Mishkin - Test - Bank 2023 Update

102752298 Mishkin Test Bank 2023 Update
Chapter. 1
Why Study Money, Banking, and Financial Markets?
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
Ques Status: Previous Edition
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
3) Well-functioning financial markets promote

A) inflation.
B) deflation.
C) unemployment.
D) growth.
Answer: D
4) 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
Ques Status: New
5) 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
2 Mishkin · The Economics of Money, Banking, and Financial Markets, 9th Edition
6) 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
7) Poorly performing financial markets can be the cause of

A) wealth.
B) poverty.
C) financial stability.
D) financial expansion.
Answer: B
8) 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
9) 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
10) 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
Chapter 1 Why Study Money, Banking, and Financial Markets? 3
11) 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
12) 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
13) 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
Ques Status: New
14) 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
15) 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
16) 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
17) 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
18) 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
Ques Status: Revised
19) 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
20) 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
21) 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
22) 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
23) Low stock market prices might consumers willingness to spend and might
businesses willingness to undertake investment projects.
A) increase; increase
B) increase; decrease
C) decrease; decrease
D) decrease; increase
Answer: C
Ques Status: New
24) 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
25) A share of common stock is a claim on a corporation's

A) debt.
B) liabilities.
C) expenses.
D) earnings and assets.
Answer: D
26) On , October 19, 1987, the market experienced its worst one -day drop in its entire
history with the DIJA falling by more than 500 points.
A) "Terrible Tuesday"
B) "Woeful Wednesday"
C) "Freaky Friday"
D) "Black Monday"
Answer: D
27) The decline in stock prices from 2000 through 2002

A) increased individuals' willingness to spend.
B) had no effect on individual spending.
C) reduced individuals' willingness to spend.
D) increased individual wealth.
Answer: C
28) The Dow reached a peak of over 11,000 before the collapse of the bubble in 2000.
A) housing
B) manufacturing
C) high-tech
D) banking
Answer: C
29) 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.
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.
Ques Status: New
1.2 Why Study Financial Institutions and Banking?

1) Channeling funds from individuals with surplus funds 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
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
Ques Status: New
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 U.S. economy.
D) create inflation.
Answer: B
4) Financial intermediaries
A) provide a channel for linking those who want to save with those who want to invest.
B) produce nothing of value and are therefore a drain on society's resources.
C) can hurt the performance of the economy.
D) hold very little of the average American's wealth.
Answer: A
5) 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
6) Financial institutions search for has resulted in many financial innovations.

A) higher profits
B) regulations
C) respect
D) higher risk
Answer: A
Ques Status: New
7) Banks and other financial institutions engage in financial intermediation, which

A) can hurt the performance of the economy.
B) can benefit economic performance.
C) has no effect on economic performance.
D) involves borrowing from investors and lending to savers.
Answer: B
8) Financial institutions that accept deposits and make loans are called .
A) exchanges
B) banks
C) over-the-counter markets
D) finance companies
Answer: B
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
10) Which of the following is not a financial institution?

A) a life insurance company
B) a pension fund
C) a credit union
D) a business college
Answer: D
11) The delivery of financial services electronically is called .

A) e-business
B) e-commerce
C) e-finance
D) e-possible
Answer: C
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.
Ques Status: New
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 risk-free repository of spending power.
D) the unrecognized liability of governments.
Answer: B
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
3) Sustained downward movements in the business cycle are referred to as

A) inflation.
B) recessions.
C) economic recoveries.
D) expansions.
Answer: B
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
Ques Status: New
5) Prior to all recessions since 1900, there has been a drop in

A) inflation.
B) the money stock.
C) the growth rate of the money stock.
D) interest rates.
Answer: C
6) Evidence from business cycle fluctuations in the United States 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
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
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
9) It is true that inflation is a

A) continuous increase in the money supply.
B) continuous fall in prices.
C) decline in interest rates.
D) continually rising price level.
Answer: D
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: B
11) If ten years ago the prices of the items bought last month by the average consumer would have
been much higher, then one can likely conclude that
A) the aggregate price level has declined during this ten-year period.
B) the average inflation rate for this ten -year period has been positive.
C) the average rate of money growth for this ten-year period has been positive.
D) the aggregate price level has risen during this ten- year period.
Answer: A
12) From 1950-2008 the price level in the United States increased more than .
A) twofold
B) threefold
C) sixfold
D) ninefold
Answer: C
13) Complete Milton Friedman's famous statement, "Inflation is always and everywhere a
phenomenon."
A) recessionary
B) discretionary
C) repressionary
D) monetary
Answer: D
14) There is a 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
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 "inflation is always and everywhere a monetary
phenomenon."
C) countries with low monetary growth rates tend to experience higher rates of inflation, all
else being constant.
D) money growth is clearly unrelated to inflation.
Answer: A
16) Countries that experience very high rates of inflation may also have
A) balanced budgets.
B) rapidly growing money supplies.
C) falling money supplies.
D) constant money supplies.
Answer: B
17) Between 1950 and 1980 in the U.S., interest rates trended upward. During this same time period,
A) the rate of money growth declined.
B) the rate of money growth increased.
C) the government budget deficit (expressed as a percentage of GNP) trended downward.
D) the aggregate price level declined quite dramatically.
Answer: B
18) The management of money and interest rates is called policy and is conducted by a
nation's bank.
A) monetary; superior
B) fiscal; superior
C) fiscal; central
D) monetary; central
Answer: D
19) The organization responsible for the conduct of monetary policy in the United States is the
A) Comptroller of the Currency.
B) U.S. Treasury.
C) Federal Reserve System.
D) Bureau of Monetary Affairs.
Answer: C
20) policy involves decisions about government spending and taxation.

A) Monetary
B) Fiscal
C) Financial
D) Systemic
Answer: B
21) When tax revenues are greater than government expenditures, the government has a budget
.
A) crisis
B) deficit
C) surplus
D) revision
Answer: C
22) A budget occurs when government expenditures exceed tax revenues for a particular
time period.
A) deficit
B) surplus
C) surge
D) surfeit
Answer: A
Ques Status: New
23) Budgets deficits can be a concern because they might

A) ultimately lead to higher inflation.
B) lead to lower interest rates.
C) lead to a slower rate of money growth.
D) lead to higher bond prices.
Answer: A
24) Budget deficits are important because deficits

A) cause bank failures.
B) always cause interest rates to fall.
C) can result in higher rates of monetary growth.
D) always cause prices to fall.
Answer: C
25) What happens to economic growth and unemployment during a business cycle recession?
What is the relationship between the money growth rate and a business cycle recession?
Answer: During a recession, output declines and unemployment increases. Prior to every
recession in the U.S. the money growth rate has declined, however, not every decline is
followed by a recession.
1.4 Why Study International Finance?

1) American companies can borrow funds
A) only in U.S. financial markets.
B) only in foreign financial markets.
C) in both U.S. and foreign financial markets.
D) only from the U.S. government.
Answer: C
Ques Status: New
2) The price of one country's currency in terms of another country's currency is called the
A) exchange rate.
B) interest rate.
C) Dow Jones industrial average.
D) prime rate.
Answer: A
3) The market where one currency is converted into another currency is called the
market.
A) stock
B) bond
C) derivatives
D) foreign exchange
Answer: D
4) Everything else constant, a stronger dollar will mean that

A) vacationing in England becomes more expensive.
B) vacationing in England becomes less expensive.
C) French cheese becomes more expensive.
D) Japanese cars become more expensive.
Answer: B
5) Which of the following is most likely to result from a stronger dollar?

A) U.S. goods exported aboard will cost less in foreign countries, and so foreigners will buy
more of them.
B) U.S. goods exported aboard will cost more in foreign countries and so foreigners will buy
more of them.
C) U.S. goods exported abroad will cost more in foreign countries, and so foreigners will buy
fewer of them.
D) Americans will purchase fewer foreign goods.
Answer: C
6) Everything else held constant, a weaker dollar will likely hurt

A) textile exporters in South Carolina.
B) wheat farmers in Montana that sell domestically.
C) automobile manufacturers in Michigan that use domestically produced inputs.
D) furniture importers in California.
Answer: D
7) Everything else held constant, a stronger dollar benefits and hurts .

A) American businesses; American consumers
B) American businesses; foreign businesses
C) American consumers; American businesses
D) foreign businesses; American consumers
Answer: C
8) From 1980 to early 1985 the dollar in value, thereby benefiting American .
A) appreciated; consumers
B) appreciated, businesses
C) depreciated; consumers
D) depreciated, businesses
Answer: A
9) From 1980 to 1985 the dollar appreciated relative to the British pound. Holding everything else
constant, one would expect that, when compared to 1980,
A) fewer Britons traveled to the United States in 1985.
B) Britons imported more wine from California in 1985.
C) Americans exported more wheat to England in 1985.
D) more Britons traveled to the United States in 1985.
Answer: A
10) When in 1985 a British pound cost approximately $1.30, a Shetland sweater that cost 100 British
pounds would have cost $130. With a weaker dollar, the same Shetland sweater would have
cost
A) less than $130.
B) more than $130.
C) $130, since the exchange rate does not affect the prices that American consumers pay for
foreign goods.
D) $130, since the demand for Shetland sweaters will decrease to prevent an increase in price
due to the stronger dollar.
Answer: B
11) Everything else held constant, a decrease in the value of the dollar relative to all foreign
currencies means that the price of foreign goods purchased by Americans
A) increases
B) decreases.
C) remains unchanged.
D) either increases, decreases, or remains unchanged.
Answer: A
12) American farmers who sell beef to Europe benefit most from
A) a decrease in the dollar price of euros.
B) an increase in the dollar price of euros.
C) a constant dollar price for euros.
D) a European ban on imports of American beef.
Answer: B
13) If the price of a euro (the European currency) increases from $1.00 to $1.10, then, everything else
held constant,
A) a European vacation becomes less expensive.
B) a European vacation becomes more expensive.
C) the cost of a European vacation is not affected.
D) foreign travel becomes impossible.
Answer: B
14) Everything else held constant, Americans who love French wine benefit most from
A) a decrease in the dollar price of euros.
B) an increase in the dollar price of euros.
C) a constant dollar price for euros.
D) a ban on imports from Europe.
Answer: A
15) From 1980- 1985, the dollar strengthened in value against other currencies. Who was helped
and who was hurt by this strong dollar?
Answer: American consumers benefitted because imports were cheaper and consumers could
purchase more. American businesses and workers in those businesses were hurt as
domestic and foreign sales of American products fell.
Ques Status: New
1.5 Appendix: Defining Aggregate Output, Income, the Price Level, and the Inflation
Rate
1) The most comprehensive measure of aggregate output is
A) gross domestic product.
B) net national product.
C) the stock value of the industrial 500.
D) national income.
Answer: A
2) 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
3) Which of the following items are not counted in U.S. GDP?

A) your purchase of a new Ford Mustang
B) your purchase of new tires for your old car
C) GM's purchase of tires for new cars
D) a foreign consumer's purchase of a new Ford Mustang
Answer: C
Ques Status: New
4) If an economy has aggregate output of $20 trillion, then aggregate income is

A) $10 trillion.
B) $20 trillion.
C) $30 trillion.
D) $40 trillion.
Answer: B
5) When the total value of final goods and services is calculated using current prices, the resulting
measure is referred to as
A) real GDP.
B) the GDP deflator.
C) nominal GDP.
D) the index of leading indicators.
Answer: C
6) Nominal GDP is output measured in prices while real GDP is output measured in
prices.
A) current; current
B) current; fixed
C) fixed; fixed
D) fixed; current
Answer: B
Ques Status: New
7) GDP measured with constant prices is referred to as

A) real GDP.
B) nominal GDP.
C) the GDP deflator.
D) industrial production.
Answer: A
8) If your nominal income in 2002 was $50,000, and prices doubled between 2002 and 2008, to have
the same real income, your nominal income in 2008 must be
A) $50,000.
B) $75,000.
C) $90,000.
D) $100,000.
Answer: D
9) If your nominal income in 1998 is $50,000, and prices increase by 50% between 1998 and 2008,
then to have the same real income, your nominal income in 2008 must be
A) $50,000.
B) $75,000.
C) $100,000.
D) $150,000.
Answer: B
10) To convert a nominal GDP to a real GDP, you would use

A) the PCE deflator.
B) the CPI measure.
C) the GDP deflator.
D) the PPI measure.
Answer: C
Ques Status: New
11) If nominal GDP in 2001 is $9 trillion, and 2001 real GDP in 1996 prices is $6 trillion, the GDP
deflator price index is
A) 7.
B) 100.
C) 150.
D) 200.
Answer: C
12) When prices are measured in terms of fixed (base-year) prices they are called prices.
A) nominal
B) real
C) inflated
D) aggregate
Answer: B
13) The measure of the aggregate price level that is most frequently reported in the media is the
.
A) GDP deflator
B) producer price index
C) consumer price index
D) household price index
Answer: C
14) To calculate the growth rate of a variable, you will

A) calculate the percentage change from one time period to the next.
B) calculate the difference between the two variables.
C) add the ending value to the beginning value.
D) divide the increase by the number of time periods.
Answer: A
Ques Status: New
15) If real GDP grows from $10 trillion in 2002 to $10.5 trillion in 2003, the growth rate for real GDP
is
A) 5%.
B) 10%.
C) 50%.
D) 0.5%.
Answer: A
16) If real GDP in 2002 is $10 trillion, and in 2003 real GDP is $9.5 trillion, then real GDP growth
from 2002 to 2003 is
A) 0.5%.
B) 5%.
C) 0%.
D) - 5%.
Answer: D
17) If the aggregate price level at time t is denoted by Pt, the inflation rate from time t - 1 to t is
defined as
A) t = (Pt - Pt - 1)/Pt - 1.
B) t = (Pt + 1 - Pt - 1) /Pt - 1.
C) t = (Pt + 1 - Pt) /Pt.
D) t = (Pt - Pt - 1) /Pt.
Answer: A
18) If the price level increases from 200 in year 1 to 220 in year 2, the rate of inflation from year 1 to
year 2 is
A) 20%.
B) 10%.
C) 11%.
D) 120%.
Answer: B
19) If the CPI is 120 in 1996 and 180 in 2002, then between 1996 and 2002, prices have increased by
A) 180%.
B) 80%.
C) 60%.
D) 50%.
Answer: D
20) If the CPI in 2004 is 200, and in 2005 the CPI is 180, the rate of inflation from 2004 to 2005 is
A) 20%.
B) 10%.
C) 0%.
D) - 10%.
Answer: D
Chapter 2
An Overview of the Financial System
2.1 Function of Financial Markets
1) Every financial market has the following characteristic:

A) It determines the level of interest rates.
B) It allows common stock to be traded.
C) It allows loans to be made.
D) It channels funds from lenders- savers to borrowers-spenders.
Answer: D
2) Financial markets have the basic function of

A) getting people with funds to lend together with people who want to borrow funds.
B) assuring that the swings in the business cycle are less pronounced.
C) assuring that governments need never resort to printing money.
D) providing a risk-free repository of spending power.
Answer: A
3) Financial markets improve economic welfare because

A) they channel funds from investors to savers.
B) they allow consumers to time their purchase better.
C) they weed out inefficient firms.
D) eliminate the need for indirect finance.
Answer: B
4) Well-functioning financial markets

A) cause inflation.
B) eliminate the need for indirect finance.
C) cause financial crises.
D) produce an efficient allocation of capital.
Answer: D
5) A breakdown of financial markets can result in

A) financial stability.
B) rapid economic growth.
C) political instability.
D) stable prices.
Answer: C
Chapter 2 An Overview of the Financial System 21
6) The principal lender- savers are

A) governments.
B) businesses.
C) households.
D) foreigners.
Answer: C
Ques Status: New
7) Which of the following can be described as direct finance?

