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

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    TEST BANK FOR The Economics of Money, Banking, and Financial Markets Sixth Canadian Edition Frederic S. Mishkin Columbia University Apostolos Serletis University of Calgary Prepared by Lance Shandler Kwantlen Polytechnic University

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    1 Economics of Money, Banking, and Financial Markets 6e (Mishkin) Chapter 1 Why Study Money, Banking, and Financial Markets? 1.1 Why Study Financial Markets? 1) Financial markets promote economic efficiency by ________. A) channelling funds from investors to savers B) creating inflation C) channelling funds to those who have a productive use for them D) reducing investment Answer: C Diff: 1 Type: MC Skill: Recall Objective: 1.1 Recognize the importance of financial markets in the economy. 2) Well - functioning financial markets promote ________. A) inflation B) deflation C) unemployment D) economic growth Answer: D Diff: 1 Type: MC Skill: Recall Objective: 1.1 Recognize the importance of financial markets in the economy. 3) 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 Diff: 1 Type: MC Skill: Recall Objective: 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 for them to those who do are called ________. A) commodity markets B) fund - available markets C) derivative exchange markets D) financial markets Answer: D Diff: 1 Type: MC Skill: Recall Objective: 1.1 Recognize the importance of financial markets in the economy.

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    2 5) ________ markets transfer funds from people who do not have a productive use for them to people who do. A) Commodity B) Fund - available C) Financial D) Derivative exchange Answer: C Diff: 1 Type: MC Skill: Recall Objective: 1.1 Recognize the importance of financial markets in the economy. 6) Poorly performing financial markets can be the cause of ________. A) wealth B) poverty C) financial stability D) financial expansion Answer: B Diff: 1 Type: MC Skill: Recall Objective: 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 Canada B) the markets where foreign exchange rates are determined C) where corporations and governments borrow to finance their activities D) the markets where all borrowers get their funds Answer: C Diff: 1 Type: MC Skill: Recall Objective: 1.1 Recognize the importance of financial markets in the economy. 8) A security is also known as ________. A) a financial instrument B) a contingent claim C) the interest rate D) a liability Answer: A Diff: 1 Type: MC Skill: Applied Objective: 1.1 Recognize the importance of financial markets in the economy.

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    3 9) A bond is ________. A) not as good as investment as stocks B) pays interest sporadically C) never pays interest D) makes payments periodically for a specified period of time Answer: D Diff: 1 Type: MC Skill: Recall Objective: 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 rate B) is due to changes in stock prices C) cannot occur because there is only one interest rate D) impacts all Canadians Answer: D Diff: 1 Type: MC Skill: Recall Objective: 1.1 Recognize the importance of financial markets in the economy. 11) The cost of borrowing is commonly referred to as the ________. A) inflation rate B) exchange rate C) interest rate D) aggregate price level Answer: C Diff: 1 Type: MC Skill: Recall Objective: 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 bills fluctuate ________ and are ________ on average. A) more; lower B) less; lower C) more; higher D) less; higher Answer: A Diff: 1 Type: MC Skill: Applied Objective: 1.1 Recognize the importance of financial markets in the economy.

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    4 13) The interest rate on long - term corporate bonds is ________, on average, than other interest rates. The spread between it an other rates ________ over time. A) lower; remains constant B) lower; fluctuates C) higher; remains constant D) higher; fluctuates Answer: D Diff: 1 Type: MC Skill: Applied Objective: 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) rise B) remain unchanged C) either rise, fall, or remain the same D) fall Answer: D Diff: 2 Type: MC Skill: Applied Objective: 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 high interest rates might ________ saving. A) discourage; encourage B) discourage; discourage C) encourage; encourage D) encourage; discourage Answer: A Diff: 2 Type: MC Skill: Applied Objective: 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 interest income. A) encourage B) discourage C) disallow D) invalidate Answer: A Diff: 2 Type: MC Skill: Recall Objective: 1.1 Recognize the importance of financial markets in the economy.

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    5 17) Everything else held constant, an increase in interest rates on student loans ________. A) may increase the cost of education B) may reduce the cost of education C) has no effect on educational costs D) increases costs for students with no loans Answer: A Diff: 2 Type: MC Skill: Applied Objective: 1.1 Recognize the importance of financial markets in the economy. 18) A common stock ________. A) cannot be purchased by individuals B) is also known as a debt security C) is a share of ownership in a corporation D) is a claim on assets Answer: C Diff: 1 Type: MC Skill: Recall Objective: 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) debt B) liabilities C) expenses D) earnings and assets Answer: D Diff: 1 Type: MC Skill: Recall Objective: 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 would provide more jobs. A) complete B) postpone C) consider D) start Answer: C Diff: 1 Type: MC Skill: Applied Objective: 1.1 Recognize the importance of financial markets in the economy.

