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
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
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
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
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
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
19) A rising stock market index due to higher share prices
A) increases peopleʹs wealth, but is unlikely to increase their willingness to spend.
B) increases peopleʹs 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 peopleʹs wealth, but is unlikely to increase their willingness to spend.
Answer: B
20) When stock prices fall
A) an individualʹs 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 individualʹs wealth may decrease but their willingness to spend is not affected.
D) an individualʹs wealth may decrease and their willingness to spend may decrease.
Answer: D
21) Changes in stock prices
A) do not affect peopleʹs wealth and their willingness to spend.
B) affect firmsʹ 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 peopleʹs 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
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 corporationʹs
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) ʺTerrible Tuesdayʺ
B) ʺWoeful Wednesdayʺ
C) ʺFreaky Fridayʺ
D) ʺBlack Mondayʺ
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
6) The principal lender-savers are
A) governments.
B) businesses.
C) households.
D) foreigners.
Answer: C
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 issuerʹs 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 firmʹs 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 instrumentʹs
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 corporationʹs ________. 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 corporationʹs
profitability?
A) a bond holder
B) a commercial paper holder
C) a shareholder
D) a T-bill holder
Answer: C
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
 Chapter 3
What Is 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 ʺmoneynessʺ 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 personʹs
A) wealth.
B) income.
C) money.
D) credit.
Answer: A
6) A personʹs 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 individualʹs 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
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
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 economistsʹ 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 moneyʹs 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
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
 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
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
15) The dollar amount of the yearly coupon payment expressed as a percentage of the face
value of the bond is called the bondʹs
A) coupon rate.
B) maturity rate.
C) face value rate.
D) payment rate.
Answer: A
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
 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
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
________,everything else held constant.
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 assetʹs 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
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 ________.
A) increase; increase
B) increase; decrease
C) decrease; decrease
D) decrease; increase
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 ________.
A) increase; increase
B) increase; decrease
C) decrease; decrease
D) decrease; increase
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 ________.
A) increases; increases
B) increases; decreases
C) decreases; decreases
D) decreases; increases
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 ________.
A) increase; increase
B) increase; decrease
C) decrease; decrease
D) decrease; increase
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 ________.
A) increase; increase
B) increase; decrease
C) decrease; decrease
D) decrease; increase
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
82 Mishkin · The Economics of Money, Banking, and Financial Markets, 9th Edition
22) Holding everything else constant,
A) if asset Aʹs 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
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
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
 Chapter 6
The Risk and Term Structure of Interest Rates
6.1 Risk Structure of Interest Rates
1) The risk structure of interest rates is
A) the structure of how interest rates move over time.
B) the relationship among interest rates of different bonds with the same maturity.
C) the relationship among the term to maturity of different bonds.
D) the relationship among interest rates on bonds with different maturities.
Answer: B
2) The risk that interest payments will not be made, or that the face value of a bond is not
repaid when a bond matures is
A) interest rate risk.
B) inflation risk.
C) moral hazard.
D) default risk.
Answer: D
3) Bonds with no default risk are called
A) flower bonds.
B) no-risk bonds.
C) default-free bonds.
D) zero-risk bonds.
Answer: C
4) Which of the following bonds are considered to be default-risk free?
A) Municipal bonds
B) Investment-grade bonds
C) U.S. Treasury bonds
D) Junk bonds
Answer: C
5) U.S. government bonds have no default risk because
A) they are backed by the full faith and credit of the federal government.
B) the federal government can increase taxes to pay its obligations.
C) they are backed with gold reserves.
D) they can be exchanged for silver at any time.
Answer: B
6) The spread between the interest rates on bonds with default risk and default-free bonds
is called the
A) risk premium.
B) junk margin.
C) bond margin.
D) default premium.
Answer: A
7) If the probability of a bond default increases because corporations begin to suffer large
losses, then the default risk on corporate bonds will ________ and the expected return on
these bonds will ________, everything else held constant.
A) decrease; increase
B) decrease; decrease
C) increase; increase
D) increase; decrease
Answer: D
8) A bond with default risk will always have a ________ risk premium and an increase in
its default risk will ________ the risk premium.
