Money and Banking Exam Practice Tests
Course Introduction
Money and Banking examines the role of money, financial institutions, and central banks in modern economies. The course explores the nature and functions of money, the workings of commercial banks and non-bank financial intermediaries, and the structure of financial markets. Key topics include how banks create money, the process and impact of monetary policy, interest rate determination, and the regulatory environment governing financial institutions. Additionally, students analyze the functions and operation of central banks particularly the Federal Reserve and their influence on inflation, unemployment, and overall economic stability. Through case studies and real-world examples, the course provides a solid foundation for understanding how monetary systems support economic growth and stability.
Recommended Textbook
Economics of Money Banking and Financial Markets 12th Edition by Frederic S. Mishkin
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27 Chapters
2796 Verified Questions
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Page 2
Chapter 1: Why Study Money, banking, and Financial Markets
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109 Verified Questions
109 Flashcards
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Sample Questions
Q1) The gross domestic product is the
A)the value of all wealth in an economy.
B)the value of all goods and services sold to other nations in a year.
C)the market value of all final goods and services produced in an economy in a year.
D)the market value of all intermediate goods and services produced in an economy in a year.
Answer: C
Q2) 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
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Chapter 2: An Overview of the Financial System
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Sample Questions
Q1) Equity instruments are traded in the ________ market.
A)money
B)bond
C)capital
D)commodities
Answer: C
Q2) You can borrow $5,000 to finance a new business venture. This new venture will generate annual earnings of $251. The maximum interest rate that you would pay on the borrowed funds and still increase your income is A)25%.
B)12.5%.
C)10%.
D)5%.
Answer: D
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Page 4
Chapter 3: What Is Money
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Sample Questions
Q1) Which of the following sequences accurately describes the evolution of the payments system?
A)barter,coins made of precious metals,paper currency,checks,electronic funds transfers
B)barter,coins made of precious metals,checks,paper currency,electronic funds transfers
C)barter,checks,paper currency,coins made of precious metals,electronic funds transfers
D)barter,checks,paper currency,electronic funds transfers
Answer: A
Q2) The other checkable deposits component of the M1 measure reported by the Federal Reserve includes
A)negotiable time deposits.
B)money market mutual fund shares.
C)automatic transfer from savings accounts.
D)money market deposit accounts.
Answer: C
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Chapter 4: The Meaning of Interest Rates
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Sample Questions
Q1) The riskiness of an asset's returns due to changes in interest rates is
A)exchange-rate risk.
B)price risk.
C)asset risk.
D)interest-rate risk.
Q2) The ________ interest rate is adjusted for expected changes in the price level.
A)ex ante real
B)ex post real
C)ex post nominal
D)ex ante nominal
Q3) The ________ is below the coupon rate when the bond price is ________ its par value.
A)yield to maturity;above
B)yield to maturity;below
C)discount rate;above
D)discount rate;below
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) Everything else held constant,if the expected return on RST stock declines from 12 to 9 percent and the expected return on XYZ stock declines from 8 to 7 percent,then the expected return of holding RST stock ________ relative to XYZ stock and demand for XYZ stock ________.
A)rises;rises
B)rises;falls
C)falls;rises
D)falls;falls
Q2) What is the impact on interest rates when the Federal Reserve decreases the money supply by selling bonds to the public?
Q3) In the figure above,the factor responsible for the decline in the interest rate is
A)a decline the price level.
B)a decline in income.
C)an increase in the money supply.
D)a decline in the expected inflation rate.
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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Sample Questions
Q1) Everything else held constant,a decrease in marginal tax rates would likely have the effect of ________ the demand for municipal bonds,and ________ the demand for U.S. government bonds.
A)increasing;increasing
B)increasing;decreasing
C)decreasing;increasing
D)decreasing;decreasing
Q2) When yield curves are steeply upward sloping
A)long-term interest rates are above short-term interest rates.
B)short-term interest rates are above long-term interest rates.
C)short-term interest rates are about the same as long-term interest rates.
D)medium-term interest rates are above both short-term and long-term interest rates.
