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TB_599810_Mishkin_TP.qxd:Layout 1 6/4/09 9:45 AM Page 2 Contents Chapter1 WhyStudyMoney,Banking,andFinancialMarkets? 1 Chapter2 AnOverviewoftheFinancialSystem 20 Chapter3 WhatIsMoney? 43 Chapter4 UnderstandingInterestRates 60 Chapter5 TheBehaviorofInterestRates 78 Chapter6 TheRiskandTermStructureofInterestRates 111 Chapter7 TheStockMarket,theTheory ofRationalExpectations, andtheEfficientMarketHypothesis 133 Chapter8 AnEconomicAnalysisofFinancialStructure 150 Chapter9 FinancialCrisesandtheSubprimeMeltdown 169 Chapter10 BankingandtheManagementofFinancialInstitutions 181 Chapter11 EconomicAnalysisofFinancialRegulation 208 Chapter12 BankingIndustry:StructureandCompetition 229 Chapter13 CentralBanksandtheFederalReserveSystem 253 Chapter14 TheMoneySupplyProcess 274 Chapter15 ToolsforMonetaryPolicy 319 Chapter16 TheConductofMonetaryPolicy:StrategyandTactics 343 Chapter17 TheForeignExchangeMarket 363 Chapter18 TheInternationalFinancialSystem 389 Chapter19 TheDemandforMoney 418 Chapter20 The ISLMModel 440 Chapter21 MonetaryandFiscalPolicyintheISLMModel 466 Chapter22 AggregateDemandandSupplyAnalysis 493 Chapter23 TransmissionMechanismsofMonetaryPolicy:TheEvidence 511 Chapter24 MoneyandInflation 529 Chapter25 RationalExpectations:ImplicationsforPolicy 549 Chapter1 WhyStudyMoney,Banking,andFinancialMarkets? 1.1 WhyStudyFinancialMarkets? 1) Financialmarketspromoteeconomicefficiencyby A) channelingfundsfrominvestorstosavers. B) creatinginflation. C) channelingfundsfromsaverstoinvestors. D) reducinginvestment. Answer: C QuesStatus: PreviousEdition 2) Financialmarketspromotegreatereconomicefficiencybychannelingfundsfrom________to ________. A) investors;savers B) b orrowers;savers C) savers;borrowers D) savers;lenders Answer: C QuesStatus: PreviousEdition 3) Well - functioningfinancialmarketspromote A) inflation. B) deflation. C) unemployment. D) growth. Answer: D QuesStatus: PreviousEdition 4) Akeyfactorinproducinghigheconomicgrowthis A) eliminatingforeigntrade. B) well - functioningfinancialmarkets. C) highinterestrates. D) stockmarketvolatility. Answer: B QuesStatus: New 5) Marketsinwhichfundsaretransferredfromthosewhohaveexcessfundsavailabletothose whohaveashortageofavailablefundsarecalled A) commoditymarkets. B) fund - availablemarkets. C) derivativeexchangemarkets. D) financialmarkets. Answer: D QuesStatus: PreviousEdition 2Mishkin · TheEconomicsofMoney,Banking,andFinancialMarkets,9 th Edition 6) ________marketstransferfundsfrompeoplewhohaveanexcessofavailablefundstopeople whohaveashortage. A) Commodity B) Fund - available C) Financial D) Derivativeexchange Answer: C QuesStatus: PreviousEdition 7) Poorlyperformingfinancialmarketscanbethecauseof A) wealth. B) poverty. C) financialstability. D) financialexpansion. Answer: B QuesStatus: PreviousEdition 8) Thebondmarketsareimportantbecausetheyare A) easilythemostwidelyfollowedfinancialmarketsintheUnitedStates. B) themarketswhereforeignexchangeratesaredetermined. C) themarketswhereinterestratesaredetermined. D) themarketswhereallborrowersgettheirfunds. Answer: C QuesStatus: PreviousEdition 9) Thepricepaidfortherentalofborrowedfunds(usuallyexpressedasapercentageoftherental of$100peryear)iscommonlyreferredtoasthe A) inflationrate. B) exchangerate. C) interestrate. D) aggregatepricelevel. Answer: C QuesStatus: PreviousEdition 10) Comparedtointerestratesonlong - termU.S.governmentbonds,interestratesonthree - month Treasurybillsfluctuate________andare________onaverage. A) more;lower B) less;lower C) more;higher D) less;higher Answer: A QuesStatus: PreviousEdition Chapter1WhyStudyMoney,Banking,andFinancialMarkets? 