A) positive; raise
B) positive; lower
C) negative; raise
D) negative; lower
Answer: A
9) If a corporation begins to suffer large losses, then the default risk on the corporate bond
will
A) increase and the bondʹs return will become more uncertain, meaning the expected return
on the corporate bond will fall.
B) increase and the bondʹs return will become less uncertain, meaning the expected return
on the corporate bond will fall.
C) decrease and the bondʹs return will become less uncertain, meaning the expected return
on the corporate bond will fall.
D) decrease and the bondʹs return will become less uncertain, meaning the expected return
on the corporate bond will rise.
Answer: A
10) If the possibility of a default increases because corporations begin to suffer losses, then
the default risk on corporate bonds will ________, and the bondsʹ returns will
become________uncertain, meaning that the expected return on these bonds will decrease,
everything else held constant.
A) increase; less
B) increase; more
C) decrease; less
D) decrease; more
Answer: B
11) Other things being equal, an increase in the default risk of corporate bonds shifts the
demand curve for corporate bonds to the ________ and the demand curve for Treasury
bonds to the________.
A) right; right
B) right; left
C) left; right
D) left; left
Answer: C
12) An increase in the riskiness of corporate bonds will ________ the price of corporate
bonds and________ the price of Treasury bonds, everything else held constant.
A) increase; increase
B) reduce; reduce
C) reduce; increase
D) increase; reduce
Answer: C
13) An increase in the riskiness of corporate bonds will ________ the yield on corporate
bonds and________ the yield on Treasury securities, everything else held constant.
A) increase; increase
B) reduce; reduce
C) increase; reduce
D) reduce; increase
Answer: C
14) An increase in default risk on corporate bonds ________ the demand for these bonds,
but________ the demand for default-free bonds, everything else held constant.
A) increases; lowers
B) lowers; increases
C) does not change; greatly increases
D) moderately lowers; does not change
Answer: B
15) As default risk increases, the expected return on corporate bonds ________, and the
return becomes ________ uncertain, everything else held constant.
A) increases; less
B) increases; more
C) decreases; less
D) decreases; more
Answer: D
16) As their relative riskiness ________, the expected return on corporate bonds ________
relative to the expected return on default-free bonds, everything else held constant.
A) increases; increases
B) increases; decreases
C) decreases; decreases
D) decreases; does not change
Answer: B
17) Which of the following statements are true?
A) A decrease in default risk on corporate bonds lowers the demand for these bonds, but
increases the demand for default-free bonds.
B) The expected return on corporate bonds decreases as default risk increases.
C) A corporate bondʹs return becomes less uncertain as default risk increases.
D) As their relative riskiness increases, the expected return on corporate bonds increases
relative to the expected return on default-free bonds.
Answer: B
18) Everything else held constant, if the federal government were to guarantee today that
it will pay creditors if a corporation goes bankrupt in the future, the interest rate on
corporate bonds will________ and the interest rate on Treasury securities will ________.
A) increase; increase
B) increase; decrease
C) decrease; increase
D) decrease; decrease
Answer: C
19) Bonds with relatively high risk of default are called
A) Brady bonds.
B) junk bonds.
C) zero coupon bonds.
D) investment grade bonds.
Answer: B
20) Bonds with relatively low risk of default are called ________ securities and have a
rating of Baa (or BBB) and above; bonds with ratings below Baa (or BBB) have a higher
default risk and are called ________.
A) investment grade; lower grade
B) investment grade; junk bonds
C) high quality; lower grade
D) high quality; junk bonds
Answer: B
21) Which of the following bonds would have the highest default risk?
A) Municipal bonds
B) Investment-grade bonds
C) U.S. Treasury bonds
D) Junk bonds
Answer: D
22) Which of the following long-term bonds has the highest interest rate?
A) Corporate Baa bonds
B) U.S. Treasury bonds
C) Corporate Aaa bonds
D) Municipal bonds
Answer: A
23) Which of the following securities has the lowest interest rate?
A) Junk bonds
B) U.S. Treasury bonds
C) Investment-grade bonds
D) Corporate Baa bonds
Answer: B
24) The spread between interest rates on low quality corporate bonds and U.S. government
bonds
A) widened significantly during the Great Depression.
B) narrowed significantly during the Great Depression.