Q3) Everything else held constant,if income tax rates were lowered,then
A)the interest rate on municipal bonds would fall.
B)the interest rate on Treasury bonds would rise.
C)the interest rate on municipal bonds would rise.
D)the price of Treasury bonds would fall.
Q4) If a higher inflation is expected,what would you expect to happen to the shape of the yield curve? Why?
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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 the generalized dividend model,if the expected sales price is in the distant future
A)it does not affect the current stock price.
B)it is more important than dividends in determining the current stock price.
C)it is equally important with dividends in determining the current stock price.
D)it is less important than dividends but still affects the current stock price.
Q2) ________ occurs when market participants observe returns on a security that are larger than what is justified by the characteristics of that security and take action to quickly eliminate the unexploited profit opportunity.
A)Arbitrage
B)Mediation
C)Asset capitalization
D)Market intercession
Q3) The efficient markets hypothesis implies that future changes in exchange rates should for all practical purposes be
A)unpredictable.
B)set by each country.
C)increasing.
D)pegged to a standard such as the U.S. dollar or the Euro.
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Chapter 8: An Economic Analysis of Financial Structure
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Sample Questions
Q1) In developing countries,it can be expensive and time-consuming for the poor to legalize their property ownership. Without legal title,the property cannot be used as ________ to borrow funds.
A)collateral
B)points
C)interest
D)restrictive covenants
Q2) With regard to external sources of financing for nonfinancial businesses in the United States,which of the following are accurate statements?
A)Marketable securities account for a larger share of external business financing in the United States than in Germany and Japan.
B)Since 1970,most of the newly issued corporate bonds and commercial paper have been sold directly to American households.
C)Direct finance accounts for more than 50 percent of the external financing of American businesses.
D)Smaller businesses almost always raise funds by issuing marketable securities.
Q3) How does collateral help to reduce the adverse selection problem in credit market?
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Chapter 9: Banking and the Management of Financial Institutions
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Sample Questions
Q1) Which of the following are transaction deposits?
A)savings accounts
B)small-denomination time deposits
C)checkable deposits
D)certificates of deposit
Q2) If a bank has $50 million in rate-sensitive assets and $20 million in rate-sensitive liabilities then
A)an increase in interest rates will reduce bank profits.
B)a decrease in interest rates will reduce bank profits.
C)interest rate changes will not impact bank profits.
D)a decrease in interest rates will increase bank profits.
Q3) Which of the following are reported as liabilities on a bank's balance sheet?
A)discount loans
B)reserves
C)U)S. Treasury securities
D)real estate loans
Q4) Using T-accounts show what happens to reserves at Security National Bank if one individual deposits $1,000 in cash into her checking account and another individual withdraws $750 in cash from her checking account.
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Chapter 10: Economic Analysis of Financial Regulation
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Sample Questions
Q1) Which of the following is NOT a reason financial regulation and supervision is difficult in real life?
A)Financial institutions have strong incentives to avoid existing regulations.
B)Unintended consequences may happen if details in the regulations are not precise.
C)Regulated firms lobby politicians to lean on regulators to ease the rules.
D)Financial institutions are not required to follow the rules.
Q2) All of the following are common to banking crises in different countries EXCEPT A)financial liberalization or innovation.
B)weak bank regulatory systems.
C)a government safety net.
D)a dual banking system.
Q3) Depositors lack of information about the quality of bank assets can lead to A)bank panics.
B)bank booms.
C)sequencing.
D)asset transformation.
Q4) How did the increase in the interest rates in the early 80s contribute to the S&L crisis?
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Chapter 11: Banking Industry: Structure and Competition
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Sample Questions
Q1) Critics of nationwide banking fear
A)an elimination of community banks.
B)increased lending to small businesses.
C)cutthroat competition.
D)banks with economies of scale problems.
Q2) The most important source of the changes in supply conditions that stimulate financial innovation has been the
A)deregulation of financial institutions.
B)dramatic increase in the volatility of interest rates.
C)improvement in information technology.
D)dramatic increase in competition from foreign banks.