3 11) TheinterestrateonBaa(mediumquality)corporatebondsis________,onaverage,thanother interestrates,andthespreadbetweenitandotherratesbecame________inthe1970s. A) lower;smaller B) lower;larger C) higher;smaller D) higher;larger Answer: D QuesStatus: PreviousEdition 12) Everythingelseheldconstant,adeclineininterestrateswillcausespendingonhousingto A) fall. B) remainunchanged. C) eitherrise,fall,orremainthesame. D) rise. Answer: D QuesStatus: PreviousEdition 13) Highinterestratesmight________purchasingahouseorcarbutatthesametimehighinterest ratesmight________saving. A) discourage;encourage B) discourage;discourage C) encourage;encourage D) encourage;discourage Answer: A QuesStatus: New 14) Anincreaseininterestratesmight________savingbecausemorecanbeearnedininterest income. A) encourage B) discourage C) disallow D) invalidate Answer: A QuesStatus: PreviousEdition 15) Everythingelseheldconstant,anincreaseininterestratesonstudentloans A) increasesthecostofacollegeeducation. B) reducesthecostofacollegeeducation. C) hasnoeffectoneducationalcosts. D) increasescostsforstudentswithnoloans. Answer: A QuesStatus: PreviousEdition 4Mishkin · TheEconomicsofMoney,Banking,andFinancialMarkets,9 th Edition 16) Highinterestratesmightcauseacorporationto________buildinganewplantthatwould providemorejobs. A) complete B) consider C) postpone D) contemplate Answer: C QuesStatus: PreviousEdition 17) Thestockmarketisimportantbecauseitis A) whereinterestratesaredetermined. B) themostwidelyfollowedfinancialmarketintheUnitedStates. C) whereforeignexchangeratesaredetermined. D) themarketwheremostborrowersgettheirfunds. Answer: B QuesStatus: PreviousEdition 18) Stockpricesare A) relativelystabletrendingupwardatasteadypace. B) relativelystabletrendingdownwardatamoderaterate. C) extremelyvolatile. D) unstabletrendingdownwardatamoderaterate. Answer: C QuesStatus: Revised 19) Arisingstockmarketindexduetohighershareprices A) increasespeopleʹswealth,butisunlikelytoincreasetheirwillingnesstospend. B) increasespeopleʹswealthandasaresultmayincreasetheirwillingnesstospend. C) decreasestheamountoffundsthatbusinessfirmscanraisebysellingnewly - issuedstock. D) decreases peopleʹswealth,butisunlikelytoincreasetheirwillingnesstospend. Answer: B QuesStatus: PreviousEdition 20) Whenstockpricesfall A) anindividualʹswealthisnotaffectednoristheirwillingnesstospend. B) abusinessfirmwillbemorelikelytosellstocktofinanceinvestmentspending. C) anindividualʹswealthmaydecreasebuttheirwillingnesstospendisnotaffected. D) anindividualʹswealthmaydecreaseandtheir willingnesstospendmaydecrease. Answer: D QuesStatus: PreviousEdition 21) Changesinstockprices A) donotaffectpeopleʹswealthandtheirwillingnesstospend. B) affectfirmsʹdecisionstosellstocktofinanceinvestmentspending. C) occurinregularpatterns. D) areunimportanttodecisionmakers. Answer: B QuesStatus: PreviousEdition Chapter1WhyStudyMoney,Banking,andFinancialMarkets? 5 22) Anincreaseinstockprices________thesizeofpeopleʹswealthandmay________their willingnesstospend,everythingelseheldconstant. A) increases;increase B) increases;decrease C) decreases;increase D) decreases;decrease Answer: A QuesStatus: PreviousEdition 23) Lowstockmarketpricesmight________consumerswillingnesstospendandmight________ businesseswillingnesstoundertakeinvestmentprojects. A) increase;increase B) increase;decrease C) decrease;decrease D) decrease;increase Answer: C QuesStatus: New 24) Fearofamajorrecessioncausesstockpricestofall,everythingelseheldconstant,whichinturn causesconsumerspendingto A) increase. B) remainunchanged. C) decrease. D) cannotbedetermined. Answer: C QuesStatus: PreviousEdition 25) Ashareofcommonstockisaclaimonacorporationʹs A) debt. B) liabilities. C) expenses. D) earningsandassets. Answer: D QuesStatus: Revised 26) On________,October19,1987,themarketexperienceditsworstone - daydropinitsentire historywiththeDIJAfallingbymorethan500points. A) ʺTerribleTuesdayʺ B) ʺWoefulWednesdayʺ C) ʺFreakyFridayʺ D) ʺBlackMondayʺ Answer: D QuesStatus: PreviousEdition 6Mishkin · TheEconomicsofMoney,Banking,andFinancialMarkets,9 th Edition 27) Thedeclineinstockpricesfrom2000through2002 A) increasedindividualsʹwillingnesstospend. B) hadnoeffectonindividualspending. C) reducedindividualsʹwillingnesstospend. D) increasedindividualwealth. Answer: C QuesStatus: PreviousEdition 28) TheDowreachedapeakofover11,000beforethecollapseofthe________bubblein2000. A) housing B) manufacturing C) high - tech D) b anking Answer: C QuesStatus: PreviousEdition 29) Whatisastock?Howdostocksaffecttheeconomy? Answer: Astockrepresentsashareofownershipofacorporation,oraclaimonafirmʹs earnings/assets.Stocksarepartofwealth,andchangesintheirvalueaffectpeopleʹs willingnesstospend.Changesinstockpricesaffectafirmʹs abilitytoraisefunds,and thustheirinvestment. QuesStatus: PreviousEdition 30) Whyisitimportanttounderstandthebondmarket? Answer: Thebondmarketsupportseconomicactivitybyenablingthegovernmentand corporationstoborrowtoundertaketheirprojectsanditisthemarketwhereinterest ratesaredetermined. QuesStatus: New 1.2 WhyStudyFinancialInstitutionsandBanking? 