The Economics of Money, Banking and Financial Markets, Sixth Canadian Edition Test Bank

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TEST BANKFORThe Economics of Money, Banking,and Financial MarketsSixthCanadianEditionFrederic S. MishkinColumbia UniversityApostolos SerletisUniversity of CalgaryPrepared byLance ShandlerKwantlen Polytechnic University

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1Economics of Money, Banking, and Financial Markets 6e(Mishkin)Chapter 1Why Study Money, Banking, and Financial Markets?1.1Why Study Financial Markets?1) Financial markets promote economic efficiency by ________.A) channelling funds from investors to saversB) creating inflationC) channelling funds to those who have a productive use for themD) reducing investmentAnswer: CDiff: 1Type:MCSkill: RecallObjective: 1.1 Recognize the importance of financial markets in the economy.2) Well-functioning financial markets promote ________.A) inflationB) deflationC) unemploymentD) economic growthAnswer: DDiff: 1Type:MCSkill: RecallObjective: 1.1 Recognize the importance of financial markets in the economy.3) A key factor in producing high economic growth is ________.A) eliminating foreign tradeB) well-functioning financial marketsC) high interest ratesD) stock market volatilityAnswer: BDiff: 1Type:MCSkill: RecallObjective: 1.1 Recognize the importance of financial markets in the economy.4) Markets in which funds are transferred from those who do not have a productive use forthem to those who do are called ________.A) commodity marketsB) fund-available marketsC) derivative exchange marketsD) financial marketsAnswer: DDiff: 1Type:MCSkill: RecallObjective: 1.1 Recognize the importance of financial markets in the economy.

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25) ________ markets transfer funds from people who do not have a productive use for them topeople who do.A) CommodityB) Fund-availableC) FinancialD) Derivative exchangeAnswer: CDiff: 1Type:MCSkill: RecallObjective: 1.1 Recognize the importance of financial markets in the economy.6) Poorly performing financial markets can be the cause of ________.A) wealthB) povertyC) financial stabilityD) financial expansionAnswer: BDiff: 1Type:MCSkill: RecallObjective: 1.1 Recognize the importance of financial markets in the economy.7) The bond markets are important because they are ________.A) easily the most widely followed financial markets in CanadaB) the markets where foreign exchange rates are determinedC) where corporations and governments borrow to finance their activitiesD) the markets where all borrowers get their fundsAnswer: CDiff: 1Type:MCSkill: RecallObjective: 1.1 Recognize the importance of financial markets in the economy.8) A security is also known as ________.A) a financial instrumentB) a contingent claimC) the interest rateD) a liabilityAnswer: ADiff: 1Type:MCSkill: AppliedObjective: 1.1 Recognize the importance of financial markets in the economy.

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39) A bond is ________.A) not as good as investment as stocksB) pays interest sporadicallyC) never pays interestD) makes payments periodically for a specified period of timeAnswer: DDiff: 1Type:MCSkill: RecallObjective: 1.1 Recognize the importance of financial markets in the economy.10) The fluctuation of interest rates ________.A) never occurs because the central bank is involved in setting the rateB) is due to changes in stock pricesC) cannot occur because there is only one interest rateD) impacts all CanadiansAnswer: DDiff: 1Type:MCSkill: RecallObjective: 1.1 Recognize the importance of financial markets in the economy.11) The cost of borrowing is commonly referred to as the ________.A) inflation rateB) exchange rateC) interest rateD) aggregate price levelAnswer: CDiff: 1Type:MCSkill: RecallObjective: 1.1 Recognize the importance of financial markets in the economy.12) Compared to interest rates on long-term bonds, interest rates on three-month Treasury billsfluctuate ________ and are ________ on average.A) more; lowerB) less; lowerC) more; higherD) less; higherAnswer: ADiff: 1Type:MCSkill: AppliedObjective: 1.1 Recognize the importance of financial markets in the economy.