A) You take out a mortgage from your local bank.
B) You borrow $2500 from a friend.
C) You buy shares of common stock in the secondary market.
D) You buy shares in a mutual fund.
Answer: B
8) Assume that you borrow $2000 at 10% annual interest to finance a new business project. For this
loan to be profitable, the minimum amount this project must generate in annual earnings is
A) $400.
B) $201.
C) $200.
D) $199.
Answer: B
9) You can borrow $5000 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
10) Which of the following can be described as involving direct finance?

A) A corporation issues new shares of stock.
B) People buy shares in a mutual fund.
C) A pension fund manager buys a short-term corporate security in the secondary market.
D) An insurance company buys shares of common stock in the over- the-counter markets.
Answer: A
11) Which of the following can be described as involving direct finance?

A) A corporation takes out loans from a bank.
B) People buy shares in a mutual fund.
C) A corporation buys a short-term corporate security in a secondary market.
D) People buy shares of common stock in the primary markets.
Answer: D
12) Which of the following can be described as involving indirect finance?

A) You make a loan to your neighbor.
B) A corporation buys a share of common stock issued by another corporation in the primary
market.
C) You buy a U.S. Treasury bill from the U.S. Treasury.
D) You make a deposit at a bank.
Answer: D
13) Which of the following can be described as involving indirect finance?

A) You make a loan to your neighbor.
B) You buy shares in a mutual fund.
C) You buy a U.S. Treasury bill from the U.S. Treasury.
D) A corporation buys a short- term security issued by another corporation in the primary
market.
Answer: B
14) Securities are for the person who buys them, but are for the individual or
firm that issues them.
A) assets; liabilities
B) liabilities; assets
C) negotiable; nonnegotiable
D) nonnegotiable; negotiable
Answer: A
15) With finance, borrowers obtain funds from lenders by selling them securities in the
financial markets.
A) active
B) determined
C) indirect
D) direct
Answer: D
16) With direct finance funds are channeled through the financial market from the directly
to the .
A) savers, spenders
B) spenders, investors
C) borrowers, savers
D) investors, savers
Answer: A
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)
are the major source of funds for corporations in the U.S.
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 issuer's income.
D) They both enable a corporation to raise funds.
Answer: B
2) Which of the following statements about the characteristics of debt and equities is true?
A) They can both be long- term financial instruments.
B) Bond holders are residual claimants.
C) The income from bonds is typically more variable than that from equities.
D) Bonds pay dividends.
Answer: A
3) Which of the following statements about financial markets and securities is true?
A) A bond is a long-term security that promises to make periodic payments called dividends
to the firm's residual claimants.
B) A debt instrument is intermediate term if its maturity is less than one year.
C) A debt instrument is intermediate term if its maturity is ten years or longer.
D) The maturity of a debt instrument is the number of years (term) to that instrument's
expiration date.
Answer: D
4) Which of the following is an example of an intermediate- term debt?

A) A thirty-year mortgage.
B) A sixty-month car loan.
C) A six month loan from a finance company.
D) A Treasury bond.
Answer: B
5) If the maturity of a debt instrument is less than one year, the debt is called .
A) short-term
B) intermediate-term
C) long-term
D) prima- term
Answer: A
6) Long-term debt has a maturity that is .

A) between one and ten years.
B) less than a year.
C) between five and ten years.
D) ten years or longer.
Answer: D
7) When I purchase , I own a portion of a firm and have the right to vote on issues
important to the firm and to elect its directors.
A) bonds
B) bills
C) notes
D) stock
Answer: D
8) Equity holders are a corporation's . That means the corporation must pay all of its debt
holders before it pays its equity holders.
A) debtors
B) brokers
C) residual claimants
D) underwriters
Answer: C
9) Which of the following benefit directly from any increase in the corporation's profitability?
A) a bond holder
B) a commercial paper holder
C) a shareholder
D) a T-bill holder
Answer: C
Ques Status: New
10) A financial market in which previously issued securities can be resold is called a
market.
A) primary
B) secondary
C) tertiary
D) used securities
Answer: B
11) An important financial institution that assists in the initial sale of securities in the primary
market is the
A) investment bank.
B) commercial bank.
C) stock exchange.
D) brokerage house.
Answer: A
12) When an investment bank securities, it guarantees a price for a corporation's securities
and then sells them to the public.
A) underwrites
B) undertakes
C) overwrites
D) overtakes
Answer: A
13) Which of the following is not a secondary market?

A) foreign exchange market
B) futures market
C) options market
D) IPO market
Answer: D
Ques Status: New
14) work in the secondary markets matching buyers with sellers of securities.
A) Dealers
B) Underwriters
C) Brokers
D) Claimants
Answer: C
15) A corporation acquires new funds only when its securities are sold in the
A) primary market by an investment bank.
B) primary market by a stock exchange broker.
C) secondary market by a securities dealer.
D) secondary market by a commercial bank.
Answer: A
16) A corporation acquires new funds only when its securities are sold in the
A) secondary market by an investment bank.
B) primary market by an investment bank.
C) secondary market by a stock exchange broker.
D) secondary market by a commercial bank.
Answer: B
17) An important function of secondary markets is to

A) make it easier to sell financial instruments to raise funds.
B) raise funds for corporations through the sale of securities.
C) make it easier for governments to raise taxes.
D) create a market for newly constructed houses.
Answer: A
18) Secondary markets make financial instruments more

A) solid.
B) vapid.
C) liquid.
D) risky.
Answer: C
19) A liquid asset is

A) an asset that can easily and quickly be sold to raise cash.
B) a share of an ocean resort.
C) difficult to resell.
D) always sold in an over-the-counter market.
Answer: A
Ques Status: New
20) The higher a security's price in the secondary market the funds a firm can raise by
selling securities in the market.
A) more; primary
B) more; secondary
C) less; primary
D) less; secondary
Answer: A
21) When secondary market buyers and sellers of securities meet in one central location to conduct
trades the market is called a(n)
A) exchange.
B) over-the-counter market.
C) common market.
D) barter market.
Answer: A
Ques Status: New
22) Forty or so dealers establish a "market" in these securities by standing ready to buy and sell
them.
A) Secondary stocks
B) Surplus stocks
C) U.S. government bonds
D) Common stocks
Answer: C
23) Which of the following statements about financial markets and securities is true?
A) Many common stocks are traded over-the-counter, although the largest corporations
usually have their shares traded at organized stock exchanges such as the New York Stock
Exchange.
B) As a corporation gets a share of the broker's commission, a corporation acquires new
funds whenever its securities are sold.
C) Capital market securities are usually more widely traded than shorter -term securities and
so tend to be more liquid.
D) Because of their short- terms to maturity, the prices of money market instruments tend to
fluctuate wildly.
Answer: A
24) A financial market in which only short-term debt instruments are traded is called the
market.
A) bond
B) money
C) capital
D) stock
Answer: B
25) Equity instruments are traded in the market.

A) money
B) bond
C) capital
D) commodities
Answer: C
26) Corporations receive funds when their stock is sold in the primary market. Why do corporations
pay attention to what is happening to their stock in the secondary market?
Answer: The existence of the secondary market makes their stock more liquid and the price in the
secondary market sets the price that the corporation would receive if they choose to sell
more stock in the primary market.
27) Describe the two methods of organizing a secondary market.

Answer: A secondary market can be organized as an exchange where buyers and sellers meet in
one central location to conduct trades. An example of an exchange is the New York Stock
Exchange. A secondary market can also be organized as an over -the-counter market. In
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
2.3 Financial Market Instruments

1) Prices of money market instruments undergo the least price fluctuations because of
A) the short terms to maturity for the securities.
B) the heavy regulations in the industry.
C) the price ceiling imposed by government regulators.
D) the lack of competition in the market.
Answer: A
Ques Status: New
2) U.S. Treasury bills pay no interest but are sold at a . That is, you will pay a lower
purchase price than the amount you receive at maturity.
A) premium
B) collateral
C) default
D) discount
Answer: D
3) U.S. Treasury bills are considered the safest of all money market instruments because there is no
risk of .
A) defeat
B) default
C) desertion
D) demarcation
Answer: B
4) A debt instrument sold by a bank to its depositors that pays annual interest of a given amount
and at maturity pays back the original purchase price is called
A) commercial paper.
B) a negotiable certificate of deposit.
C) a municipal bond.
D) federal funds.
Answer: B
5) A short-term debt instrument issued by well- known corporations is called

A) commercial paper.
B) corporate bonds.
C) municipal bonds.
D) commercial mortgages.
Answer: A
Ques Status: New
6) are short-term loans in which Treasury bills serve as collateral.

A) Repurchase agreements
B) Negotiable certificates of deposit
C) Federal funds
D) U.S. government agency securities
Answer: A
Ques Status: New
7) Collateral is the lender receives if the borrower does not pay back the loan.
A) a liability
B) an asset
C) a present
D) an offering
Answer: B
8) Federal funds are

A) funds raised by the federal government in the bond market.
B) loans made by the Federal Reserve System to banks.
C) loans made by banks to the Federal Reserve System.
D) loans made by banks to each other.
Answer: D
9) The British Banker's Association average of interbank rates for dollar deposits in the London
market is called the
A) Libor rate.
B) federal funds rate.
C) prime rate.
D) Treasury Bill rate.
Answer: A
Ques Status: New
10) Which of the following are short-term financial instruments?

A) A repurchase agreement.
B) A share of Walt Disney Corporation stock.
C) A Treasury note with a maturity of four years.
D) A residential mortgage.
Answer: A
11) Which of the following instruments are traded in a money market?

A) State and local government bonds.
B) U.S. Treasury bills.
C) Corporate bonds.
D) U.S. government agency securities.
Answer: B
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
13) Which of the following instruments is not traded in a money market?

A) Residential mortgages.
B) U.S. Treasury Bills.
C) Negotiable bank certificates of deposit.
D) Commercial paper.
Answer: A
14) Bonds issued by state and local governments are called bonds.
A) corporate
B) Treasury
C) municipal
D) commercial
Answer: C
15) Equity and debt instruments with maturities greater than one year are called market
instruments.
A) capital
B) money
C) federal
D) benchmark
Answer: A
Ques Status: New
16) Which of the following is a long-term financial instrument?

A) A negotiable certificate of deposit.
B) A repurchase agreement.
C) A U.S. Treasury bond.
D) A U.S. Treasury bill.
Answer: C
17) Which of the following instruments are traded in a capital market?

A) U.S. Government agency securities.
B) Negotiable bank CDs.
C) Repurchase agreements.
D) U.S. Treasury bills.
Answer: A
18) Which of the following instruments are traded in a capital market?

A) Corporate bonds.
B) U.S. Treasury bills.
C) Negotiable bank CDs.
D) Repurchase agreements.
Answer: A
19) Which of the following are not traded in a capital market?

A) U.S. government agency securities.
B) State and local government bonds.
C) Repurchase agreements.
D) Corporate bonds.
Answer: C
2.4 Internationalization of Financial Markets
1) Equity of U.S. companies can be purchased by

A) U.S. citizens only.
B) foreign citizens only.
C) U.S. citizens and foreign citizens.
D) U.S. mutual funds only.
Answer: C
Ques Status: New
2) One reason for the extraordinary growth of foreign financial markets is

A) decreased trade.
B) increases in the pool of savings in foreign countries.
C) the recent introduction of the foreign bond.
D) slower technological innovation in foreign markets.
Answer: B
3) Bonds that are sold in a foreign country and are denominated in the country's currency in which
they are sold are known as
A) foreign bonds.
B) Eurobonds.
C) equity bonds.
D) country bonds.
Answer: A
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
A) foreign bonds.
B) Eurobonds.
C) equity bonds.
D) country bonds.
Answer: B
5) If Microsoft sells a bond in London and it is denominated in dollars, the bond is a .

A) Eurobond
B) foreign bond
C) British bond
D) currency bond
Answer: A
6) U.S. dollar deposits in foreign banks outside the U.S. or in foreign branches of U.S. banks are
called .
A) Atlantic dollars
B) Eurodollars
C) foreign dollars
D) outside dollars
Answer: B
7) Distinguish between a foreign bond and a Eurobond.