1) Channelingfundsfromindividualswithsurplusfundstothosedesiringfundswhenthesaver doesnotpurchasetheborrowerʹssecurityisknownas A) b arter. B) redistribution. C) financialintermediation. D) taxation. Answer: C QuesStatus: PreviousEdition 2) Afinancialcrisisis A) notpossibleinthemodernfinancialenvironment. B) amajordisruptioninthefinancialmarkets. C) afeatureofdevelopingeconomiesonly. D) typicallyfollowedbyaneconomicboom. Answer: B QuesStatus: New [...]... this type of market, dealers in different locations buy and sell securities to anyone who comes to them and is willing to accept their prices. An example of an over -the- counter market is the federal funds market Ques Status: New 28 Mishkin · The Economics of Money, Banking, and Financial Markets, 9th Edition 2.3 Financial Market Instruments 1) Prices of money market instruments undergo the least price fluctuations because of. .. Chapter 2 An Overview of the Financial System 23 17) Distinguish between direct finance and indirect finance. Which of these is the most important source of funds for corporations in the United States? Answer: With direct finance, funds flow directly from the lender/saver to the borrower. With indirect finance, funds flow from the lender/saver to a financial intermediary who then channels the funds to the borrower/investor. Financial intermediaries (indirect finance) ... 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 ʺinflation is always and everywhere a monetary... 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:... 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... Ques Status: Previous Edition 30 Mishkin · The Economics of Money, Banking, and Financial Markets, 9th Edition 12) Which of the following instruments are traded in a money market? A) Bank commercial loans B) Commercial paper C) State and local government bonds D) Residential mortgages Answer: B Ques Status: Revised 13) Which of the following instruments is not traded in a money market? A) Residential mortgages... channels the funds to the borrower/investor. Financial intermediaries (indirect finance) are the major source of funds for corporations in the U.S Ques Status: Previous Edition 2.2 Structure of Financial Markets 1) Which of the following statements about the characteristics of debt and equity is false? A) They can both be long-term financial instruments B) They can both be short-term financial instruments C) They both involve a claim on the issuerʹs income D) They both enable a corporation to raise funds... 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... 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 ... Bonds that are sold in a foreign country and are denominated in the countryʹs currency in which they are sold are known as A) foreign bonds B) Eurobonds C) equity bonds D) country bonds Answer: A Ques Status: Previous Edition 32 Mishkin · The Economics of Money, Banking, and Financial Markets, 9th Edition 4) Bonds that are sold in a foreign country and are denominated in a currency other than that of the country in which it is sold are known as . 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. PreviousEdition 10) Which of the followingisatruestatement? A) Money or the money supplyisdefinedasFederalReservenotes. B) The averageprice of goodsandservicesinaneconomyiscalled the aggregatepricelevel. C). Between1950and1980in the U.S.,interestratestrendedupward.Duringthissametimeperiod, A) the rate of money growthdeclined. B) the rate of money growthincreased. C) the governmentbudgetdeficit(expressedasapercentage of GNP)trendeddownward. D)