Q3) The agreement to provide a standardized commodity to a buyer on a specific date at a specific future price is
A)a put option.
B)a call option.
C)a futures contract.
D)a mortgage-backed security.
Q4) What financial innovations helped banks to get around the bank branching restrictions of the McFadden Act?
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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) A major disruption in financial markets characterized by sharp declines in asset prices and firm failures is called a
A)financial crisis.
B)fiscal imbalance.
C)free-rider problem.
D)"lemons" problem.
Q3) During the "Great Recession" unemployment rates in the United States increased to A)over 10%.
B)over 25%.
C)7.5%.
D)5%.
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Chapter 13: Central Banks and the Federal Reserve System
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Sample Questions
Q1) The Second Bank of the United States
A)was disbanded in 1811 when its charter was not renewed.
B)had its charter renewal vetoed in 1832.
C)is considered to be the primary cause of the bank panic of 1907.
D)None of the above.
Q2) The Governing Council usually meets ________ times a year.
A)four
B)six
C)eight
D)twelve
Q3) Make the case for and against an independent Federal Reserve.
Q4) In the Governing Council,the decision of what policy to implement is made by
A)majority vote of the Executive Board members.
B)majority vote of the heads of the National Banks.
C)consensus.
D)majority vote of all members of the Governing Council.
Q5) Explain the similarities and differences between the European System of Central Banks and the Federal Reserve System.
Q6) What is the theory of bureaucratic behavior and how can it be used to explain the behavior of the Federal Reserve?
Page 15
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Chapter 14: The Money Supply Process
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Sample Questions
Q1) A simple deposit multiplier equal to two implies a required reserve ratio equal to A)100 percent.
B)50 percent.
C)25 percent.
D)0 percent.
Q2) If the required reserve ratio is one-third,currency in circulation is $300 billion,and checkable deposits are $900 billion,then the currency-deposit ratio is A)0.25.
B)0.33.
C)0.67.
D)0.375.
Q3) If the required reserve ratio is 5 percent,currency in circulation is $400 billion,checkable deposits are $800 billion,and excess reserves total $0.8 billion,then the M1 money multiplier is A)2.5.
B)2.72.
C)2.3.
D)0.551.
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Chapter 15: Tools of Monetary Policy
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Sample Questions
Q1) Which of the following statements about the deposit facility in the Eurosystem are correct?
A)Banks are paid an interest rate that is typically 100 basis points below the target financing rate.
B)The prespecified interest rate on the deposit facility provides a floor for the overnight market interest rate.
C)The interest rate on reserves set by the ECB is not always positive.
D)All of the above.
E)Only A and B.
Q2) Open market sales ________ reserves and the monetary base thereby ________ the money supply.
A)raise;lowering
B)raise;raising
C)lower;lowering
D)lower;raising
Q3) Open market sales shrink ________ thereby lowering ________.
A)the money multiplier;the money supply
B)the money multiplier;reserves and the monetary base
C)reserves and the monetary base;the money supply
D)the money base;the money multiplier
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Chapter 16: The Conduct of Monetary Policy: Strategy and Tactics
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Sample Questions
Q1) The time-inconsistency problem with monetary policy tells us that,if policymakers use discretionary policy,there is a higher probability that the ________ will be higher,compared to policy makers following a behavior rule.
A)inflation rate
B)unemployment rate
C)interest rate
D)foreign exchange rate
Q2) Which of the following is a disadvantage to monetary targeting?
A)It relies on a stable money-inflation relationship.
B)There is a delayed signal about the achievement of a target.
C)It implies larger output fluctuations.
D)It implies a lack of transparency.
Q3) The strengthening of the dollar between 1980 and 1985 contributed to a ________ in American competitiveness,putting pressure on the Fed to pursue a more ________ monetary policy.
A)decrease;contractionary
B)increase;expansionary
C)increase;contractionary
D)decrease;expansionary
Page 18
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Chapter 17: The Foreign Exchange Market
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Sample Questions
Q1) ________ in the domestic interest rate causes the demand for domestic assets to shift to the ________ and the domestic currency to appreciate,everything else held constant.