Answer: A foreign bond is sold in a foreign country and priced in that country's currency. A
Eurobond is sold in a foreign country and priced in a currency that is not that country's
currency.
Ques Status: New
2.5 Function of Financial Intermediaries: Indirect Finance

1) The process of indirect finance using financial intermediaries is called
A) direct lending.
B) financial intermediation.
C) resource allocation.
D) financial liquidation.
Answer: B
2) In the United States, loans from are far important for corporate finance than
are securities markets.
A) government agencies; more
B) government agencies; less
C) financial intermediaries; more
D) financial intermediaries; less
Answer: C
3) The time and money spent in carrying out financial transactions are called
A) economies of scale.
B) financial intermediation.
C) liquidity services.
D) transaction costs.
Answer: D
Ques Status: New
4) Economies of scale enable financial institutions to

A) reduce transactions costs.
B) avoid the asymmetric information problem.
C) avoid adverse selection problems.
D) reduce moral hazard.
Answer: A
5) An example of economies of scale in the provision of financial services is

A) investing in a diversified collection of assets.
B) providing depositors with a variety of savings certificates.
C) spreading the cost of borrowed funds over many customers.
D) spreading the cost of writing a standardized contract over many borrowers.
Answer: D
6) Financial intermediaries provide customers with liquidity services. Liquidity services

A) make it easier for customers to conduct transactions.
B) allow customers to have a cup of coffee while waiting in the lobby.
C) are a result of the asymmetric information problem.
D) are another term for asset transformation.
Answer: A
Ques Status: New
7) The process where financial intermediaries create and sell low-risk assets and use the proceeds
to purchase riskier assets is known as
A) risk sharing.
B) risk aversion.
C) risk neutrality.
D) risk selling.
Answer: A
8) The process of asset transformation refers to the conversion of

A) safer assets into risky assets.
B) safer assets into safer liabilities.
C) risky assets into safer assets.
D) risky assets into risky liabilities.
Answer: C
9) Reducing risk through the purchase of assets whose returns do not always move together is
A) diversification.
B) intermediation.
C) intervention.
D) discounting.
Answer: A
10) The concept of diversification is captured by the statement

A) don't look a gift horse in the mouth.
B) don't put all your eggs in one basket.
C) it never rains, but it pours.
D) make hay while the sun shines.
Answer: B
11) Risk sharing is profitable for financial institutions due to

A) low transactions costs.
B) asymmetric information.
C) adverse selection.
D) moral hazard.
Answer: A
12) Typically, borrowers have superior information relative to lenders about the potential returns
and risks associated with an investment project. The difference in information is called
A) moral selection.
B) risk sharing.
C) asymmetric information.
D) adverse hazard
Answer: C
13) If bad credit risks are the ones who most actively seek loans and, therefore, receive them from
financial intermediaries, then financial intermediaries face the problem of
A) moral hazard.
B) adverse selection.
C) free-riding.
D) costly state verification.
Answer: B
14) The problem created by asymmetric information before the transaction occurs is called
, while the problem created after the transaction occurs is called .
A) adverse selection; moral hazard
B) moral hazard; adverse selection
C) costly state verification; free-riding
D) free-riding; costly state verification
Answer: A
15) Adverse selection is a problem associated with equity and debt contracts arising from
A) the lender's relative lack of information about the borrower's potential returns and risks of
his investment activities.
B) the lender's inability to legally require sufficient collateral to cover a 100% loss if the
borrower defaults.
C) the borrower's lack of incentive to seek a loan for highly risky investments.
D) the borrower's lack of good options for obtaining funds.
Answer: A
16) An example of the problem of is when a corporation uses the funds raised from selling
bonds to fund corporate expansion to pay for Caribbean cruises for all of its employees and their
families.
A) adverse selection
B) moral hazard
C) risk sharing
D) credit risk
Answer: B
17) Studies of the major developed countries show that when businesses go looking for funds to
finance their activities they usually obtain these funds from
A) government agencies.
B) equities markets.
C) financial intermediaries.
D) bond markets.
Answer: C
18) The countries that have made the least use of securities markets are and ; in
these two countries finance from financial intermediaries has been almost ten times greater than
that from securities markets.
A) Germany; Japan
B) Germany; Great Britain
C) Great Britain; Canada
D) Canada; Japan
Answer: A
19) Although the dominance of over is clear in all countries, the relative
importance of bond versus stock markets differs widely.
A) financial intermediaries; securities markets
B) financial intermediaries; government agencies
C) government agencies; financial intermediaries
D) government agencies; securities markets
Answer: A
20) Because there is an imbalance of information in a lending situation, we must deal with the
problems of adverse selection and moral hazard. Define these terms and explain how financial
intermediaries can reduce these problems.
Answer: Adverse selection is the asymmetric information problem that exists before the
transaction occurs. For lenders, it is the difficulty in judging a good credit risk from a bad
credit risk. Moral hazard is the asymmetric information problem that exists after the
transaction occurs. For lenders, it is the difficulty in making sure the borrower uses the
funds appropriately. Financial intermediaries can reduce adverse selection through
intensive screening and can reduce moral hazard by monitoring the borrower.
2.6 Types of Financial Intermediaries

1) Financial institutions that accept deposits and make loans are called institutions.
A) investment
B) contractual savings
C) depository
D) underwriting
Answer: C
2) Thrift institutions include

A) banks, mutual funds, and insurance companies.
B) savings and loan associations, mutual savings banks, and credit unions.
C) finance companies, mutual funds, and money market funds.
D) pension funds, mutual funds, and banks.
Answer: B
3) Which of the following is a depository institution?

A) A life insurance company
B) A credit union
C) A pension fund
D) A mutual fund
Answer: B
4) Which of the following is a depository institution?

B) A mutual savings bank
C) A pension fund
D) A finance company
Answer: B
5) Which of the following financial intermediaries is not a depository institution?

A) A savings and loan association
B) A commercial bank
C) A credit union
D) A finance company
Answer: D
6) The primary assets of credit unions are

A) municipal bonds.
B) business loans.
C) consumer loans.
D) mortgages.
Answer: C
7) The primary liabilities of a commercial bank are

A) bonds.
B) mortgages.
C) deposits.
D) commercial paper.
Answer: C
8) The primary liabilities of depository institutions are

A) premiums from policies.
B) shares.
C) deposits.
D) bonds.
Answer: C
9) institutions are financial intermediaries that acquire funds at periodic intervals on a

contractual basis.
A) Investment
B) Contractual savings
C) Thrift
D) Depository
Answer: B
10) Which of the following is a contractual savings institution?

B) A credit union
C) A savings and loan association
D) A mutual fund
Answer: A
11) Contractual savings institutions include

A) mutual savings banks.
B) money market mutual funds.
C) commercial banks.
D) life insurance companies.
Answer: D
12) Which of the following are not contractual savings institutions?

A) Life insurance companies
B) Credit unions
C) Pension funds
D) State and local government retirement funds
Answer: B
13) Which of the following is not a contractual savings institution?

B) A pension fund
C) A savings and loan association
D) A fire and casualty insurance company
Answer: C
14) The primary assets of a pension fund are

A) money market instruments.
B) corporate bonds and stock.
C) consumer and business loans.
D) mortgages.
Answer: B
15) Which of the following are investment intermediaries?

A) Life insurance companies
B) Mutual funds
C) Pension funds
D) State and local government retirement funds
Answer: B
16) An investment intermediary that lends funds to consumers is

A) a finance company.
B) an investment bank.
C) a finance fund.
D) a consumer company.
Answer: A
Ques Status: New
17) The primary assets of a finance company are

A) municipal bonds.
B) corporate stocks and bonds.
C) consumer and business loans.
D) mortgages.
Answer: C
18) are financial intermediaries that acquire funds by selling shares to many individuals
and using the proceeds to purchase diversified portfolios of stocks and bonds.
A) Mutual funds
B) Investment banks
C) Finance companies
D) Credit unions
Answer: A
Ques Status: New
19) Money market mutual fund shares function like

A) checking accounts that pay interest.
B) bonds.
C) stocks.
D) currency.
Answer: A
20) An important feature of money market mutual fund shares is

A) deposit insurance.
B) the ability to write checks against shareholdings.
C) the ability to borrow against shareholdings.
D) claims on shares of corporate stock.
Answer: B
21) The primary assets of money market mutual funds are

A) stocks.
B) bonds.
C) money market instruments.
D) deposits.
Answer: C
22) An investment bank helps issue securities.

A) a corporation
B) the United States government
C) the SEC
D) foreign governments
Answer: A
Ques Status: New
23) An investment bank purchases securities from a corporation at a predetermined price and then
resells them in the market. This process is called
A) underwriting.
B) underhanded.
C) understanding.
D) undertaking.
Answer: A
Ques Status: New
2.7 Regulation of the Financial System

1) Which of the following is not a goal of financial regulation?
A) Ensuring the soundness of the financial system
B) Reducing moral hazard
C) Reducing adverse selection
D) Ensuring that investors never suffer losses
Answer: D
2) Increasing the amount of information available to investors helps to reduce the problems of
and in the financial markets.
A) adverse selection; moral hazard
B) adverse selection; risk sharing
C) moral hazard; transactions costs
D) adverse selection; economies of scale
Answer: A
Ques Status: New
3) A goal of the Securities and Exchange Commission is to reduce problems arising from
A) competition.
B) banking panics.
C) risk.
D) asymmetric information.
Answer: D
4) The purpose of the disclosure requirements of the Securities and Exchange Commission is to
A) increase the information available to investors.
B) prevent bank panics.
C) improve monetary control.
D) protect investors against financial losses.
Answer: A
5) Government regulations to reduce the possibility of financial panic include all of the following
except
A) transactions costs.
B) restrictions on assets and activities.
C) disclosure.
D) deposit insurance.
Answer: A
Ques Status: New
6) Which of the following do not provide charters?

A) The Office of the Comptroller of the Currency
B) The Federal Reserve System
C) The National Credit Union Administration
D) State banking and insurance commissions
Answer: B
7) A restriction on bank activities that was repealed in 1999 was

A) the prohibition of the payment of interest on checking deposits.
B) restrictions on credit terms.
C) minimum down payments on loans to purchase securities.
D) separation of commercial banking from the securities industries.
Answer: D
8) In order to reduce risk and increase the safety of financial institutions, commercial banks and
other depository institutions are prohibited from
A) owning municipal bonds.
B) making real estate loans.
C) making personal loans.
D) owning common stock.
Answer: D
9) The primary purpose of deposit insurance is to

A) improve the flow of information to investors.
B) prevent banking panics.
C) protect bank shareholders against losses.
D) protect bank employees from unemployment.
Answer: B
10) The agency that was created to protect depositors after the banking failures of 1930 -1933 is the
A) Federal Reserve System.
B) Federal Deposit Insurance Corporation.
C) Treasury Department.
D) Office of the Comptroller of the Currency.
Answer: B
11) Savings and loan associations are regulated by the

A) Federal Reserve System.
B) Securities and Exchange Commission.
C) Office of the Comptroller of the Currency.
D) Office of Thrift Supervision.
Answer: D
12) The regulatory agency that sets reserve requirements for all banks is
A) the Federal Reserve System.
B) the Federal Deposit Insurance Corporation.
C) the Office of Thrift Supervision.
D) the Securities and Exchange Commission.
Answer: A
Ques Status: New
13) Asymmetric information is a universal problem. This would suggest that financial regulations
A) in industrial countries are an unqualified failure.
B) differ significantly around the world.
C) in industrialized nations are similar.
D) are unnecessary.
Answer: C
14) How do regulators help to ensure the soundness of financial intermediaries?

Answer: Regulators restrict who can set up a financial intermediary, conduct regular
examinations, restrict assets, and provide insurance to help ensure the soundness of
financial intermediaries.
Chapter 3
What Is Money?
3.1 Meaning of Money
1) To an economist, is anything that is generally accepted in payment for goods and

services or in the repayment of debt.
A) wealth
B) income
C) money
D) credit
Answer: C
2) Money is
A) anything that is generally accepted in payment for goods and services or in the repayment
of debt.
B) a flow of earnings per unit of time.
C) the total collection of pieces of property that are a store of value.
D) always based on a precious metal like gold or silver.
Answer: A
3) Currency includes
A) paper money and coins.
B) paper money, coins, and checks.
C) paper money and checks.
D) paper money, coins, checks, and savings deposits.
Answer: A
4) Even economists have no single, precise definition of money because

A) money supply statistics are a state secret.
B) the Federal Reserve does not employ or report different measures of the money supply.
C) the "moneyness" or liquidity of an asset is a matter of degree.
D) economists find disagreement interesting and refuse to agree for ideological reasons.
Answer: C
5) The total collection of pieces of property that serve to store value is a person's
A) wealth.
B) income.
C) money.
D) credit.
Answer: A
Ques Status: New
6) A person's house is part of her

A) money.
B) income.
C) liabilities.
D) wealth.
Answer: D
7) is used to make purchases while is the total collection of pieces of property

that serve to store value.
A) Money; income
B) Wealth; income
C) Income; money
D) Money; wealth
Answer: D
8) is a flow of earnings per unit of time.

A) Income
B) Money
C) Wealth
D) Currency
Answer: A
9) An individual's annual salary is her

A) money.
B) income.
C) wealth.
D) liabilities.
Answer: B
10) When we say that money is a stock variable, we mean that

A) the quantity of money is measured at a given point in time.
B) we must attach a time period to the measure.
C) it is sold in the equity market.
D) money never loses purchasing power.
Answer: A
Ques Status: New
11) The difference between money and income is that

A) money is a flow and income is a stock.
B) money is a stock and income is a flow.
C) there is no difference money and income are both stocks.
D) there is no difference money and income are both flows.
Answer: B
Chapter 3 What Is Money? 45
12) Which of the following is a true statement?