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413) The interest rate on long-term corporate bonds is ________, on average, than other interestrates. The spread between it an other rates ________ over time.A) lower; remains constantB) lower; fluctuatesC) higher; remains constantD) higher; fluctuatesAnswer: DDiff: 1Type:MCSkill: AppliedObjective: 1.1 Recognize the importance of financial markets in the economy.14) Everything else held constant, a rise in interest rates will cause spending on housing to________.A) riseB) remain unchangedC) either rise, fall, or remain the sameD) fallAnswer: DDiff: 2Type:MCSkill: AppliedObjective: 1.1 Recognize the importance of financial markets in the economy.15) High interest rates might ________ purchasing a house or car but at the same time highinterest rates might ________ saving.A) discourage; encourageB) discourage; discourageC) encourage; encourageD) encourage; discourageAnswer: ADiff: 2Type:MCSkill: AppliedObjective: 1.1 Recognize the importance of financial markets in the economy.16) An increase in interest rates might ________ saving because more can be earned in interestincome.A) encourageB) discourageC) disallowD) invalidateAnswer: ADiff: 2Type:MCSkill: RecallObjective: 1.1 Recognize the importance of financial markets in the economy.

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517) Everything else held constant, an increase in interest rates on student loans ________.A) may increase the cost of educationB) may reduce the cost of educationC) has no effect on educational costsD) increases costs for students with no loansAnswer: ADiff: 2Type:MCSkill: AppliedObjective: 1.1 Recognize the importance of financial markets in the economy.18) A common stock ________.A) cannot be purchased by individualsB) is also known as a debt securityC) is a share of ownership in a corporationD) is a claim on assetsAnswer: CDiff: 1Type:MCSkill: RecallObjective: 1.1 Recognize the importance of financial markets in the economy.19) A share of common stock is a claim on a corporation's ________.A) debtB) liabilitiesC) expensesD) earnings and assetsAnswer: DDiff: 1Type:MCSkill: RecallObjective: 1.1 Recognize the importance of financial markets in the economy.20) Lower interest rates might cause a corporation to ________ building a new plant that wouldprovide more jobs.A) completeB) postponeC) considerD) startAnswer: CDiff: 1Type:MCSkill: AppliedObjective: 1.1 Recognize the importance of financial markets in the economy.

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621) Bonds of different maturities ________.A) show no common featuresB) have interest rates that tend to move togetherC) have interest rates that can differ substantiallyD) B and C onlyAnswer: DDiff: 1Type:MCSkill: RecallObjective: 1.1 Recognize the importance of financial markets in the economy.22) The stock market is important because it is ________.A) where interest rates are determinedB) the most widely followed financial market in the CanadaC) where foreign exchange rates are determinedD) the market where most borrowers get their fundsAnswer: BDiff: 1Type:MCSkill: RecallObjective: 1.1 Recognize the importance of financial markets in the economy.23) Stock prices, as measured by the S&P/TSX Composite Index, ________.A) have not changed much over timeB) have risen smoothly over timeC) have been extremely volatile over timeD) have declined substantially since they peaked in the mid 1980sAnswer: CDiff: 1Type:MCSkill: AppliedObjective: 1.1 Recognize the importance of financial markets in the economy.24) Stock prices are ________.A) relatively stable trending upward at a steady paceB) relatively stable trending downward at a moderate rateC) extremely volatileD) unstable trending downward at a moderate rateAnswer: CDiff: 2Type:MCSkill: RecallObjective: 1.1 Recognize the importance of financial markets in the economy.

