Economics of Money, Banking, and Financial Markets, Alternate Edition (Mishkin) Chapter 1 1.1 Why Study Financial Markets?
1) Financial markets promote economic efficiency by
A) channeling funds from investors to savers. B) creating inflation. C) channeling funds from savers to investors. D) reducing investment. Answer: C
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2) Financial markets promote greater economic efficiency by channeling funds from ________ to ________.
A) investors; savers B) borrowers; savers C) savers; borrowers D) savers; lenders Answer: C
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3) Well-functioning financial markets promote
A) inflation. B) deflation. C) unemployment. D) growth. Answer: D
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4) 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
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5) ________ markets transfer funds from people who have an excess of available funds to people who have a shortage. A) Commodity B) Fund-available C) Financial D) Derivative exchange Answer: C
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Economics of Money, Banking, and Financial Markets, 8e (Mishkin) Chapter 1
6) Poorly performing financial markets can be the cause of
A) wealth. B) poverty. C) financial stability. D) financial expansion. Answer: B
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7) The bond markets are important because they are
A) easily the most widely followed financial markets in the United States. B) the markets where foreign exchange rates are determined. C) the markets where interest rates are determined. D) the markets where all borrowers get their funds. Answer: C
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8) The price paid for the rental of borrowed funds (usually expressed as a percentage of the rental of $100 per year) is commonly referred to as the A) inflation rate. B) exchange rate. C) interest rate. D) aggregate price level. Answer: C
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9) Compared to interest rates on long-term U.S. government 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
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10) The interest rate on Baa (medium quality) corporate bonds is ________, on average, than other interest rates,
and the spread between it and other rates became ________ in the 1970s. A) lower; smaller B) lower; larger C) higher; smaller D) higher; larger Answer: D
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Economics of Money, Banking, and Financial Markets, 8e (Mishkin) Chapter 1
11) Everything else held constant, a decline in interest rates will cause spending on housing to
A) fall. B) remain unchanged. C) either rise, fall, or remain the same. D) rise. Answer: D
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12) 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
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13) Everything else held constant, an increase in interest rates on student loans
A) increases the cost of a college education. B) reduces the cost of a college education. C) has no effect on educational costs. D) increases costs for students with no loans. Answer: A
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14) High interest rates might cause a corporation to ________ building a new plant that would provide more jobs.
A) complete B) consider C) postpone D) contemplate Answer: C
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15) The stock market is important because it is
A) where interest rates are determined. B) the most widely followed financial market in the United States. C) where foreign exchange rates are determined. D) the market where most borrowers get their funds. Answer: B
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16) Stock prices since the 1950s have been
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
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Economics of Money, Banking, and Financial Markets, 8e (Mishkin) Chapter 1
17) A rising stock market index due to higher share prices
A) increases people's wealth, but is unlikely to increase their willingness to spend. B) increases people's wealth and as a result may increase their willingness to spend. C) decreases the amount of funds that business firms can raise by selling newly-issued stock. D) decreases people's wealth, but is unlikely to increase their willingness to spend. Answer: B
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18) When stock prices fall
A) an individual's wealth is not affected nor is their willingness to spend. B) a business firm will be more likely to sell stock to finance investment spending. C) an individual's wealth may decrease but their willingness to spend is not affected. D) an individual's wealth may decrease and their willingness to spend may decrease. Answer: D
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19) 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) occur in regular patterns. D) are unimportant to decision makers. Answer: B
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20) An increase in stock prices ________ the size of people's wealth and may ________ their willingness to spend,
everything else held constant. A) increases; increase B) increases; decrease C) decreases; increase D) decreases; decrease Answer: A
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21) Fear of a major recession causes stock prices to fall, everything else held constant, which in turn causes
consumer spending to A) increase. B) remain unchanged. C) decrease. D) cannot be determined. Answer: C
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22) A common stock is a claim on a corporation's
A) debt. B) liabilities. C) expenses. D) earnings and assets. Answer: D
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