A) Money and income are flow variables.
B) Money is a flow variable.
C) Income is a flow variable.
D) Money and income are stock variables.
Answer: C
13) Which of the following statements uses the economists' definition of money?
A) I plan to earn a lot of money over the summer.
B) Betsy is rich she has a lot of money.
C) I hope that I have enough money to buy my lunch today.
D) The job with New Company gave me the opportunity to earn more money.
Answer: C
3.2 Functions of Money
1) Of money's three functions, the one that distinguishes money from other assets is its function as
a
A) store of value.
B) unit of account.
C) standard of deferred payment.
D) medium of exchange.
Answer: D
2) If peanuts serve as a medium of exchange, a unit of account, and a store of value, then peanuts
are
A) bank deposits.
B) reserves.
C) money.
D) loanable funds.
Answer: C
3) are the time and resources spent trying to exchange goods and services.
A) Bargaining costs.
B) Transaction costs.
C) Contracting costs.
D) Barter costs.
Answer: B
4) Compared to an economy that uses a medium of exchange, in a barter economy

A) transaction costs are higher.
B) transaction costs are lower.
C) liquidity costs are higher.
D) liquidity costs are lower.
Answer: A
5) When compared to exchange systems that rely on money, disadvantages of the barter system
include:
A) the requirement of a double coincidence of wants.
B) lowering the cost of exchanging goods over time.
C) lowering the cost of exchange to those who would specialize.
D) encouraging specialization and the division of labor.
Answer: A
6) The conversion of a barter economy to one that uses money

A) increases efficiency by reducing the need to exchange goods and services.
B) increases efficiency by reducing the need to specialize.
C) increases efficiency by reducing transactions costs.
D) does not increase economic efficiency.
Answer: C
7) Which of the following statements best explains how the use of money in an economy increases
economic efficiency?
A) Money increases economic efficiency because it is costless to produce.
B) Money increases economic efficiency because it discourages specialization.
C) Money increases economic efficiency because it decreases transactions costs.
D) Money cannot have an effect on economic efficiency.
Answer: C
8) When economists say that money promotes , they mean that money encourages
specialization and the division of labor.
A) bargaining
B) contracting
C) efficiency
D) greed
Answer: C
9) Money transaction costs, allowing people to specialize in what they do best.

A) reduces
B) increases
C) enhances
D) eliminates
Answer: A
10) For a commodity to function effectively as money it must be

A) easily standardized, making it easy to ascertain its value.
B) difficult to make change.
C) deteriorate quickly so that its supply does not become too large.
D) hard to carry around.
Answer: A
11) All of the following are necessary criteria for a commodity to function as money except
A) it must deteriorate quickly.
B) it must be divisible.
C) it must be easy to carry.
D) it must be widely accepted.
Answer: A
Ques Status: New
12) Whatever a society uses as money, the distinguishing characteristic is that it must
A) be completely inflation proof.
B) be generally acceptable as payment for goods and services or in the repayment of debt.
C) contain gold.
D) be produced by the government.
Answer: B
13) All but the most primitive societies use money as a medium of exchange, implying that
A) the use of money is economically efficient.
B) barter exchange is economically efficient.
C) barter exchange cannot work outside the family.
D) inflation is not a concern.
Answer: A
14) Kevin purchasing concert tickets with his debit card is an example of the function of
money.
A) medium of exchange
B) unit of account
C) store of value
D) specialization
Answer: A
15) When money prices are used to facilitate comparisons of value, money is said to function as a
A) unit of account.
B) medium of exchange.
C) store of value.
D) payments- system ruler.
Answer: A
16) A problem with barter exchange when there are many goods is that in a barter system
A) transactions costs are minimized.
B) there exists a multiple number of prices for each good.
C) there is only one store of value.
D) exchange of services is impossible.
Answer: B
17) In a barter economy the number of prices in an economy with N goods is

A) [N(N - 1)]/2.
B) N(N/2).
C) 2N.
D) N(N/2) - 1.
Answer: A
18) If there are five goods in a barter economy, one needs to know ten prices in order to exchange
one good for another. If, however, there are ten goods in a barter economy, then one needs to
know prices in order to exchange one good for another.
A) 20
B) 25
C) 30
D) 45
Answer: D
19) If there are four goods in a barter economy, then one needs to know prices in order to
exchange one good for another.
A) 8
B) 6
C) 5
D) 4
Answer: B
20) Because it is a unit of account, money

A) increases transaction costs.
B) reduces the number of prices that need to be calculated.
C) does not earn interest.
D) discourages specialization.
Answer: B
21) Dennis notices that jackets are on sale for $99. In this case money is functioning as a .
A) medium of exchange
B) unit of account
C) store of value
D) payments-system ruler
Answer: B
22) As a store of value, money

A) does not earn interest.
B) cannot be a durable asset.
C) must be currency.
D) is a way of saving for future purchases.
Answer: D
23) Patrick places his pocket change into his savings bank on his desk each evening. By his actions,
Patrick indicates that he believes that money is a
A) medium of exchange.
B) unit of account.
C) store of value.
D) unit of specialization.
Answer: C
24) is the relative ease and speed with which an asset can be converted into a medium of
exchange.
A) Efficiency
B) Liquidity
C) Deflation
D) Specialization
Answer: B
25) Increasing transactions costs of selling an asset make the asset

A) more valuable.
B) more liquid.
C) less liquid.
D) more moneylike.
Answer: C
26) Since it does not have to be converted into anything else to make purchases, is the
most liquid asset.
A) money
B) stock
C) artwork
D) gold
Answer: A
Ques Status: New
27) Of the following assets, the least liquid is

A) stocks.
B) traveler's checks.
C) checking deposits.
D) a house.
Answer: D
28) Ranking assets from most liquid to least liquid, the correct order is
A) savings bonds; house; currency.
B) currency; savings bonds; house.
C) currency; house; savings bonds.
D) house; savings bonds; currency.
Answer: B
29) People hold money even during inflationary episodes when other assets prove to be better
stores of value. This can be explained by the fact that money is
A) extremely liquid.
B) a unique good for which there are no substitutes.
C) the only thing accepted in economic exchange.
D) backed by gold.
Answer: A
30) If the price level doubles, the value of money

A) doubles.
B) more than doubles, due to scale economies.
C) rises but does not double, due to diminishing returns.
D) falls by 50 percent.
Answer: D
31) A fall in the level of prices

A) does not affect the value of money.
B) has an uncertain effect on the value of money.
C) increases the value of money.
D) reduces the value of money.
Answer: C
32) A hyperinflation is
A) a period of extreme inflation generally greater than 50% per month.
B) a period of anxiety caused by rising prices.
C) an increase in output caused by higher prices.
D) impossible today because of tighter regulations.
Answer: A
Ques Status: New
33) During hyperinflations,

A) the value of money rises rapidly.
B) money no longer functions as a good store of value and people may resort to barter
transactions on a much larger scale.
C) middle-class savers benefit as prices rise.
D) money's value remains fixed to the price level; that is, if prices double so does the value of
money.
Answer: B
34) Because inflation in Germany after World War I sometimes exceeded 1,000 % per month, one
can conclude that the German economy suffered from
A) deflation.
B) disinflation.
C) hyperinflation.
D) superdeflation.
Answer: C
35) If merchants in the country Zed choose to close their doors, preferring to be stuck with rotting
merchandise rather than worthless currency, then one can conclude that Zed is experiencing a
A) superdeflation.
B) hyperdeflation.
C) disinflation.
D) hyperinflation.
Answer: D
36) Explain how cigarettes could be called "money" in prisoner- of-war camps of World War II.
Answer: The cigarettes performed the three functions of money. They served as the medium of
exchange because individuals did exchange items for cigarettes. They served as a unit of
account because prices were quoted in terms of the number of cigarettes required for the
exchange. They served as a store of value because an individual would be willing to save
their cigarettes even if they did not smoke because they believed that they could
exchange the cigarettes for something that they did want at some time in the future.
3.3 Evolution of the Payments System
1) The payments system is

A) the method of conducting transactions in the economy.
B) used by union officials to set salary caps.
C) an illegal method of rewarding contracts.
D) used by your employer to determine salary increases.
Answer: A
Ques Status: New
2) As the payments system evolves from barter to a monetary system,

A) commodity money is likely to precede the use of paper currency.
B) transaction costs increase.
C) the number of prices that need to be calculated increase rather dramatically.
D) specialization decreases.
Answer: A
3) A disadvantage of is that it is very heavy and hard to transport from one place to
another.
A) commodity money
B) fiat money
C) electronic money
D) paper money
Answer: A
4) Paper currency that has been declared legal tender but is not convertible into coins or precious
metals is called money.
A) commodity
B) fiat
C) electronic
D) funny
Answer: B
5) When paper currency is decreed by governments as legal tender, legally it must be .

A) paper currency backed by gold
B) a precious metal such as gold or silver
C) accepted as payment for debts
D) convertible into an electronic payment
Answer: C
6) The evolution of the payments system from barter to precious metals, then to fiat money, then to
checks can best be understood as a consequence of the fact that
A) paper is more costly to produce than precious metals.
B) precious metals were not generally acceptable.
C) precious metals were difficult to carry and transport.
D) paper money is less accepted than checks.
Answer: C
7) Compared to checks, paper currency and coins have the major drawbacks that they
A) are easily stolen.
B) are hard to counterfeit.
C) are not the most liquid assets.
D) must be backed by gold.
Answer: A
8) Introduction of checks into the payments system reduced the costs of exchanging goods and
services. Another advantage of checks is that
A) they provide convenient receipts for purchases.
B) they can never be stolen.
C) they are more widely accepted than currency.
D) the funds from a deposited check are available for use immediately.
Answer: A
Ques Status: New
9) The evolution of the payments system from barter to precious metals, then to fiat money, then to
checks can best be understood as a consequence of
A) government regulations designed to improve the efficiency of the payments system.
B) government regulations designed to promote the safety of the payments system.
C) innovations that reduced the costs of exchanging goods and services.
D) competition among firms to make it easier for customers to purchase their products.
Answer: C
10) Compared to an electronic payments system, a payments system based on checks has the major
drawback that
A) checks are less costly to process.
B) checks take longer to process, meaning that it may take several days before the depositor
can get her cash.
C) fraud may be more difficult to commit when paper receipts are eliminated.
D) legal liability is more clearly defined.
Answer: B
11) 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
12) During the past two decades an important characteristic of the modern payments system has
been the rapidly increasing use of
A) checks and decreasing use of currency.
B) electronic fund transfers.
C) commodity monies.
D) fiat money.
Answer: B
13) Which of the following is not a form of e-money?

A) a debit card
B) a credit card
C) a stored-value card
D) a smart card
Answer: B
14) A smart card is the equivalent of

A) cash.
B) savings bonds.
C) savings deposits.
D) certificates of deposit.
Answer: A
15) An electronic payments system has not completely replaced the paper payments system because
of all of the following reasons except
A) expensive equipment is necessary to set up the system.
B) security concerns.
C) privacy concerns.
D) transportation costs.
Answer: D
16) In explaining the evolution of money

A) government regulation is the most important factor.
B) commodity money, because it is valued more highly, tends to drive out paper money.
C) new forms of money evolve to lower transaction costs.
D) paper money is always backed by gold and therefore more desirable than checks.
Answer: C
17) What factors have slowed down the movement to a system where all payments are made
electronically?
Answer: The equipment necessary to set up the system is expensive, security of the information,
and privacy concerns are issues that need to be addressed before an electronic payments
system will be widely accepted.
3.4 Measuring Money

1) Recent financial innovation makes the Federal Reserve's job of conducting monetary policy
A) easier, since the Fed now knows what to consider money.
B) more difficult, since the Fed now knows what to consider money.
C) easier, since the Fed no longer knows what to consider money.
D) more difficult, since the Fed no longer knows what to consider money.
Answer: D
2) Defining money becomes difficult as the pace of financial innovation .

A) less; quickens
B) more; quickens
C) more; slows
D) more; stops
Answer: B
3) Monetary aggregates are

A) measures of the money supply reported by the Federal Reserve.
B) measures of the wealth of individuals.
C) never redefined since "money" never changes.
D) reported by the Treasury Department annually.
Answer: A
Ques Status: New
4) is the narrowest monetary aggregate that the Fed reports.

A) M0
B) M1
C) M2
D) M3
Answer: B
5) The currency component includes paper money and coins held in .

A) bank vaults
B) ATMs
C) the hands of the nonbank public
D) the central bank
Answer: C
6) The components of the U.S. M1 money supply are demand and checkable deposits plus
A) currency.
B) currency plus savings deposits.
C) currency plus travelers checks.
D) currency plus travelers checks plus money market deposits.
Answer: C
7) The M1 measure of money includes

A) small denomination time deposits.
B) traveler's checks.
C) money market deposit accounts.
D) money market mutual fund shares.
Answer: B
8) Which of the following is not included in the measure of M1?

A) NOW accounts.
B) Demand deposits.
C) Currency.
D) Savings deposits.
Answer: D
9) Which of the following is not included in the M1 measure of money but is included in the M2
measure of money?
A) Currency
B) Traveler's checks
C) Demand deposits
D) Small-denomination time deposits
Answer: D
10) Which of the following is included in both M1 and M2?

A) Currency
B) Savings deposits
C) Small-denomination time deposits
D) Money market deposit accounts
Answer: A
11) Which of the following is not included in the monetary aggregate M2?
A) Currency
B) Savings bonds
C) Traveler's checks
D) Checking deposits
Answer: B
12) Which of the following is included in M2 but not in M1?

A) NOW accounts
B) Demand deposits
C) Currency
D) Money market mutual fund shares (retail)
Answer: D
13) Of the following, the largest is

A) money market deposit accounts.
B) demand deposits.
C) M1.
D) M2.
Answer: D
14) If an individual redeems a U.S. savings bond for currency

A) M1 stays the same and M2 decreases.
B) M1 increases and M2 increases.
C) M1 increases and M2 stays the same.
D) M1 stays the same and M2 stays the same.
Answer: B
15) If an individual moves money from a small -denomination time deposit to a demand deposit
account,
A) M1 increases and M2 stays the same.
B) M1 stays the same and M2 increases.
C) M1 stays the same and M2 stays the same.
D) M1 increases and M2 decreases.
Answer: A
16) If an individual moves money from a demand deposit account to a money market deposit
account,
A) M1 decreases and M2 stays the same.
Answer: A
17) If an individual moves money from a savings deposit account to a money market deposit
account,
Answer: C
18) If an individual moves money from currency to a demand deposit account,

D) M1 increases and M2 stays the same.
Answer: C
19) If an individual moves money from a money market deposit account to currency,
A) M1 increases and M2 stays the same.
Answer: A
20) Small- denomination time deposits refer to certificates of deposit with a denomination of less
than .
A) $1,000
B) $10,000
C) $100,000
D) $1,000,000
Answer: C
21) Which of the following statements accurately describes the two measures of the money supply?
A) The two measures do not move together, so they cannot be used interchangeably by
policymakers.
B) The two measures' movements closely parallel each other, even on a month -to-month
basis.
C) Short-run movements in the money supply are extremely reliable.
D) M2 is the narrowest measure the Fed reports.
Answer: A
22) The decade during which the growth rates of monetary aggregates diverged the most is
A) the 1960s.
B) the 1970s.
C) the 1980s.
D) the 1990s.
Answer: D
23) Why are most of the U.S. dollars held outside of the United States?
Answer: Concern about high inflation eroding the value of their own currency causes many people
in foreign countries to hold U.S. dollars as a hedge against inflation risk.
3.5 How Reliable are the Money Data?