A)An increase;right
B)An increase;left
C)A decrease;right
D)A decrease;left
Q2) If the exchange at time t is E = 1/$. You invest $1 in an euro asset at t,which has an interest of 8%. When the asset expires at t+1,you get paid ________. If E +1 = 1.02/$,then you can buy back $________.
A)1.08;1.06
B)1;1.06
C)1.08;1.02
D)1.06;1.08
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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Chapter 18: The International Financial System
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Sample Questions
Q1) Everything else held constant,if a central bank makes an unsterilized ________ of foreign assets,then the domestic money supply will ________ and the domestic currency will depreciate.
A)purchase;increase B)purchase;decrease C)sale;increase
D)sale;decrease
Q2) The monetary policy strategy that provides an automatic rule for the conduct of monetary policy is
A)exchange-rate targeting.
B)monetary targeting.
C)inflation targeting.
D)the implicit nominal anchor.
Q3) Countries with balance of payments deficits do not want to see their currencies ________ because it makes foreign goods ________ expensive for domestic consumers.
A)appreciate;less
B)appreciate;more
C)depreciate;less
D)depreciate;more
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Chapter 19: Quantity Theory, inflation and the Demand for Money
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Sample Questions
Q1) Keynes's theory of the demand for money implies that velocity is
A)not constant but fluctuates with movements in interest rates.
B)not constant but fluctuates with movements in the price level.
C)not constant but fluctuates with movements in the time of year. D)a constant.
Q2) If the government finances its spending by issuing debt to the public,the monetary base will ________ and the money supply will ________.
A)increase;increase B)increase;decrease
C)decrease;increase
D)not change;not change
Q3) The quantity theory of inflation indicates that the inflation rate equals
A)the growth rate of the money supply minus the growth rate of aggregate output. B)the level of the money supply minus the level of aggregate output.
C)the growth rate of the money supply plus the growth rate of aggregate output.
D)the level of the money supply plus the level of aggregate output.
Q4) What factors determine the demand for money in the Baumol-Tobin analysis of transactions demand for money? How does a change in each factor affect the quantity of money demanded?
21
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Chapter 20: The Is Curve
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Sample Questions
Q1) When the interest rate rises
A)planned investment falls.
B)planned investment rises.
C)planned investment will be unaffected.
D)equilibrium income increases.
Q2) In an open economy,aggregate demand is the sum of
A)consumer expenditure,actual investment spending,and government spending.
B)consumer expenditure,planned investment spending,and government spending.
C)consumer expenditure,actual investment spending,government spending,and net exports.
D)consumer expenditure,planned investment spending,government spending,and net exports.
Q3) Everything else held constant,a shift in tastes in the U.S. toward Mexican goods will ________ net exports in the U.S. and cause the quantity of aggregate output demanded to ________ in Mexico.
A)decrease;rise
B)decrease;fall
C)increase;rise
D)increase;fall
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Chapter 21: The Monetary Policy and Aggregate Demand
Curves
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Sample Questions
Q1) The Fed's policy actions of reacting to higher inflation by raising the real interest rate during 2004-2006 were
A)upward movements along the monetary policy curve.
B)downward movement along the monetary policy curve.
C)upward shifts of the monetary policy curve.
D)downward shifts of the monetary policy curve.
Q2) The Taylor Principle states that central banks raise nominal rates by ________ than any rise in expected inflation so that real interest rates ________ when there is a rise in inflation.
A)less;rise
B)more;fall
C)less;fall
D)more;rise
Q3) Everything else held constant,an appreciation of the domestic currency 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
23
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Chapter 22: Aggregate Demand and Supply Analysis
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Sample Questions
Q1) With downward-sloping monetary policy and IS curves,the aggregate demand curve is
A)downward sloping.
B)flat.
C)vertical.
D)upward sloping.
Q2) Suppose the U.S. economy is operating at potential output. A negative supply shock that is accommodated by an open market purchase by the Federal Reserve will cause ________ in real GDP in the long run and ________ in inflation in the long run,everything else held constant.