C) narrowed moderately during the Great Depression.
D) did not change during the Great Depression.
Answer: A
25) During the Great Depression years 1930-1933 there was a very high rate of business
failures and defaults, we would expect the risk premium for ________ bonds to be very
high.
A) U.S. Treasury
B) corporate Aaa
C) municipal
D) corporate Baa
Answer: D
26) Risk premiums on corporate bonds tend to ________ during business cycle expansions
and________ during recessions, everything else held constant.
A) increase; increase
B) increase; decrease
C) decrease; increase
D) decrease; decrease
Answer: C
 Chapter 12
Banking Industry: Structure and Competition
12.1 Historical Development of the Banking System
1) The modern commercial banking system began in America when the
A) Bank of United States was chartered in New York in 1801.
B) Bank of North America was chartered in Philadelphia in 1782.
C) Bank of United States was chartered in Philadelphia in 1801.
D) Bank of North America was chartered in New York in 1782.
Answer: B
2) A major controversy involving the banking industry in its early years was
A) whether banks should both accept deposits and make loans or whether these functions
should be separated into different institutions.
B) whether the federal government or the states should charter banks.
C) what percent of deposits banks should hold as fractional reserves.
D) whether banks should be allowed to issue their own bank notes.
Answer: B
3) The government institution that has responsibility for the amount of money and credit
supplied in the economy as a whole is the
A) central bank.
B) commercial bank.
C) bank of settlement.
D) monetary fund.
Answer: A
4) Because of the abuses by state banks and the clear need for a central bank to help the
federal government raise funds during the War of 1812, Congress created the
A) Bank of United States in 1812.
B) Bank of North America in 1814.
C) Second Bank of the United States in 1816.
D) Second Bank of North America in 1815.
Answer: C
5) The Second Bank of the United States was denied a new charter by
A) President Andrew Jackson.
B) Vice President John Calhoun.
C) President Benjamin Harrison.
D) President John Q. Adams.
Answer: A
6) Currency circulated by banks that could be redeemed for gold was called ________.
A) junk bonds
B) banknotes
C) gold bills
D) state money
Answer: B
7) To eliminate the abuses of the state-chartered banks, the ________ created a new
banking system of federally chartered banks, supervised by the ________.
A) National Bank Act of 1863; Office of the Comptroller of the Currency
B) Federal Reserve Act of 1863; Office of the Comptroller of the Currency
C) National Bank Act of 1863; Office of Thrift Supervision
D) Federal Reserve Act of 1863; Office of Thrift Supervision
Answer: A
8) The belief that bank failures were regularly caused by fraud or the lack of sufficient bank
capital explains, in part, the passage of
A) the National Bank Charter Amendments of 1918.
B) the Garn-St. Germain Act of 1982.
C) the National Bank Act of 1863.
D) Federal Reserve Act of 1913.
Answer: C
9) Before 1863,
A) federally-chartered banks had regulatory advantages not granted to state-chartered
banks.
B) the number of federally-chartered banks grew at a much faster rate than at any other
time since the end of the Civil War.
C) banks acquired funds by issuing bank notes.
D) banks were required to maintain 100% of their deposits as reserves.
Answer: C
10) Although the National Bank Act of 1863 was designed to eliminate state -chartered
banks by imposing a prohibitive tax on banknotes, these banks have been able to stay in
business by
A) issuing credit cards.
B) ignoring the regulations.
C) acquiring funds through deposits.
D) branching into other states.
Answer: C
11) The National Bank Act of 1863, and subsequent amendments to it,
A) created a banking system of state-chartered banks.
B) established the Office of the Comptroller of the Currency.
C) broadened the regulatory powers of the Federal Reserve.
D) created insurance on deposit accounts.
Answer: B
12) Which regulatory body charters national banks?
A) The Federal Reserve
B) The FDIC
C) The Comptroller of the Currency
D) The U.S. Treasury
Answer: C
13) The regulatory system that has evolved in the United States whereby banks are
regulated at the state level, the national level, or both, is known as a
A) bilateral regulatory system.
B) tiered regulatory system.
C) two-tiered regulatory system.
D) dual banking system.