1) The Fed revises its estimates of the monetary aggregates, sometimes by large amounts, because
A) large depository institutions need only report their deposits infrequently.
B) weekly monetary data need to be adjusted for the "weekend effect."
C) monthly monetary data need to be adjusted for the "payday effect."
D) seasonal adjustments become more precise only as more data becomes available.
Answer: D
2) The Fed estimates initial monetary aggregate reports because depository institutions
report the amount of their deposits infrequently.
A) all
B) small
C) large
D) state
Answer: B
3) The increase in holiday spending is not the same every year causing the Fed's adjustment for
to be revised as more data becomes available.
A) seasonal variation
B) reporting discrepancy
C) market churning
D) transactions discrepancy
Answer: A
4) An examination of revised money supply statistics, when compared to the initial statistics,
suggests that the initial statistics
A) are pretty good.
B) do not provide a good guide to short- run movements in the money supply.
C) provide a poor guide of monetary policy because they are usually underestimates of the
revised statistics.
D) provide a good guide of monetary policy, though they are usually underestimates of the
revised statistics.
Answer: B
5) Generally, the initial money supply data reported by the Fed

A) is not a reliable guide to the short- run behavior of the money supply.
B) is not a reliable guide to the long- run behavior of the money supply.
C) is a reliable guide to the short-run behavior of the money supply.
D) usually underestimate the revised statistics.
Answer: A
6) The initial money supply data reported by the Fed are not a reliable guide to short -run
movements in the money supply such as a , but are reasonably reliable for longer
periods such as a .
A) month; year
B) day; month
C) year; decade
D) decade; century
Answer: A
Ques Status: New
Chapter 4
Understanding Interest Rates
4.1 Measuring Interest Rates
1) The concept of is based on the common -sense notion that a dollar paid to you in the
future is less valuable to you than a dollar today.
A) present value
B) future value
C) interest
D) deflation
Answer: A
2) The present value of an expected future payment as the interest rate increases.
A) falls
B) rises
C) is constant
D) is unaffected
Answer: A
3) An increase in the time to the promised future payment the present value of the
payment.
A) decreases
B) increases
C) has no effect on
D) is irrelevant to
Answer: A
4) With an interest rate of 6 percent, the present value of $100 next year is approximately
A) $106.
B) $100.
C) $94.
D) $92.
Answer: C
5) If a security pays $55 in one year and $133 in three years, its present value is $150 if the interest
rate is
A) 5 percent.
B) 10 percent.
C) 12.5 percent.
D) 15 percent.
Answer: B
Chapter 4 Understanding Interest Rates 61
6) To claim that a lottery winner who is to receive $1 million per year for twenty years has won $20
million ignores the process of
A) face value.
B) par value.
C) deflation.
D) discounting the future.
Answer: D
7) A credit market instrument that provides the borrower with an amount of funds that must be
repaid at the maturity date along with an interest payment is known as a
A) simple loan.
B) fixed-payment loan.
C) coupon bond.
D) discount bond.
Answer: A
8) A credit market instrument that requires the borrower to make the same payment every period
until the maturity date is known as a
A) simple loan.
B) fixed- payment loan.
C) coupon bond.
D) discount bond.
Answer: B
9) Which of the following are true of fixed payment loans?

A) The borrower repays both the principal and interest at the maturity date.
B) Installment loans and mortgages are frequently of the fixed payment type.
C) The borrower pays interest periodically and the principal at the maturity date.
D) Commercial loans to businesses are often of this type.
Answer: B
10) A fully amortized loan is another name for

A) a simple loan.
B) a fixed-payment loan.
C) a commercial loan.
D) an unsecured loan.
Answer: B
11) A credit market instrument that pays the owner a fixed coupon payment every year until the
maturity date and then repays the face value is called a
A) simple loan.
B) fixed-payment loan.
C) coupon bond.
D) discount bond.
Answer: C
12) A pays the owner a fixed coupon payment every year until the maturity date, when
the value is repaid.
A) coupon bond; discount
B) discount bond; discount
C) coupon bond; face
D) discount bond; face
Answer: C
13) The is the final amount that will be paid to the holder of a coupon bond.
A) discount value
B) coupon value
C) face value
D) present value
Answer: C
14) When talking about a coupon bond, face value and mean the same thing.
A) par value
B) coupon value
C) amortized value
D) discount value
Answer: A
Ques Status: New
15) The dollar amount of the yearly coupon payment expressed as a percentage of the face value of
the bond is called the bond's
A) coupon rate.
B) maturity rate.
C) face value rate.
D) payment rate.
Answer: A
Ques Status: New
16) If a $5,000 coupon bond has a coupon rate of 13 percent, then the coupon payment every year is
A) $650.
B) $1,300.
C) $130.
D) $13.
Answer: A
17) An $8,000 coupon bond with a $400 coupon payment every year has a coupon rate of
A) 5 percent.
B) 8 percent.
C) 10 percent.
D) 40 percent.
Answer: A
18) All of the following are examples of coupon bonds except

A) Corporate bonds
B) U.S. Treasury bills
C) U.S. Treasury notes
D) U.S. Treasury bonds
Answer: B
19) A bond that is bought at a price below its face value and the face value is repaid at a maturity
date is called a
A) simple loan.
B) fixed- payment loan.
C) coupon bond.
D) discount bond.
Answer: D
20) A is bought at a price below its face value, and the value is repaid at the
maturity date.
A) coupon bond; discount
B) discount bond; discount
C) coupon bond; face
D) discount bond; face
Answer: D
21) A discount bond

A) pays the bondholder a fixed amount every period and the face value at maturity.
B) pays the bondholder the face value at maturity.
C) pays all interest and the face value at maturity.
D) pays the face value at maturity plus any capital gain.
Answer: B
22) Examples of discount bonds include

A) U.S. Treasury bills.
B) corporate bonds.
C) U.S. Treasury notes.
D) municipal bonds.
Answer: A
23) Which of the following are true for discount bonds?

A) A discount bond is bought at par.
B) The purchaser receives the face value of the bond at the maturity date.
C) U.S. Treasury bonds and notes are examples of discount bonds.
D) The purchaser receives the par value at maturity plus any capital gains.
Answer: B
24) The interest rate that equates the present value of payments received from a debt instrument
with its value today is the
A) simple interest rate.
B) current yield.
C) yield to maturity.
D) real interest rate.
Answer: C
25) Economists consider the to be the most accurate measure of interest rates.
A) simple interest rate.
B) current yield.
C) yield to maturity.
D) real interest rate.
Answer: C
26) For simple loans, the simple interest rate is the yield to maturity.
A) greater than
B) less than
C) equal to
D) not comparable to
Answer: C
27) If the amount payable in two years is $2420 for a simple loan at 10 percent interest, the loan
amount is
A) $1000.
B) $1210.
C) $2000.
D) $2200.
Answer: C
28) For a 3-year simple loan of $10,000 at 10 percent, the amount to be repaid is
A) $10,030.
B) $10,300.
C) $13,000.
D) $13,310.
Answer: D
29) If $22,050 is the amount payable in two years for a $20,000 simple loan made today, the interest
rate is
A) 5 percent.
B) 10 percent.
C) 22 percent.
D) 25 percent.
Answer: A
30) If a security pays $110 next year and $121 the year after that, what is its yield to maturity if it
sells for $200?
A) 9 percent
B) 10 percent
C) 11 percent
D) 12 percent
Answer: B
31) The present value of a fixed- payment loan is calculated as the of the present value of
all cash flow payments.
A) sum
B) difference
C) multiple
D) log
Answer: A
Ques Status: New
32) Which of the following are true for a coupon bond?

A) When the coupon bond is priced at its face value, the yield to maturity equals the coupon
rate.
B) The price of a coupon bond and the yield to maturity are positively related.
C) The yield to maturity is greater than the coupon rate when the bond price is above the par
value.
D) The yield is less than the coupon rate when the bond price is below the par value.
Answer: A
33) The price of a coupon bond and the yield to maturity are related; that is, as the yield to
maturity , the price of the bond .
A) positively; rises; rises
B) negatively; falls; falls
C) positively; rises; falls
D) negatively; rises; falls
Answer: D
34) The yield to maturity is than the rate when the bond price is its face
value.
A) greater; coupon; above
B) greater; coupon; below
C) greater; perpetuity; above
D) less; perpetuity; below
Answer: B
35) A $10,000 8 percent coupon bond that sells for $10,000 has a yield to maturity of
A) 8 percent.
B) 10 percent.
C) 12 percent.
D) 14 percent.
Answer: A
36) Which of the following $1,000 face-value securities has the highest yield to maturity?
A) A 5 percent coupon bond selling for $1,000
B) A 10 percent coupon bond selling for $1,000
C) A 12 percent coupon bond selling for $1,000
D) A 12 percent coupon bond selling for $1,100
Answer: C
37) Which of the following $5,000 face-value securities has the highest to maturity?
D) A 12 percent coupon bond selling for $4,500
Answer: D
38) Which of the following $1,000 face-value securities has the highest yield to maturity?
A) A 5 percent coupon bond with a price of $600
B) A 5 percent coupon bond with a price of $800
C) A 5 percent coupon bond with a price of $1,000
D) A 5 percent coupon bond with a price of $1,200
Answer: A
39) Which of the following $1,000 face-value securities has the lowest yield to maturity?
D) A 15 percent coupon bond selling for $900
Answer: A
40) Which of the following bonds would you prefer to be buying?

A) A $10,000 face-value security with a 10 percent coupon selling for $9,000
B) A $10,000 face-value security with a 7 percent coupon selling for $10,000
C) A $10,000 face-value security with a 9 percent coupon selling for $10,000
D) A $10,000 face-value security with a 10 percent coupon selling for $10,000
Answer: A
41) A coupon bond that has no maturity date and no repayment of principal is called a
A) consol.
B) cabinet.
C) Treasury bill.
D) Treasury note.
Answer: A
Ques Status: New
42) The price of a consol equals the coupon payment

A) times the interest rate.
B) plus the interest rate.
C) minus the interest rate.
D) divided by the interest rate.
Answer: D
43) The interest rate on a consol equals the

A) price times the coupon payment.
B) price divided by the coupon payment.
C) coupon payment plus the price.
D) coupon payment divided by the price.
Answer: D
44) A consol paying $20 annually when the interest rate is 5 percent has a price of
A) $100.
B) $200.
C) $400.
D) $800.
Answer: C
45) If a perpetuity has a price of $500 and an annual interest payment of $25, the interest rate is
A) 2.5 percent.
B) 5 percent.
C) 7.5 percent.
D) 10 percent.
Answer: B
46) The yield to maturity for a perpetuity is a useful approximation for the yield to maturity on
long-term coupon bonds. It is called the when approximating the yield for a coupon
bond.
A) current yield
B) discount yield
C) future yield
D) star yield
Answer: A
Ques Status: New
47) The yield to maturity for a one-year discount bond equals the increase in price over the year,
divided by the
A) initial price.
B) face value.
C) interest rate.
D) coupon rate.
Answer: A
48) If a $10,000 face -value discount bond maturing in one year is selling for $5,000, then its yield to
maturity is
A) 5 percent.
B) 10 percent.
C) 50 percent.
D) 100 percent.
Answer: D
49) If a $5,000 face- value discount bond maturing in one year is selling for $5,000, then its yield to
maturity is
A) 0 percent.
B) 5 percent.
C) 10 percent.
D) 20 percent.
Answer: A
50) A discount bond selling for $15,000 with a face value of $20,000 in one year has a yield to
maturity of
A) 3 percent.
B) 20 percent.
C) 25 percent.
D) 33.3 percent.
Answer: D
51) The yield to maturity for a discount bond is related to the current bond price.
A) negatively
B) positively
C) not
D) directly
Answer: A
Ques Status: New
52) In Japan in 1998 and in the U.S. in 2008, interest rates were negative for a short period of time
because investors found it convenient to hold six-month bills as a store of value because
A) of the high inflation rate.
B) these bills sold at a discount from face value.
C) the bills were denominated in small amounts and could be stored electronically.
D) the bills were denominated in large amounts and could be stored electronically.
Answer: D
53) If the interest rate is 5%, what is the present value of a security that pays you $1, 050 next year
and $1,102.50 two years from now? If this security sold for $2200, is the yield to maturity greater
or less than 5%? Why?
Answer: PV = $1,050/(1. + .05) + $1,102.50/(1 + 0.5)2

PV = $2,000
If this security sold for $2200, the yield to maturity is less than 5%. The lower the interest
rate the higher the present value.
4.2 The Distinction Between Interest Rates and Returns

1) The is defined as the payments to the owner plus the change in a security's value
expressed as a fraction of the security's purchase price.
A) yield to maturity
B) current yield
C) rate of return
D) yield rate
Answer: C
2) Which of the following are true concerning the distinction between interest rates and returns?
A) The rate of return on a bond will not necessarily equal the interest rate on that bond.
B) The return can be expressed as the difference between the current yield and the rate of
capital gains.
C) The rate of return will be greater than the interest rate when the price of the bond falls
between time t and time t + 1.
D) The return can be expressed as the sum of the discount yield and the rate of capital gains.
Answer: A
3) The sum of the current yield and the rate of capital gain is called the
A) rate of return.
B) discount yield.
C) pertuity yield.
D) par value.
Answer: A
Ques Status: New
4) What is the return on a 5 percent coupon bond that initially sells for $1,000 and sells for $1,200
next year?
A) 5 percent
B) 10 percent
C) -5 percent
D) 25 percent
Answer: D
5) What is the return on a 5 percent coupon bond that initially sells for $1,000 and sells for $900
next year?
A) 5 percent
B) 10 percent
C) -5 percent
D) -10 percent
Answer: C
6) The return on a 5 percent coupon bond that initially sells for $1,000 and sells for $950 next year
is
A) - 10 percent.
B) - 5 percent.
C) 0 percent.
D) 5 percent.
Answer: C
7) Suppose you are holding a 5 percent coupon bond maturing in one year with a yield to maturity
of 15 percent. If the interest rate on one-year bonds rises from 15 percent to 20 percent over the
course of the year, what is the yearly return on the bond you are holding?
A) 5 percent
B) 10 percent
C) 15 percent
D) 20 percent
Answer: C
8) If the interest rates on all bonds rise from 5 to 6 percent over the course of the year, which bond
would you prefer to have been holding?
A) A bond with one year to maturity
B) A bond with five years to maturity
C) A bond with ten years to maturity
D) A bond with twenty years to maturity
Answer: A
9) An equal decrease in all bond interest rates

A) increases the price of a five-year bond more than the price of a ten-year bond.
B) increases the price of a ten- year bond more than the price of a five -year bond.
C) decreases the price of a five-year bond more than the price of a ten- year bond.
D) decreases the price of a ten-year bond more than the price of a five- year bond.
Answer: B
10) An equal increase in all bond interest rates

A) increases the return to all bond maturities by an equal amount.
B) decreases the return to all bond maturities by an equal amount.
C) has no effect on the returns to bonds.
D) decreases long-term bond returns more than short- term bond returns.
Answer: D
11) Which of the following are generally true of bonds?

