightening of monetary policy
A)causes an upward movement along the monetary policy curve.
B)causes a downward movement along the monetary policy curve.
C)shifts the monetary policy curve upward.
D)shifts the monetary policy curve downward.
Q2) Everything else held constant,an increase in autonomous consumer spending will cause the IS curve to shift to the ________ and aggregate demand will ________.
A)right;increase
B)right;decrease
C)left;increase
D)left;decrease
Q3) The upward slope of the MP curve indicates that
A)the central bank lowers real interest rates when inflation rises.
B)the central bank raises real interest rates when inflation falls.
C)the central bank raises nominal interest rates when inflation rises.
D)the central bank raises real interest rates when inflation rises.
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23
Chapter 22: Aggregate Demand and Supply Analysis
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Sample Questions
Q1) Everything else held constant,an increase in net taxes ________ aggregate
A)increases;demand
B)decreases;demand
C)decreases;supply
D)increases;supply
Q2) Suppose the economy is producing at the natural rate of output. Assuming a fixed natural rate of output and everything else held constant,the development of a new,more productive technology will cause ________ in the unemployment rate in the long run and ________ in inflation in the short run.
A)an increase;an increase
B)a decrease;a decrease
C)no change;a decrease
D)no change;no change
Q3) ________ flexible wages and prices imply that the short-run aggregate supply curve is ________.
A)More;flatter
B)Less;steeper
C)Less;vertical
D)More;steeper
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Chapter 23: Monetary Policy Theory
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Sample Questions
Q1) When the economy suffers a permanent negative supply shock and the central bank does not respond by changing the autonomous component of monetary policy,then
A)inflation will be lower.
B)output will be at its potential.
C)output will be unchanged.
D)inflation will be unchanged.
Q2) If the economy suffers a permanent negative supply shock because there is an increase in regulations that permanently reduce the level of potential output,then
A)potential output falls.
B)the long-run aggregate supply curve shifts leftward.
C)the short-run aggregate supply curve shifts upward.
D)all of the above.
Q3) Which of the following is most likely to lead to inflationary monetary policy?
A)declining oil prices
B)resolution of conflict in the Middle East
C)the enactment of a free-trade agreement with Mexico
D)rising unemployment
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25
Chapter 24: The Role of Expectations in Monetary Policy
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Q1) The argument that econometric policy evaluation is likely to be misleading if policymakers assume stable economic relationships is known as
A)the monetarist revolution.
B)the Lucas critique.
C)public choice theory.
D)new Keynesian theory.
Q2) Ending the "Great Inflation" era in the 1970s is an example of
A)inflation targeting.
B)exchange rate targeting.
C)central bank independence.
D)appointment of a more conservative central banker.
E)all of the above.
Q3) Arguments for adopting a policy rule include
A)the time-inconsistency problem can lead to poor economic outcomes.
B)discretionary policies pursue overly expansionary monetary policies to boost employment in the short run but generate higher inflation in the long run.
C)policy makers and politicians cannot be trusted.
D)all of the above.
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Chapter 25: Transmission Mechanisms of Monetary Policy
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Sample Questions
Q1) Discuss three channels by which monetary policy affects stock prices and aggregate spending.
Q2) The monetary transmission mechanism that links monetary policy to GDP through real interest rates and investment spending is called the
A)traditional interest-rate channel.
B)Tobins' q theory.
C)wealth effects.
D)cash flow channel.
Q3) ________ examines whether one variable affects another by using data to build a model that explains the channels through which this variable affects the other.
A)Indirect-model evidence
B)Organizational-model evidence
C)Reduced-form evidence
D)Structural-model evidence
Q4) During the Great Depression,real interest rates
A)rose to unprecedentedly high levels.
B)rose only slightly above the long-run trend.
C)fell to unprecedentedly low levels.
D)fell only slightly below the long-run trend.
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Chapter 26: Financial Crises in Emerging Market Economies
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Sample Questions
Q1) Financial crises generally develop along two basic paths
A)mismanagement of financial liberalization/globalization and severe fiscal imbalances.
B)stock market declines and severe fiscal imbalances.
C)mismanagement of financial liberalization/globalization and stock market declines.
D)stock market declines and unanticipated declines in the value of the domestic currency.
Q2) The two key factors that trigger speculative attacks on emerging market currencies are
A)deterioration in bank balance sheets and severe fiscal imbalances.
B)deterioration in bank balance sheets and low interest rates abroad.
C)low interest rates abroad and severe fiscal imbalances.
D)low interest rates abroad and rising asset prices.
Q3) All of the following might create problems from financial liberalization in emerging countries EXCEPT
A)ineffective screening of borrowers.
B)limits on risk-taking.
C)lax government supervision of banks.
D)lenders failure to monitor borrowers.
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Chapter 27: The ISLM Model
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Sample
Questions
Q1) As aggregate output rises,the demand for money ________ and the interest rate ________,so that money demanded equals money supplied and the money market is in equilibrium.
A)increases;rises
B)increases;falls
C)decreases;rises
D)decreases;falls
Q2) Everything else held constant,a monetary contraction is characterized by ________ output and ________ interest rates.
A)rising;rising
B)rising;falling
C)falling;rising
D)falling;falling
Q3) If the quantity of money demanded is not affected by changes in the interest rate,the LM curve is ________ and fiscal policy will be ________.
A)horizontal;very effective
B)horizontal;ineffective
C)vertical;ineffective
D)vertical;very effective
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