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    6 21) Bonds of different maturities ________. A) show no common features B) have interest rates that tend to move together C) have interest rates that can differ substantially D) B and C only Answer: D Diff: 1 Type: MC Skill: Recall Objective: 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 determined B) the most widely followed financial market in the Canada C) where foreign exchange rates are determined D) the market where most borrowers get their funds Answer: B Diff: 1 Type: MC Skill: Recall Objective: 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 time B) have risen smoothly over time C) have been extremely volatile over time D) have declined substantially since they peaked in the mid 1980s Answer: C Diff: 1 Type: MC Skill: Applied Objective: 1.1 Recognize the importance of financial markets in the economy. 24) Stock prices are ________. A) relatively stable trending upward at a steady pace B) relatively stable trending downward at a moderate rate C) extremely volatile D) unstable trending downward at a moderate rate Answer: C Diff: 2 Type: MC Skill: Recall Objective: 1.1 Recognize the importance of financial markets in the economy.

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    7 25) Changes in stock prices ________. A) do not affect people's wealth and their willingness to spend B) affect firms' decisions to sell stock to finance investment spending C) are predictable D) are unimportant to decision makers Answer: B Diff: 2 Type: MC Skill: Recall Objective: 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 rate B) bond; debt C) stock; assets D) stock; debt Answer: C Diff: 1 Type: MC Skill: Recall Objective: 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 entire history with the S&P/TSX Composite falling by 11 percent. A) "Terrible Tuesday" B) "Woeful Wednesday" C) "Freaky Friday" D) "Black Monday" Answer: D Diff: 1 Type: MC Skill: Recall Objective: 1.1 Recognize the importance of financial markets in the economy. 28) Fluctuations in stock prices ________. A) have become less smaller since the year 2000 B) since the year 2000 are about the same as they were before the year 2000 C) have become more volatile since the year 2000 D) have been almost eliminated since the year 2000 Answer: C Diff: 1 Type: MC Skill: Recall Objective: 1.1 Recognize the importance of financial markets in the economy.

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    8 29) 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: C Diff: 1 Type: MC Skill: Recall Objective: 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 and corporations to borrow to undertake their projects and it is the market where interest rates are determined. Diff: 2 Type: ES Skill: Recall Objective: 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's earnings/assets. Stocks are part of wealth, and changes in their value affect people's willingness to spend. Changes in stock prices affect a firm's ability to raise funds, and thus their investment. Diff: 2 Type: ES Skill: Recall Objective: 1.1 Recognize the importance of financial markets in the economy.

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    9 1.2 Why Study Financial Institutions and Banking? 1) Channelling funds from individuals with savings to those desiring funds when the saver does not purchase the borrower's security is known as ________. A) barter B) redistribution C) financial intermediation D) taxation Answer: C Diff: 2 Type: MC Skill: Applied Objective: 1.2 Describe how financial intermediation and financial innovation affect banking and the economy 2) A financial crisis is ________. A) not possible in the modern financial environment B) a major disruption in the financial markets C) a feature of developing economies only D) typically followed by an economic boom Answer: B Diff: 1 Type: MC Skill: Recall Objective: 1.2 Describe how financial intermediation and financial innovation affect banking and the economy 3) Banks are important to the study of money and the economy because they ________. A) channel funds from investors to savers B) have been a source of rapid financial innovation C) are the only important financial institution in the US economy D) create inflation Answer: B Diff: 1 Type: MC Skill: Recall Objective: 1.2 Describe how financial intermediation and financial innovation affect banking and the economy 4) Financial crises are characterized by ________. A) surging employment B) hyperinflation C) decline in asset prices D) high profits in the financial sector Answer: C Diff: 1 Type: MC Skill: Recall Objective: 1.2 Describe how financial intermediation and financial innovation affect banking and the economy