A) The only bond whose return equals the initial yield to maturity is one whose time to
maturity is the same as the holding period.
B) A rise in interest rates is associated with a fall in bond prices, resulting in capital gains on
bonds whose terms to maturity are longer than the holding periods.
C) The longer a bond's maturity, the smaller is the size of the price change associated with an
interest rate change.
D) Prices and returns for short-term bonds are more volatile than those for longer -term
bonds.
Answer: A
12) Which of the following are generally true of all bonds?

A) The longer a bond's maturity, the greater is the rate of return that occurs as a result of the
increase in the interest rate.
B) Even though a bond has a substantial initial interest rate, its return can turn out to be
negative if interest rates rise.
C) Prices and returns for short-term bonds are more volatile than those for longer term
bonds.
D) A fall in interest rates results in capital losses for bonds whose terms to maturity are longer
than the holding period.
Answer: B
13) 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.
Answer: D
14) Interest- rate risk is the riskiness of an asset's returns due to

A) interest- rate changes.
B) changes in the coupon rate.
C) default of the borrower.
D) changes in the asset's maturity.
Answer: A
15) Prices and returns for bonds are more volatile than those for bonds,
everything else held constant.
A) long-term; long-term
B) long-term; short-term
C) short-term; long-term
D) short-term; short-term
Answer: B
16) There is for any bond whose time to maturity matches the holding period.
A) no interest-rate risk
B) a large interest-rate risk
C) rate-of-return risk
D) yield-to- maturity risk
Answer: A
Ques Status: New
17) Your favorite uncle advises you to purchase long-term bonds because their interest rate is 10%.
Should you follow his advice?
Answer: It depends on where you think interest rates are headed in the future. If you think
interest rates will be going up, you should not follow your uncle's advice because you
would then have to discount your bond if you needed to sell it before the maturity date.
Long- term bonds have a greater interest- rate risk.
4.3 The Distinction Between Real and Nominal Interest Rates

1) 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
Answer: A
Ques Status: New
2) The interest rate more accurately reflects the true cost of borrowing.
A) nominal
B) real
C) discount
D) market
Answer: B
3) The nominal interest rate minus the expected rate of inflation

A) defines the real interest rate.
B) is a less accurate measure of the incentives to borrow and lend than is the nominal interest
rate.
C) is a less accurate indicator of the tightness of credit market conditions than is the nominal
interest rate.
D) defines the discount rate.
Answer: A
4) When the interest rate is low, there are greater incentives to and fewer
incentives to .
A) nominal; lend; borrow
B) real; lend; borrow
C) real; borrow; lend
D) market; lend; borrow
Answer: C
5) The interest rate that describes how well a lender has done in real terms after the fact is called
the
A) ex post real interest rate.
B) ex ante real interest rate.
C) ex post nominal interest rate.
D) ex ante nominal interest rate.
Answer: A
Ques Status: New
6) The states that the nominal interest rate equals the real interest rate plus the expected
rate of inflation.
A) Fisher equation
B) Keynesian equation
C) Monetarist equation
D) Marshall equation
Answer: A
7) If the nominal rate of interest is 2 percent, and the expected inflation rate is -10 percent, the real
rate of interest is
A) 2 percent.
B) 8 percent.
C) 10 percent.
D) 12 percent.
Answer: D
8) In which of the following situations would you prefer to be the lender?

A) The interest rate is 9 percent and the expected inflation rate is 7 percent.
B) The interest rate is 4 percent and the expected inflation rate is 1 percent.
C) The interest rate is 13 percent and the expected inflation rate is 15 percent.
D) The interest rate is 25 percent and the expected inflation rate is 50 percent.
Answer: B
9) In which of the following situations would you prefer to be the borrower?

A) The interest rate is 9 percent and the expected inflation rate is 7 percent.
B) The interest rate is 4 percent and the expected inflation rate is 1 percent.
C) The interest rate is 13 percent and the expected inflation rate is 15 percent.
D) The interest rate is 25 percent and the expected inflation rate is 50 percent.
Answer: D
10) If you expect the inflation rate to be 15 percent next year and a one - year bond has a yield to
maturity of 7 percent, then the real interest rate on this bond is
A) 7 percent.
B) 22 percent.
C) - 15 percent.
D) - 8 percent.
Answer: D
11) If you expect the inflation rate to be 12 percent next year and a one - year bond has a yield to
A) - 5 percent.
B) - 2 percent.
C) 2 percent.
D) 12 percent.
Answer: A
12) If you expect the inflation rate to be 4 percent next year and a one year bond has a yield to
A) - 3 percent.
B) - 2 percent.
C) 3 percent.
D) 7 percent.
Answer: C
13) The interest rate on Treasury Inflation Protected Securities is a direct measure of
A) the real interest rate.
B) the nominal interest rate.
C) the rate of inflation.
D) the rate of deflation.
Answer: A
14) Assuming the same coupon rate and maturity length, the difference between the yield on a
Treasury Inflation Protected Security and the yield on a nonindexed Treasury security provides
insight into
A) the nominal interest rate.
B) the real interest rate.
C) the nominal exchange rate.
D) the expected inflation rate.
Answer: D
15) Assuming the same coupon rate and maturity length, when the interest rate on a Treasury
Inflation Protected Security is 3 percent, and the yield on a nonindexed Treasury bond is 8
percent, the expected rate of inflation is
A) 3 percent.
B) 5 percent.
C) 8 percent.
D) 11 percent.
Answer: B
16) Would it make sense to buy a house when mortgage rates are 14% and expected inflation is
15%? Explain your answer.
Answer: Even though the nominal rate for the mortgage appears high, the real cost of borrowing
the funds is - 1%. Yes, under this circumstance it would be reasonable to make this
purchase.
4.4 Web Appendix: Measuring Interest-Rate Risk: Duration

1) Duration is
A) an asset's term to maturity.
B) the time until the next interest payment for a coupon bond.
C) the average lifetime of a debt security's stream of payments.
D) the time between interest payments for a coupon bond.
Answer: C
2) Comparing a discount bond and a coupon bond with the same maturity,
A) the coupon bond has the greater effective maturity.
B) the discount bond has the greater effective maturity.
C) the effective maturity cannot be calculated for a coupon bond.
D) the effective maturity cannot be calculated for a discount bond.
Answer: B
3) The duration of a coupon bond increases

A) the longer is the bond's term to maturity.
B) when interest rates increase.
C) the higher the coupon rate on the bond.
D) the higher the bond price.
Answer: A
4) All else equal, when interest rates , the duration of a coupon bond .
A) rise; falls
B) rise; increases
C) falls; falls
D) falls; does not change
Answer: A
Ques Status: New
5) All else equal, the the coupon rate on a bond, the the bond's duration.
A) higher; longer
B) higher; shorter
C) lower; shorter
D) greater; longer
Answer: B
6) If a financial institution has 50% of its portfolio in a bond with a five-year duration and 50% of
its portfolio in a bond with a seven-year duration, what is the duration of the portfolio?
A) 12 years
B) 7 years
C) 6 years
D) 5 years
Answer: C
7) An asset's interest rate risk as the duration of the asset .

A) increases; decreases
B) decreases; decreases
C) decreases; increases
D) remains constant; increases
Answer: B
Chapter 5
The Behavior of Interest Rates
5.1 Determinants of Asset Demand
1) Pieces of property that serve as a store of value are called

A) assets.
B) units of account.
C) liabilities.
D) borrowings.
Answer: A
Ques Status: New
2) Of the four factors that influence asset demand, which factor will cause the demand for all assets
to increase when it increases, everything else held constant?
A) wealth
B) expected returns
C) risk
D) liquidity
Answer: A
3) If wealth increases, the demand for stocks and that of long-term bonds ,
A) increases; increases
B) increases; decreases
C) decreases; decreases
D) decreases; increases
Answer: A
4) Everything else held constant, a decrease in wealth

A) increases the demand for stocks.
B) increases the demand for bonds.
C) reduces the demand for silver.
D) increases the demand for gold.
Answer: C
5) An increase in an asset's expected return relative to that of an alternative asset, holding

everything else constant, the quantity demanded of the asset.
A) increases
B) decreases
C) has no effect on
D) erases
Answer: A
Ques Status: New
Chapter 5 The Behavior of Interest Rates 79
6) Everything else held constant, if the expected return on ABC stock rises from 5 to 10 percent and
the expected return on CBS stock is unchanged, then the expected return of holding CBS stock
relative to ABC stock and the demand for CBS stock .
A) rises; rises
B) rises; falls
C) falls; rises
D) falls; falls
Answer: D
7) Everything else held constant, if the expected return on U.S. Treasury bonds falls from 10 to 5
percent and the expected return on GE stock rises from 7 to 8 percent, then the expected return
of holding GE stock relative to U.S. Treasury bonds and the demand for GE stock
.
A) rises; rises
B) rises; falls
C) falls; rises
D) falls; falls
Answer: A
8) If housing prices are expected to increase, then, other things equal, the demand for houses will
and that of Treasury bills will .
Answer: B
9) If stock prices are expected to drop dramatically, then, other things equal, the demand for stocks
will and that of Treasury bills will .
Answer: D
10) 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
Answer: C
11) Everything else held constant, if the expected return on U.S. Treasury bonds falls from 8 to 7
percent and the expected return on corporate bonds falls from 10 to 8 percent, then the expected
return of corporate bonds relative to U.S. Treasury bonds and the demand for
corporate bonds .
A) rises; rises
B) rises; falls
C) falls; rises
D) falls; falls
Answer: D
12) An increase in the expected rate of inflation will the expected return on bonds relative
to the that on assets, everything else held constant.
A) reduce; financial
B) reduce; real
C) raise; financial
D) raise; real
Answer: B
13) If fluctuations in interest rates become smaller, then, other things equal, the demand for stocks
and the demand for long- term bonds .
Answer: D
14) If the price of gold becomes less volatile, then, other things equal, the demand for stocks will
and the demand for antiques will .
Answer: C
15) If brokerage commissions on bond sales decrease, then, other things equal, the demand for
bonds will and the demand for real estate will .
Answer: B
16) If gold becomes acceptable as a medium of exchange, the demand for gold will and
the demand for bonds will , everything else held constant.
A) decrease; decrease
B) decrease; increase
C) increase; increase
D) increase; decrease
Answer: D
17) The demand for Picasso paintings rises (holding everything else equal) when
A) stocks become easier to sell.
B) people expect a boom in real estate prices.
C) Treasury securities become riskier.
D) people expect gold prices to rise.
Answer: C
18) The demand for silver decreases, other things equal, when
A) the gold market is expected to boom.
B) the market for silver becomes more liquid.
C) wealth grows rapidly.
D) interest rates are expected to rise.
Answer: A
19) You would be less willing to purchase U.S. Treasury bonds, other things equal, if
A) you inherit $1 million from your Uncle Harry.
B) you expect interest rates to fall.
C) gold becomes more liquid.
D) stock prices are expected to fall.
Answer: C
20) You would be more willing to buy AT&T bonds (holding everything else constant) if
A) the brokerage commissions on bond sales become cheaper.
B) interest rates are expected to rise.
C) your wealth has decreased.
D) you expect diamonds to appreciate in value.
Answer: A
21) The demand for gold increases, other things equal, when
A) the market for silver becomes more liquid.
B) interest rates are expected to rise.
C) interest rates are expected to fall.
D) real estate prices are expected to increase.
Answer: B
22) Holding everything else constant,

A) if asset A's risk rises relative to that of alternative assets, the demand will increase for asset
A.
B) the more liquid is asset A, relative to alternative assets, the greater will be the demand for
asset A.
C) the lower the expected return to asset A relative to alternative assets, the greater will be
the demand for asset A.
D) if wealth increases, demand for asset A increases and demand for alternative assets
decreases.
Answer: B
23) Holding all other factors constant, the quantity demanded of an asset is
A) positively related to wealth.
B) negatively related to its expected return relative to alternative assets.
C) positively related to the risk of its returns relative to alternative assets.
D) negatively related to its liquidity relative to alternative assets.
Answer: A
Ques Status: New
24) Everything else held constant, would an increase in volatility of stock prices have any impact on
the demand for rare coins? Why or why not?
Answer: Yes, it would cause the demand for rare coins to increase. The increased volatility of
stock prices means that there is relatively more risk in owning stock than there was
previously and so the demand for an alternative asset, rare coins, would increase.
5.2 Supply and Demand in the Bond Market
1) In the bond market, the bond demanders are the and the bond suppliers are the
.
A) lenders; borrowers
B) lenders; advancers
C) borrowers; lenders
D) borrowers; advancers
Answer: A
Ques Status: New
2) The demand curve for bonds has the usual downward slope, indicating that at prices
of the bond, everything else equal, the is higher.
A) higher; demand
B) higher; quantity demanded
C) lower; demand
D) lower; quantity demanded
Answer: D
3) The supply curve for bonds has the usual upward slope, indicating that as the price ,
ceteris paribus, the increases.
A) falls; supply
B) falls; quantity supplied
C) rises; supply
D) rises; quantity supplied
Answer: D
4) In the bond market, the market equilibrium shows the market- clearing and
market- clearing .
A) price; deposit
B) interest rate; deposit
C) price; interest rate
D) interest rate; premium
Answer: C
5) When the price of a bond is above the equilibrium price, there is an excess bonds and
price will .
A) demand for; rise
B) demand for; fall
C) supply of; fall
D) supply of; rise
Answer: C
6) When the price of a bond is the equilibrium price, there is an excess demand for bonds
and price will .
A) above; rise
B) above; fall
C) below; fall
D) below; rise
Answer: D
7) When the interest rate on a bond is above the equilibrium interest rate, in the bond market there
is excess and the interest rate will .
A) demand; rise
B) demand; fall
C) supply; fall
D) supply; rise
Answer: B
8) When the interest rate on a bond is the equilibrium interest rate, in the bond market
there is excess and the interest rate will .
A) above; demand; rise
B) above; demand; fall
C) below; supply; fall
D) above; supply; rise
Answer: B
9) A situation in which the quantity of bonds supplied exceeds the quantity of bonds demanded is
called a condition of excess supply; because people want to sell bonds than others
want to buy, the price of bonds will .
A) fewer; fall
B) fewer; rise
C) more; fall
D) more; rise
Answer: C
10) If the price of bonds is set the equilibrium price, the quantity of bonds demanded
exceeds the quantity of bonds supplied, a condition called excess .
A) above; demand
B) above; supply
C) below; demand
D) below; supply
Answer: C
5.3 Changes in Equilibrium Interest Rates