Answer: D
Ques Status: Previous Edition
14) Today the United States has a dual banking system in which banks supervised by the
________and by the ________ operate side by side.
A) federal government; municipalities
B) state governments; municipalities
C) federal government; states
D) municipalities; states
Answer: C
15) The U.S. banking system is considered to be a dual system because
A) banks offer both checking and savings accounts.
B) it actually includes both banks and thrift institutions.
C) it is regulated by both state and federal governments.
D) it was established before the Civil War, requiring separate regulatory bodies for the
North and South.
Answer: C
16) The Federal Reserve Act of 1913 required that
A) state banks be subject to the same regulations as national banks.
B) national banks establish branches in the cities containing Federal Reserve banks.
C) national banks join the Federal Reserve System.
D) state banks could not join the Federal Reserve System.
Answer: C
17) The Federal Reserve Act required all ________ banks to become members of the
Federal Reserve System, while ________ banks could choose to become members of the
system.
A) state; national
B) state; municipal
C) national; state
D) national; municipal
Answer: C
18) Probably the most significant factor explaining the drastic drop in the number of bank
failures since the Great Depression has been
A) the creation of the FDIC.
B) rapid economic growth since 1941.
C) the employment of new procedures by the Federal Reserve.
D) better bank management.
Answer: A
19) With the creation of the Federal Deposit Insurance Corporation, member banks of the
Federal Reserve System ________ to purchase FDIC insurance for their depositors, while
non-member commercial banks ________ to buy deposit insurance.
A) could choose; were required
B) could choose; were given the option
C) were required, could choose
D) were required; were required
Answer: C
20) With the creation of the Federal Deposit Insurance Corporation,
A) member banks of the Federal Reserve System were given the option to purchase FDIC
insurance for their depositors, while non-member commercial banks were required to buy
deposit insurance.
B) member banks of the Federal Reserve System were required to purchase FDIC insurance
for their depositors, while non-member commercial banks could choose to buy deposit
insurance.
C) both member and non-member banks of the Federal Reserve System were required to
purchase FDIC insurance for their depositors.
D) both member and non-member banks of the Federal Reserve System could choose, but
were not required, to purchase FDIC insurance for their depositors.
Answer: B
21) The Glass-Steagall Act, before its repeal in 1999, prohibited commercial banks from
A) issuing equity to finance bank expansion.
B) engaging in underwriting and dealing of corporate securities.
C) selling new issues of government securities.
D) purchasing any debt securities.
Answer: B
22) The legislation that separated investment banking from commercial banking until its
repeal in 1999 is known as the:
A) National Bank Act of 1863.
B) Federal Reserve Act of 1913.
C) Glass-Steagall Act.
D) McFadden Act.
Answer: C
23) Which of the following statements concerning bank regulation in the United States are
true?
A) The Office of the Comptroller of the Currency has the primary responsibility for state
banks that are members of the Federal Reserve System.
B) The Federal Reserve and the state banking authorities jointly have responsibility for the
900 state banks that are members of the Federal Reserve System.
C) The Office of the Comptroller of the Currency has sole regulatory responsibility over
bank holding companies.
D) The state banking authorities have sole regulatory responsibility for all state banks.
Answer: B
24) Which bank regulatory agency has the sole regulatory authority over bank holding
companies?
A) The FDIC
B) The Comptroller of the Currency
C) The FHLBS
D) The Federal Reserve System
Answer: D
25) State banks that are not members of the Federal Reserve System are most likely to be
examined by the
A) Federal Reserve System.
B) FDIC.
C) FHLBS.
D) Comptroller of the Currency.
Answer: B
26) State banking authorities have sole jurisdiction over state banks
A) without FDIC insurance.
B) that are not members of the Federal Reserve System.
C) operating as bank holding companies.
D) chartered in the 21st century.
Answer: A
 Chapter 13
Central Banks and the Federal Reserve System
13.1 The Price Stability Goal and The Nominal Anchor
1) The most common definition that monetary policymakers use for price stability is
A) low and stable deflation.
B) an inflation rate of zero percent.
C) high and stable inflation.
D) low and stable inflation.
Answer: D
2) Price stability is desirable because
A) inflation creates uncertainty, making it difficult to plan for the future.
B) everyone is better off when prices are stable.
C) price stability increases the profitability of the Fed.