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725) Changes in stock prices ________.A) do not affect people's wealth and their willingness to spendB) affect firms' decisions to sell stock to finance investment spendingC) are predictableD) are unimportant to decision makersAnswer: BDiff: 2Type:MCSkill: RecallObjective: 1.1 Recognize the importance of financial markets in the economy.26) A ________ is an example of a security, which is a claim on future income or ________.A) bond; interest rateB) bond; debtC) stock; assetsD) stock; debtAnswer: CDiff: 1Type:MCSkill: RecallObjective: 1.1 Recognize the importance of financial markets in the economy.27) On ________, October 19, 1987, the market experienced its worst one-day drop in its entirehistory with the S&P/TSX Composite falling by 11 percent.A) "Terrible Tuesday"B) "Woeful Wednesday"C) "Freaky Friday"D) "Black Monday"Answer: DDiff: 1Type:MCSkill: RecallObjective: 1.1 Recognize the importance of financial markets in the economy.28) Fluctuations in stock prices ________.A) have become less smaller since the year 2000B) since the year 2000 are about the same as they were before the year 2000C) have become more volatile since the year 2000D) have been almost eliminated since the year 2000Answer: CDiff: 1Type:MCSkill: RecallObjective: 1.1 Recognize the importance of financial markets in the economy.

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829) The S&P/TSX Composite reached a peak of over 14000 in 2008 and then fell by ________.A) 10%B) 30%C) 50%D) 70%Answer: CDiff: 1Type:MCSkill: RecallObjective: 1.1 Recognize the importance of financial markets in the economy.30) Why is it important to understand the bond market?Answer: The bond market supports economic activity by enabling the government andcorporations to borrow to undertake their projects and it is the market where interest rates aredetermined.Diff: 2Type:ESSkill: RecallObjective: 1.1 Recognize the importance of financial markets in the economy.31) 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'searnings/assets. Stocks are part of wealth, and changes in their value affect people's willingnessto spend. Changes in stock prices affect a firm's ability to raise funds, and thus their investment.Diff: 2Type:ESSkill: RecallObjective: 1.1 Recognize the importance of financial markets in the economy.

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91.2Why Study Financial Institutions and Banking?1) Channelling funds from individuals with savings to those desiring funds when the saver doesnot purchase the borrower's security is known as ________.A) barterB) redistributionC) financial intermediationD) taxationAnswer: CDiff: 2Type:MCSkill: AppliedObjective: 1.2 Describe how financial intermediation and financial innovation affect bankingand the economy2) A financial crisis is ________.A) not possible in the modern financial environmentB) a major disruption in the financial marketsC) a feature of developing economies onlyD) typically followed by an economic boomAnswer: BDiff: 1Type:MCSkill: RecallObjective: 1.2 Describe how financial intermediation and financial innovation affect bankingand the economy3) Banks are important to the study of money and the economy because they ________.A) channel funds from investors to saversB) have been a source of rapid financial innovationC) are the only important financial institution in the US economyD) create inflationAnswer: BDiff: 1Type:MCSkill: RecallObjective: 1.2 Describe how financial intermediation and financial innovation affect bankingand the economy4) Financial crises are characterized by ________.A) surging employmentB) hyperinflationC) decline in asset pricesD) high profits in the financial sectorAnswer: CDiff: 1Type:MCSkill: RecallObjective: 1.2 Describe how financial intermediation and financial innovation affect bankingand the economy

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105) Chartered banks, trust and mortgage loan companies, and credit unions andcaissespopulaires________.A) no longer provide financial intermediationB) since deregulation now provide services only to small depositorsC) accept deposits and make loansD) create fluctuations in the stock marketAnswer: CDiff: 2Type:MCSkill: RecallObjective: 1.2 Describe how financial intermediation and financial innovation affect bankingand the economy6) Banks ________.A) are the smallest of the financial intermediariesB) are the largest financial intermediariesC) are barred from providing financial intermediation servicesD) can only provide services to corporationsAnswer: BDiff: 1Type:MCSkill: RecallObjective: 1.2 Describe how financial intermediation and financial innovation affect bankingand the economy7) Financial institutions that accept deposits and make loans include ________.A) exchangesB) banksC) over-the-counter marketsD) finance companiesAnswer: BDiff: 1Type:MCSkill: RecallObjective: 1.2 Describe how financial intermediation and financial innovation affect bankingand the economy8) Which of the following are the largest financial intermediaries in the Canadian economy?A) Insurance companiesB) Finance companiesC) BanksD) Mutual fundsAnswer: CDiff: 1Type:MCSkill: RecallObjective: 1.2 Describe how financial intermediation and financial innovation affect bankingand the economy