1) A movement along the bond demand or supply curve occurs when changes.
A) bond price
B) income
C) wealth
D) expected return
Answer: A
2) When the price of a bond decreases, all else equal, the bond demand curve .
A) shifts right
B) shifts left
C) does not shift
D) inverts
Answer: C
3) During business cycle expansions when income and wealth are rising, the demand for bonds
and the demand curve shifts to the , everything else held constant.
A) falls; right
B) falls; left
C) rises; right
D) rises; left
Answer: C
4) Everything else held constant, when households save less, wealth and the demand for bonds
and the bond demand curve shifts .
A) increase; right
B) increase; left
C) decrease; right
D) decrease; left
Answer: D
5) Everything else held constant, if interest rates are expected to fall in the future, the demand for
long-term bonds today and the demand curve shifts to the .
A) rises; right
B) rises; left
C) falls; right
D) falls; left
Answer: A
6) Holding the expected return on bonds constant, an increase in the expected return on common
stocks would the demand for bonds, shifting the demand curve to the .
A) decrease; left
B) decrease; right
C) increase; left
D) increase; right
Answer: A
7) Everything else held constant, an increase in expected inflation, lowers the expected return on
compared to assets.
A) bonds; financial
B) bonds; real
C) physical; financial
D) physical; real
Answer: B
8) Everything else held constant, an increase in the riskiness of bonds relative to alternative assets
causes the demand for bonds to and the demand curve to shift to the .
A) rise; right
B) rise; left
C) fall; right
D) fall; left
Answer: D
9) Everything else held constant, when stock prices become less volatile, the demand curve for
bonds shifts to the and the interest rate .
A) right; rises
B) right; falls
C) left; falls
D) left; rises
Answer: D
10) Everything else held constant, when stock prices become volatile, the demand curve
for bonds shifts to the and the interest rate .
A) more; right; rises
B) more; right; falls
C) less; left; falls
D) less; left; does not change
Answer: B
11) Everything else held constant, an increase in the liquidity of bonds results in a in
demand for bonds and the demand curve shifts to the .
A) rise; right
B) rise; left
C) fall; right
D) fall; left
Answer: A
12) Everything else held constant, when bonds become less widely traded, and as a consequence the
market becomes less liquid, the demand curve for bonds shifts to the and the interest
rate .
A) right; rises
B) right; falls
C) left; falls
D) left; rises
Answer: D
13) The reduction of brokerage commissions for trading common stocks that occurred in 1975
caused the demand for bonds to and the demand curve to shift to the .
A) fall; right
B) fall, left
C) rise; right
D) rise; left
Answer: B
14) Factors that decrease the demand for bonds include

A) an increase in the volatility of stock prices.
B) a decrease in the expected returns on stocks.
C) a decrease in the inflation rate.
D) a decrease in the riskiness of stocks.
Answer: D
15) During a recession, the supply of bonds and the supply curve shifts to the ,
A) increases; left
B) increases; right
C) decreases; left
D) decreases; right
Answer: C
16) In a business cycle expansion, the of bonds increases and the curve shifts to
the as business investments are expected to be more profitable.
A) supply; supply; right
B) supply; supply; left
C) demand; demand; right
D) demand; demand; left
Answer: A
Ques Status: New
17) When the expected inflation rate increases, the real cost of borrowing and bond supply
, everything else held constant.
C) decreases; increases
D) decreases; decreases
Answer: C
18) An increase in the expected inflation rate causes the supply of bonds to and the supply
curve to shift to the , everything else held constant.
A) increase; left
B) increase; right
C) decrease; left
D) decrease; right
Answer: B
19) Higher government deficits the supply of bonds and shift the supply curve to the
A) increase; left
B) increase; right
C) decrease; left
D) decrease; right
Answer: B
20) Factors that can cause the supply curve for bonds to shift to the right include
A) an expansion in overall economic activity.
B) a decrease in expected inflation.
C) a decrease in government deficits.
D) a business cycle recession.
Answer: A
21) When the inflation rate is expected to increase, the for bonds falls, while the
curve shifts to the right, everything else held constant.
A) demand; demand
B) demand; supply
C) supply; demand
D) supply; supply
Answer: B
22) When the expected inflation rate increases, the demand for bonds , the supply of bonds
, and the interest rate , everything else held constant.
A) increases; increases; rises
B) decreases; decreases; falls
C) increases; decreases; falls
D) decreases; increases; rises
Answer: D
23) Everything else held constant, when the inflation rate is expected to rise, interest rates will
; this result has been termed the .
A) fall; Keynes effect
B) fall; Fisher effect
C) rise; Keynes effect
D) rise; Fisher effect
Answer: D
24) The economist Irving Fisher, after whom the Fisher effect is named, explained why interest rates
as the expected rate of inflation , everything else held constant.
A) rise; increases
B) rise; stabilizes
C) fall; stabilizes
D) fall; increases
Answer: A
25) Everything else held constant, during a business cycle expansion, the supply of bonds shifts to
the as businesses perceive more profitable investment opportunities, while the
demand for bonds shifts to the as a result of the increase in wealth generated by the
economic expansion.
A) right; left
B) right; right
C) left; left
D) left; right
Answer: B
26) When the economy slips into a recession, normally the demand for bonds , the supply
of bonds , and the interest rate , everything else held constant.
A) increases; increases; rises
B) decreases; decreases; falls
C) increases; decreases; falls
D) decreases; increases; rises
Answer: B
27) When an economy grows out of a recession, normally the demand for bonds and the
supply of bonds , everything else held constant.
Answer: A
28) Deflation causes the demand for bonds to , the supply of bonds to , and bond
prices to , everything else held constant.
A) increase; increase; increase
B) increase; decrease; increase
C) decrease; increase; increase
D) decrease; decrease; increase
Answer: B
29) In the 1990s Japan had the lowest interest rates in the world due to a combination of
A) inflation and recession.
B) deflation and expansion.
C) inflation and expansion.
D) deflation and recession.
Answer: D
30) When the interest rate changes,

A) the demand curve for bonds shifts to the right.
B) the demand curve for bonds shifts to the left.
C) the supply curve for bonds shifts to the right.
D) it is because either the demand or the supply curve has shifted.
Answer: D
31) The interest rate falls when either the demand for bonds or the supply of bonds
.
Answer: B
32) When the government has a surplus, as occurred in the late 1990s, the curve of bonds
shifts to the , everything else held constant.
A) supply; right
B) supply; left
C) demand; right
D) demand; left
Answer: B
33) A decrease in the brokerage commissions in the housing market from 6% to 5% of the sales price
will shift the curve for bonds to the , everything else held constant.
A) demand; right
B) demand; left
C) supply; right
D) supply; left
Answer: B
34) When rare coin prices become volatile, the curve for bonds shifts to the ,
A) demand; right
B) demand; left
C) supply; right
D) supply; left
Answer: A
35) If people expect real estate prices to increase significantly, the curve for bonds will
shift to the , everything else held constant.
A) demand; right
B) demand; left
C) supply; left
D) supply; right
Answer: B
36) Everything else held constant, when prices in the art market become more uncertain,
A) the demand curve for bonds shifts to the left and the interest rate rises.
B) the demand curve for bonds shifts to the left and the interest rate falls.
C) the demand curve for bonds shifts to the right and the interest rate falls.
D) the supply curve for bonds shifts to the right and the interest rate falls.
Answer: C
37) Everything else held constant, when real estate prices are expected to decrease
C) the demand curve for bonds shifts to the right and the interest rate falls.
D) the supply curve for bonds shifts to the right and the interest rate falls.
Answer: C
Ques Status: New
38) Everything else held constant, when the government has higher budget deficits
C) the supply curve for bonds shifts to the right and the interest rate falls.
D) the supply curve for bonds shifts to the right and the interest rate rises.
Answer: D
Ques Status: New
39) If stock prices are expected to climb next year, everything else held constant, the curve
for bonds shifts and the interest rate .
A) demand; left; rises
B) demand; right; rises
C) demand; left; falls
D) supply; left; rises
Answer: A
Ques Status: New
40) If prices in the bond market become more volatile, everything else held constant, the demand
curve for bonds shifts and interest rates .
A) left; rise
B) left; fall
C) right; rise
D) right; fall
Answer: A
Ques Status: New
41) If brokerage commissions on stocks fall, everything else held constant, the demand for bonds
, the price of bonds , and the interest rate .
A) decreases; decreases; increases
B) decreases; decreases; decreases
C) increases; decreases; increases
D) increases; increases; increases
Answer: A
Ques Status: New
42) If the expected return on bonds increases, all else equal, the demand for bonds increases, the
price of bonds , and the interest rate .
A) increases; decreases
B) increases; increases
Answer: A
Ques Status: New
43) In the figure above, a factor that could cause the supply of bonds to shift to the right is:
A) a decrease in government budget deficits.
C) a recession.
D) a business cycle expansion.
Answer: D
44) In the figure above, a factor that could cause the demand for bonds to decrease (shift to the left)
is:
A) an increase in the expected return on bonds relative to other assets.
B) a decrease in the expected return on bonds relative to other assets.
C) an increase in wealth.
D) a reduction in the riskiness of bonds relative to other assets.
Answer: B
45) In the figure above, the price of bonds would fall from P 1 to P2
A) inflation is expected to increase in the future.
B) interest rates are expected to fall in the future.
C) the expected return on bonds relative to other assets is expected to increase in the future.
D) the riskiness of bonds falls relative to other assets.
Answer: A
46) In the figure above, a factor that could cause the supply of bonds to increase (shift to the right)
is:
A) a decrease in government budget deficits.
C) expectations of more profitable investment opportunities.
D) a business cycle recession.
Answer: C
47) In the figure above, a factor that could cause the demand for bonds to shift to the right is:
A) an increase in the riskiness of bonds relative to other assets.
B) an increase in the expected rate of inflation.
C) expectations of lower interest rates in the future.
D) a decrease in wealth.
Answer: C
48) In the figure above, the price of bonds would fall from P2 to P1 if
A) there is a business cycle recession.
B) there is a business cycle expansion.
C) inflation is expected to increase in the future.
D) inflation is expected to decrease in the future.
Answer: B
49) What is the impact on interest rates when the Federal Reserve decreases the money supply by
selling bonds to the public?
Answer: Bond supply increases and the bond supply curve shifts to the right. The new
equilibrium bond price is lower and thus interest rates will increase.
50) Use demand and supply analysis to explain why an expectation of Fed rate hikes would cause
Treasury prices to fall.
Answer: The expected return on bonds would decrease relative to other assets resulting in a
decrease in the demand for bonds. The leftward shift of the bond demand curve results
in a new lower equilibrium price for bonds.
5.4 Supply and Demand in the Market for Money: The Liquidity Preference Framework
1) In Keynes's liquidity preference framework, individuals are assumed to hold their wealth in two
forms:
A) real assets and financial assets.
B) stocks and bonds.
C) money and bonds.
D) money and gold.
Answer: C
2) In Keynes's liquidity preference framework,

A) the demand for bonds must equal the supply of money.
B) the demand for money must equal the supply of bonds.
C) an excess demand of bonds implies an excess demand for money.
D) an excess supply of bonds implies an excess demand for money.
Answer: D
3) In Keynes's liquidity preference framework, if there is excess demand for money, there is
A) excess demand for bonds.
B) equilibrium in the bond market.
C) excess supply of bonds.
D) too much money.
Answer: C
4) The bond supply and demand framework is easier to use when analyzing the effects of changes
in , while the liquidity preference framework provides a simpler analysis of the effects
from changes in income, the price level, and the supply of .
A) expected inflation; bonds
B) expected inflation; money
C) government budget deficits; bonds
D) government budget deficits; money
Answer: B
5) Keynes assumed that money has rate of return.