A)no change;an increase
B)no change;a decrease
C)an increase;an increase
D)a decrease;a decrease
Q3) Everything else held constant,an increase in net exports ________ aggregate
A)increases;demand
B)decreases;demand
C)decreases;supply
D)increases;supply
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Chapter 23: Monetary Policy Theory
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Sample Questions
Q1) If policymakers set a target for unemployment that is too low because it is less than the natural rate of unemployment,this can set the stage for a higher rate of money growth and
A)cost-push inflation.
B)demand-pull inflation.
C)cost-pull inflation.
D)demand-push inflation.
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) The time it takes to pass legislation to implement a particular policy is called
A)the data lag.
B)the recognition lag.
C)the legislative lag.
D)the implementation lag.
E)the effectiveness lag.
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Chapter 24: The Role of Expectations in Monetary Policy
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Sample Questions
Q1) Lucas argues that when policies change,expectations will change thereby
A)changing the relationships in econometric models.
B)causing the government to abandon its discretionary stance.
C)forcing the Fed to keep its deliberations secret.
D)making it easier to predict the effects of policy changes.
Q2) Approaches to establishing central bank credibility include
A)continued success at keeping inflation under control.
B)central bank independence.
C)appointment of a more conservative central banker.
D)all of the above.
Q3) Arguments for adopting a policy rule include
A)discretion avoids the straightjacket that would lock in the wrong policy if the model that was used to derive the policy rule proved to be incorrect.
B)discretion enables policy makers to change policy settings when an economy undergoes structural changes.
C)discretionary policies pursue overly expansionary monetary policies to boost employment in the short run but generate higher inflation in the long run.
D)all of the above.
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Chapter 25: Transmission Mechanisms of Monetary Policy
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Sample Questions
Q1) According to the household liquidity effect,higher stock prices lead to increased consumption expenditures because consumers
A)feel more secure about their financial position.
B)want to sell stocks and spend the proceeds before stock prices fall.
C)believe that their wages will increase due to increased profitability of firms.
D)can now afford more expensive imports.
Q2) Early Keynesians felt that ________ policy was ________,so they stressed the importance of ________ policy.
A)fiscal;ineffective;monetary
B)monetary;ineffective;fiscal
C)monetary;potent;monetary
D)fiscal;too potent;monetary
Q3) From the earlier 1990s until 2012,the Japanese monetary was ________ and stock and real estate prices were ________.
A)tight;rising
B)easy;rising
C)tight;falling
D)easy;falling
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Chapter 26: Financial Crises in Emerging Market Economies
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Q1) In emerging market countries,many firms have debt denominated in foreign currency like the dollar or yen. A depreciation of the domestic currency
A)results in increases in the firm's indebtedness in domestic currency terms,even though the value of their assets remains unchanged.
B)results in an increase in the value of the firm's assets.
C)means that the firm does not owe as much on their foreign debt.
D)strengthens their balance sheet in terms of the domestic currency.
Q2) The economic hardship resulting from a financial crises is severe,however,there are also social consequences such as
A)increased crime.
B)difficulty getting a loan.
C)currency devaluations.
D)loss of output.
Q3) Argentina's financial crisis was due to A)poor supervision of the banking system.
B)a lending boom prior to the crisis.
C)fiscal imbalances.
D)lack of expertise in screening and monitoring borrowers at banking institutions.
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Chapter 27: The ISLM Model
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Sample Questions
Q1) If the price level increases,everything else held constant,the ________ curve shifts to the ________.
A)IS;right
B)IS;left
C)LM;left
D)LM;right
Q2) In the Keynesian model the quantity of money demanded is ________ related to income and ________ related to the interest rate.
A)positively;positively
B)positively;negatively
C)negatively;negatively
D)negatively;positively
Q3) Everything else held constant,if aggregate output is to the ________ of the LM curve,then there is an excess ________ of money which will cause the interest rate to fall.
A)right;supply
B)right;demand
C)left;supply
D)left;demand
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