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119) The term "bank" generally includes all of the following institutions except ________.A) chartered banksB) credit unionsC) trust and mortgage loan companiesD) finance companiesAnswer: DDiff: 1Type:MCSkill: RecallObjective: 1.2 Describe how financial intermediation and financial innovation affect bankingand the economy10) The delivery of financial services electronically is called ________.A) e-businessB) e-commerceC) e-financeD) e-possibleAnswer: CDiff: 1Type:MCSkill: RecallObjective: 1.2 Describe how financial intermediation and financial innovation affect bankingand the economy11) Financial innovation can lead to ________ and ________.A) phishing; financial gainB) higher interest rates; higher inflationC) higher profits; financial disastersD) lower interest rates; lower inflationAnswer: CDiff: 1Type:MCSkill: RecallObjective: 1.2 Describe how financial intermediation and financial innovation affect bankingand the economy12) What crucial role do financial intermediaries perform in an economy?Answer: Financial intermediaries borrow funds from people who have saved and make loansto other individuals and businesses and thus improve the efficiency of the economy.Diff: 1Type:ESSkill: RecallObjective: 1.2 Describe how financial intermediation and financial innovation affect bankingand the economy

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1213) Why is the study of financial innovation important?Answer: Financial innovation shows how creative thinking on the part of financial institutionscan lead to higher profits.Diff: 2Type:ESSkill: RecallObjective: 1.2 Describe how financial intermediation and financial innovation affect bankingand the economy1.3Why Study Money and Monetary Policy?1) Money is defined as ________.A) bills of exchangeB) anything that is generally accepted in payment for goods and services or in the repayment ofdebtC) a repository of spending powerD) the unrecognized liability of governmentsAnswer: BDiff: 1Type:MCSkill: RecallObjective: 1.3 Identify the basic links between monetary policy, the business cycle, andeconomic variables2) The upward and downward movement of aggregate output produced in the economy isreferred to as the ________.A) roller coasterB) see sawC) business cycleD) shock waveAnswer: CDiff: 1Type:MCSkill: RecallObjective: 1.3 Identify the basic links between monetary policy, the business cycle, andeconomic variables3) Sustained downward movements in the business cycle are referred to as ________.A) inflationB) recessionsC) economic recoveriesD) expansionsAnswer: BDiff: 1Type:MCSkill: RecallObjective: 1.3 Identify the basic links between monetary policy, the business cycle, andeconomic variables

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134) During a recession, output declines resulting in ________.A) lower unemployment in the economyB) higher unemployment in the economyC) no impact on the unemployment in the economyD) higher wages for the workersAnswer: BDiff: 1Type:MCSkill: RecallObjective: 1.3 Identify the basic links between monetary policy, the business cycle, andeconomic variables5) Prior to all recessions, there has been a drop in ________.A) inflationB) the money stockC) the rate of money growthD) interest ratesAnswer: CDiff: 1Type:MCSkill: RecallObjective: 1.3 Identify the basic links between monetary policy, the business cycle, andeconomic variables6) Evidence from business cycle fluctuations in Canada indicates that ________.A) a negative relationship between money growth and general economic activity existsB) recessions have been preceded by declines in share prices on the stock exchangeC) recessions have been preceded by dollar depreciationD) recessions have been preceded by a decline in the growth rate of moneyAnswer: DDiff: 2Type:MCSkill: RecallObjective: 1.3 Identify the basic links between monetary policy, the business cycle, andeconomic variables7) ________ theory relates changes in the quantity of money to changes in aggregate economicactivity and the price level.A) MonetaryB) FiscalC) FinancialD) SystemicAnswer: ADiff: 1Type:MCSkill: RecallObjective: 1.3 Identify the basic links between monetary policy, the business cycle, andeconomic variables

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