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    10 5) Chartered banks, trust and mortgage loan companies, and credit unions and caisses populaires ________. A) no longer provide financial intermediation B) since deregulation now provide services only to small depositors C) accept deposits and make loans D) create fluctuations in the stock market Answer: C Diff: 2 Type: MC Skill: Recall Objective: 1.2 Describe how financial intermediation and financial innovation affect banking and the economy 6) Banks ________. A) are the smallest of the financial intermediaries B) are the largest financial intermediaries C) are barred from providing financial intermediation services D) can only provide services to corporations Answer: B Diff: 1 Type: MC Skill: Recall Objective: 1.2 Describe how financial intermediation and financial innovation affect banking and the economy 7) Financial institutions that accept deposits and make loans include ________. A) exchanges B) banks C) over - the - counter markets D) finance companies Answer: B Diff: 1 Type: MC Skill: Recall Objective: 1.2 Describe how financial intermediation and financial innovation affect banking and the economy 8) Which of the following are the largest financial intermediaries in the Canadian economy? A) Insurance companies B) Finance companies C) Banks D) Mutual funds Answer: C Diff: 1 Type: MC Skill: Recall Objective: 1.2 Describe how financial intermediation and financial innovation affect banking and the economy

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    11 9) The term "bank" generally includes all of the following institutions except ________. A) chartered banks B) credit unions C) trust and mortgage loan companies D) finance companies Answer: D Diff: 1 Type: MC Skill: Recall Objective: 1.2 Describe how financial intermediation and financial innovation affect banking and the economy 10) The delivery of financial services electronically is called ________. A) e - business B) e - commerce C) e - finance D) e - possible Answer: C Diff: 1 Type: MC Skill: Recall Objective: 1.2 Describe how financial intermediation and financial innovation affect banking and the economy 11) Financial innovation can lead to ________ and ________. A) phishing; financial gain B) higher interest rates; higher inflation C) higher profits; financial disasters D) lower interest rates; lower inflation Answer: C Diff: 1 Type: MC Skill: Recall Objective: 1.2 Describe how financial intermediation and financial innovation affect banking and the economy 12) What crucial role do financial intermediaries perform in an economy? Answer: Financial intermediaries borrow funds from people who have saved and make loans to other individuals and businesses and thus improve the efficiency of the economy. Diff: 1 Type: ES Skill: Recall Objective: 1.2 Describe how financial intermediation and financial innovation affect banking and the economy

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    12 13) Why is the study of financial innovation important? Answer: Financial innovation shows how creative thinking on the part of financial institutions can lead to higher profits. Diff: 2 Type: ES Skill: Recall Objective: 1.2 Describe how financial intermediation and financial innovation affect banking and the economy 1.3 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 repository of spending power D) the unrecognized liability of governments Answer: B Diff: 1 Type: MC Skill: Recall Objective: 1.3 Identify the basic links between monetary policy, the business cycle, and economic variables 2) The upward and downward movement of aggregate output produced in the economy is referred to as the ________. A) roller coaster B) see saw C) business cycle D) shock wave Answer: C Diff: 1 Type: MC Skill: Recall Objective: 1.3 Identify the basic links between monetary policy, the business cycle, and economic variables 3) Sustained downward movements in the business cycle are referred to as ________. A) inflation B) recessions C) economic recoveries D) expansions Answer: B Diff: 1 Type: MC Skill: Recall Objective: 1.3 Identify the basic links between monetary policy, the business cycle, and economic variables

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    13 4) During a recession, output declines resulting in ________. A) lower unemployment in the economy B) higher unemployment in the economy C) no impact on the unemployment in the economy D) higher wages for the workers Answer: B Diff: 1 Type: MC Skill: Recall Objective: 1.3 Identify the basic links between monetary policy, the business cycle, and economic variables 5) Prior to all recessions, there has been a drop in ________. A) inflation B) the money stock C) the rate of money growth D) interest rates Answer: C Diff: 1 Type: MC Skill: Recall Objective: 1.3 Identify the basic links between monetary policy, the business cycle, and economic variables 6) Evidence from business cycle fluctuations in Canada indicates that ________. A) a negative relationship between money growth and general economic activity exists B) recessions have been preceded by declines in share prices on the stock exchange C) recessions have been preceded by dollar depreciation D) recessions have been preceded by a decline in the growth rate of money Answer: D Diff: 2 Type: MC Skill: Recall Objective: 1.3 Identify the basic links between monetary policy, the business cycle, and economic variables 7) ________ theory relates changes in the quantity of money to changes in aggregate economic activity and the price level. A) Monetary B) Fiscal C) Financial D) Systemic Answer: A Diff: 1 Type: MC Skill: Recall Objective: 1.3 Identify the basic links between monetary policy, the business cycle, and economic variables

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