A) a positive
B) a negative
C) a zero
D) an increasing
Answer: C
6) In his Liquidity Preference Framework, Keynes assumed that money has a zero rate of return;
thus,
A) when interest rates rise, the expected return on money falls relative to the expected return
on bonds, causing the demand for money to fall.
B) when interest rates rise, the expected return on money falls relative to the expected return
on bonds, causing the demand for money to rise.
C) when interest rates fall, the expected return on money falls relative to the expected return
on bonds, causing the demand for money to fall.
D) when interest rates fall, the expected return on money falls relative to the expected return
on bonds, causing the demand for money to rise.
Answer: A
7) In Keynes's liquidity preference framework, as the expected return on bonds increases (holding
everything else unchanged), the expected return on money , causing the demand for
to fall.
A) falls; bonds
B) falls; money
C) rises; bonds
D) rises; money
Answer: B
8) The opportunity cost of holding money is

A) the level of income.
B) the price level.
C) the interest rate.
D) the discount rate.
Answer: C
9) An increase in the interest rate

A) increases the demand for money.
B) increases the quantity of money demanded.
C) decreases the demand for money.
D) decreases the quantity of money demanded.
Answer: D
10) If there is an excess supply of money

A) individuals sell bonds, causing the interest rate to rise.
B) individuals sell bonds, causing the interest rate to fall.
C) individuals buy bonds, causing interest rates to fall.
D) individuals buy bonds, causing interest rates to rise.
Answer: C
11) When the interest rate is above the equilibrium interest rate, there is an excess money
and the interest rate will .
A) demand for; rise
B) demand for; fall
C) supply of; fall
D) supply of; rise
Answer: C
12) In the market for money, an interest rate below equilibrium results in an excess money
and the interest rate will .
A) demand for; rise
B) demand for; fall
C) supply of; fall
D) supply of; rise
Answer: A
5.5 Changes in Equilibrium Interest Rates in the Liquidity Preference Framework

1) In the Keynesian liquidity preference framework, an increase in the interest rate causes the
demand curve for money to , everything else held constant.
A) shift right
B) shift left
C) stay where it is
D) invert
Answer: C
2) A lower level of income causes the demand for money to and the interest rate to
C) increase; decrease
D) increase; increase
Answer: A
3) When real income , the demand curve for money shifts to the and the interest
rate , everything else held constant.
A) falls; right; rises
B) rises; right; rises
C) falls; left; rises
D) rises; left; rises
Answer: B
4) A business cycle expansion increases income, causing money demand to and interest
rates to , everything else held constant.
Answer: A
5) In the Keynesian liquidity preference framework, a rise in the price level causes the demand for
money to and the demand curve to shift to the , everything else held
constant.
A) increase; left
B) increase; right
C) decrease; left
D) decrease; right
Answer: B
6) When the price level , the demand curve for money shifts to the and the
interest rate , everything else held constant.
A) falls; left; falls
B) rises; right; falls
C) falls; left; rises
D) rises; right; rises
Answer: D
7) A rise in the price level causes the demand for money to and the interest rate to
C) increase; decrease
D) increase; increase
Answer: D
8) When the price level falls, the curve for nominal money , and interest rates
A) demand; decreases; fall
B) demand; increases; rise
C) supply; increases; rise
D) supply; decreases; fall
Answer: A
9) A decline in the expected inflation rate causes the demand for money to and the
demand curve to shift to the , everything else held constant.
A) decrease; right
B) decrease; left
C) increase; right
D) increase; left
Answer: B
10) When the Fed decreases the money stock, the money supply curve shifts to the and the
A) right; rises
B) right; falls
C) left; falls
D) left; rises
Answer: D
11) When the Fed the money stock, the money supply curve shifts to the and the
A) decreases; right; rises
B) increases; right; falls
C) decreases; left; falls
D) increases; left; rises
Answer: B
12) in the money supply creates excess money, causing interest rates to
A) A decrease; demand for; rise
B) An increase; demand for; fall
C) An increase; supply of; rise
D) A decrease; supply of; fall
Answer: A
13) in the money supply creates excess demand for , causing interest rates to
A) An increase; money; rise
B) An increase; bonds; fall
C) A decrease; bonds; rise
D) A decrease; money; fall
Answer: B
14) When the price level falls, the curve for nominal money , and interest rates
A) demand; decreases; fall
B) demand; increases; rise
C) supply; increases; rise
D) supply; decreases; fall
Answer: A
15) In the figure above, one factor not responsible for the decline in the demand for money is
A) a decline the price level.
B) a decline in income.
C) an increase in income.
D) a decline in the expected inflation rate.
Answer: C
16) In the figure above, the decrease in the interest rate from i 1 to i2 can be explained by
A) a decrease in money growth.
B) a decline in the expected price level.
C) an increase in income.
D) an increase in the expected price level.
Answer: B
17) 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.
Answer: C
18) In the figure above, the decrease in the interest rate from i 1 to i2 can be explained by
A) a decrease in money growth.
B) an increase in money growth.
C) a decline in the expected price level.
D) an increase in income.
Answer: B
19) Milton Friedman called the response of lower interest rates resulting from an increase in the
money supply the effect.
A) liquidity
B) price level
C) expected-inflation
D) income
Answer: A
Ques Status: New
20) Of the four effects on interest rates from an increase in the money supply, the initial effect is,
generally, the
A) income effect.
B) liquidity effect.
C) price level effect.
D) expected inflation effect.
Answer: B
21) In the liquidity preference framework, a one- time increase in the money supply results in a
price level effect. The maximum impact of the price level effect on interest rates occurs
A) at the moment the price level hits its peak (stops rising) because both the price level and
expected inflation effects are at work.
B) immediately after the price level begins to rise, because both the price level and expected
inflation effects are at work.
C) at the moment the expected inflation rate hits its peak.
D) at the moment the inflation rate hits it peak.
Answer: A
22) Of the four effects on interest rates from an increase in the money supply, the one that works in
the opposite direction of the other three is the
A) liquidity effect.
B) income effect.
C) price level effect.
D) expected inflation effect.
Answer: A
23) It is possible that when the money supply rises, interest rates may if the
effect is more than offset by changes in income, the price level, and expected inflation.
A) fall; liquidity
B) fall; risk
C) rise; liquidity
D) rise; risk
Answer: C
24) When the growth rate of the money supply increases, interest rates end up being permanently
lower if
A) the liquidity effect is larger than the other effects.
B) there is fast adjustment of expected inflation.
C) there is slow adjustment of expected inflation.
D) the expected inflation effect is larger than the liquidity effect.
Answer: A
25) When the growth rate of the money supply is increased, interest rates will fall immediately if the
liquidity effect is than the other money supply effects and there is
adjustment of expected inflation.
A) larger; fast
B) larger; slow
C) smaller; slow
D) smaller; fast
Answer: B
26) If the Fed wants to permanently lower interest rates, then it should raise the rate of money
growth if
A) there is fast adjustment of expected inflation.
B) there is slow adjustment of expected inflation.
C) the liquidity effect is smaller than the expected inflation effect.
D) the liquidity effect is larger than the other effects.
Answer: D
27) If the liquidity effect is smaller than the other effects, and the adjustment to expected inflation is
slow, then the
A) interest rate will fall.
B) interest rate will rise.
C) interest rate will initially fall but eventually climb above the initial level in response to an
increase in money growth.
D) interest rate will initially rise but eventually fall below the initial level in response to an
increase in money growth.
Answer: C
28) If the liquidity effect is smaller than the other effects, and the adjustment to expected inflation is
immediate, then the
A) interest rate will fall.
B) interest rate will rise.
C) interest rate will fall immediately below the initial level when the money supply grows.
D) interest rate will rise immediately above the initial level when the money supply grows.
Answer: D
29) In the figure above, illustrates the effect of an increased rate of money supply growth at time
period 0. From the figure, one can conclude that the
A) liquidity effect is smaller than the expected inflation effect and interest rates adjust quickly
to changes in expected inflation.
B) liquidity effect is larger than the expected inflation effect and interest rates adjust quickly
C) liquidity effect is larger than the expected inflation effect and interest rates adjust slowly to
changes in expected inflation.
D) liquidity effect is smaller than the expected inflation effect and interest rates adjust slowly
Answer: A
30) In the figure above, illustrates the effect of an increased rate of money supply growth at time
period 0. From the figure, one can conclude that the
A) Fisher effect is dominated by the liquidity effect and interest rates adjust slowly to changes
in expected inflation.
B) liquidity effect is dominated by the Fisher effect and interest rates adjust slowly to changes
C) liquidity effect is dominated by the Fisher effect and interest rates adjust quickly to
D) Fisher effect is smaller than the expected inflation effect and interest rates adjust quickly to
Answer: C
31) The figure above illustrates the effect of an increased rate of money supply growth at time
period T0 . From the figure, one can conclude that the
Answer: C
period T0 . From the figure, one can conclude that the
Answer: A
period T0. From the figure, one can conclude that the
Answer: D
period T0. From the figure, one can conclude that the
Answer: A
35) Interest rates increased continuously during the 1970s. The most likely explanation is
A) banking failures that reduced the money supply.
B) a rise in the level of income.
C) the repeated bouts of recession and expansion.
D) increasing expected rates of inflation.
Answer: D
36) Using the liquidity preference framework, what will happen to interest rates if the Fed increases
the money supply?
Answer: The Fed's actions shift the money supply curve to the right. The new equilibrium interest
rate will be lower than it was previously.
37) Using the liquidity preference framework, show what happens to interest rates during a
business cycle recession.
Answer: During a business cycle recession, income will fall. This causes the money demand curve
to shift to the left. The resulting equilibrium will be at a lower interest rate.
5.6 Web Appendix 1: Models of Asset Pricing

1) The riskiness of an asset is measured by
A) the magnitude of its return.
B) the absolute value of any change in the asset's price.
C) the standard deviation of its return.
D) risk is impossible to measure.
Answer: C
2) Holding many risky assets and thus reducing the overall risk an investor faces is called
A) diversification.
B) foolishness.
C) risk acceptance.
D) capitalization.
Answer: A
Ques Status: New
3) The the returns on two securities move together, the benefit there is from
diversification.
A) less; more
B) less; less
C) more; more
D) more; greater
Answer: A
Ques Status: New
4) A higher means that an asset's return is more sensitive to changes in the value of the
market portfolio.
A) alpha
B) beta
C) CAPM
D) APT
Answer: B
5) The riskiness of an asset that is unique to the particular asset is

A) systematic risk.
B) portfolio risk.
C) investment risk.
D) nonsystematic risk.
Answer: D
6) The risk of a well-diversified portfolio depends only on the risk of the assets in the
portfolio.
A) systematic
B) nonsystematic
C) portfolio
D) investment
Answer: A
7) Both the CAPM and APT suggest that an asset should be priced so that it has a higher expected
return
A) when it has a greater systematic risk.
B) when it has a greater risk in isolation.
C) when it has a lower systematic risk.
D) when it has a lower systematic risk and a lower risk in isolation.
Answer: A
Ques Status: New
8) In contrast to the CAPM , the APT assumes that there can be several sources of that
cannot be eliminated through diversification.
A) nonsystematic risk
B) systematic risk
C) credit risk
D) arbitrary risk
Answer: B
5.7 Web Appendix 2: Applying the Asset Market Approach to a Commodity Market:
The Case of Gold
1) When stock prices become more volatile, the curve for gold shifts right and gold prices
A) demand; increase
B) demand; decrease
C) supply; increase
D) supply; decrease
Answer: A
Ques Status: New
2) A return to the gold standard, that is, using gold for money will the for gold,
its price, everything else held constant.
A) increase; demand; increasing
B) decrease; demand; decreasing
C) increase; supply; increasing
D) decrease; supply; increasing
Answer: A
3) When gold prices become more volatile, the curve for gold shifts to the ;
the price of gold.
A) supply; right; increasing
B) supply; left; increasing
C) demand; right; decreasing
D) demand; left; decreasing
Answer: D
4) Discovery of new gold in Alaska will the of gold, its price,

C) decrease; supply; increasing
D) increase; supply; decreasing
Answer: D
5) An increase in the expected inflation rate will the for gold, its price,
C) increase; supply; increasing
D) decrease; supply; increasing
Answer: A
6) The price of gold should be to the expected inflation rate.

A) positively related
B) negatively related
C) inversely related
D) unrelated
Answer: A
Ques Status: New
5.8 Web Appendix 3: Loanable Funds Framework

1) In the loanable funds framework, the curve of bonds is equivalent to the
curve of loanable funds.
A) demand; demand
B) demand; supply
C) supply; supply
D) supply; equilibrium
Answer: B
2) In the loanable funds framework, the is measured on the vertical axis.

A) price of bonds
B) interest rate
C) quantity of bonds
D) quantity of loanable funds
Answer: B

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102752298 Mishkin Test Bank 2023 Update

1.1 Why Study Financial Markets?

1) Financial markets promote economic efficiency by

2) Financial markets promote greater economic efficiency by channeling funds from to

3) Well-functioning financial markets promote

4) A key factor in producing high economic growth is

7) Poorly performing financial markets can be the cause of

8) The bond markets are important because they are

17) The stock market is important because it is

18) Stock prices are

19) A rising stock market index due to higher share prices

20) When stock prices fall

21) Changes in stock prices

25) A share of common stock is a claim on a corporation's

27) The decline in stock prices from 2000 through 2002

29) What is a stock? How do stocks affect the economy?

30) Why is it important to understand the bond market?

1.2 Why Study Financial Institutions and Banking?

6) Financial institutions search for has resulted in many financial innovations.

7) Banks and other financial institutions engage in financial intermediation, which

10) Which of the following is not a financial institution?

11) The delivery of financial services electronically is called .

12) What crucial role do financial intermediaries perform in an economy?

1.3 Why Study Money and Monetary Policy?

3) Sustained downward movements in the business cycle are referred to as

4) During a recession, output declines resulting in

5) Prior to all recessions since 1900, there has been a drop in

7) theory relates changes in the quantity of money to changes in aggregate economic

8) A sharp increase in the growth of the money supply is likely followed by

9) It is true that inflation is a

10) Which of the following is a true statement?

20) policy involves decisions about government spending and taxation.

23) Budgets deficits can be a concern because they might

24) Budget deficits are important because deficits

1.4 Why Study International Finance?

4) Everything else constant, a stronger dollar will mean that

5) Which of the following is most likely to result from a stronger dollar?

6) Everything else held constant, a weaker dollar will likely hurt

7) Everything else held constant, a stronger dollar benefits and hurts .

2) The gross domestic product is the

3) Which of the following items are not counted in U.S. GDP?

4) If an economy has aggregate output of $20 trillion, then aggregate income is

7) GDP measured with constant prices is referred to as

10) To convert a nominal GDP to a real GDP, you would use

14) To calculate the growth rate of a variable, you will

2.1 Function of Financial Markets

1) Every financial market has the following characteristic:

2) Financial markets have the basic function of

3) Financial markets improve economic welfare because

4) Well-functioning financial markets

5) A breakdown of financial markets can result in

6) The principal lender- savers are

7) Which of the following can be described as direct finance?

10) Which of the following can be described as involving direct finance?

11) Which of the following can be described as involving direct finance?

12) Which of the following can be described as involving indirect finance?

13) Which of the following can be described as involving indirect finance?

2.2 Structure of Financial Markets

4) Which of the following is an example of an intermediate- term debt?