D) it guarantees full employment.
Answer: A
3) Inflation results in
A) ease of planning for the future.
B) ease of comparing prices over time.
C) lower nominal interest rates.
D) difficulty interpreting relative price movements.
Answer: D
4) Economists believe that countries recently suffering hyperinflation have experienced
A) reduced growth.
B) increased growth.
C) reduced prices.
D) lower interest rates.
Answer: A
5) A nominal variable, such as the inflation rate or the money supply, which ties down the
price level to achieve price stability is called ________ anchor.
A) a nominal
B) a real
C) an operating
D) an intermediate
Answer: A
6) A central feature of monetary policy strategies in all countries is the use of a nominal
variable that monetary policymakers use as an intermediate target to achieve an ultimate
goal such as price stability. Such a variable is called a nominal
A) anchor.
B) benchmark.
C) tether.
D) guideline.
Answer: A
7) A central feature of monetary policy strategies in all countries is the use of a nominal
anchor, which is a nominal variable that monetary policymakers use as an
A) operating target, such as the federal funds interest rate.
B) intermediate target, such as the federal funds interest rate.
C) intermediate target to achieve an ultimate goal such as price stability.
D) operating target to achieve an ultimate goal such as exchange rate stability.
Answer: C
8) A nominal anchor promotes price stability by
A) outlawing inflation.
B) stabilizing interest rates.
C) keeping inflation expectations low.
D) keeping economic growth low.
Answer: C
9) Monetary policy is considered time-inconsistent because
A) of the lag times associated with the implementation of monetary policy and its effect on
the economy.
B) policymakers are tempted to pursue discretionary policy that is more contractionary in
the short run.
C) policymakers are tempted to pursue discretionary policy that is more expansionary in
the short run.
D) of the lag times associated with the recognition of a potential economic problem and
the implementation of monetary policy.
Answer: C
10) The time-inconsistency problem with monetary policy tells us that, if policymakers use
discretionary policy, there is a higher probability that the ________ will be higher,
compared to policy makers following a behavior rule.
A) inflation rate
B) unemployment rate
C) interest rate
D) foreign exchange rate
Answer: A
11) The theory that monetary policy conducted on a discretionary, day-by-day basis leads
to poor long-run outcomes is referred to as the
A) adverse selection problem.
B) moral hazard problem.
C) time-inconsistency problem.
D) nominal-anchor problem.
Answer: C
12) The ________ problem of discretionary policy arises because economic behavior is
influenced by what firms and people expect the monetary authorities to do in the future.
A) moral hazard
B) time-inconsistency
C) nominal-anchor
D) rational-expectation
Answer: B
13) If the central bank pursues a monetary policy that is more expansionary than what firms
and people expect, then the central bank must be trying to
A) boost output in the short run.
B) constrain output in the short run.
C) constrain prices.
D) boost prices in the short run.
Answer: A
14) The time-inconsistency problem in monetary policy can occur when the central bank
conducts policy
A) using a nominal anchor.
B) using a strict and inflexible rule.
C) on a discretionary, day-by-day basis.
D) using a flexible, discretionary rule.
Answer: C
15) Explain the time-inconsistency problem. What is the likely outcome of discretionary
policy? What are the solutions to the time-inconsistency problem?
Answer: With policy discretion, policymakers have an incentive to attempt to increase
output by pursuing expansionary policies once expectations are set. The problem is that
this policy results not in higher output, but in higher actual and expected inflation. The
solution is to adopt a rule to constrain discretion. Nominal anchors can provide the
necessary constraint on discretionary behavior.
13.2 Other Goals of Monetary Policy
1) Even if the Fed could completely control the money supply, monetary policy would have
critics because
A) the Fed is asked to achieve many goals, some of which are incompatible with others.
B) the Fedʹs goals do not include high employment, making labor unions a critic of the Fed.
C) the Fedʹs primary goal is exchange rate stability, causing it to ignore domestic economic
conditions.
D) it is required to keep Treasury security prices high.
Answer: A
2) High unemployment is undesirable because it
A) results in a loss of output.
B) always increases inflation.
C) always increases interest rates.
D) reduces idle resources.
Answer: A
3) When workers voluntarily leave work while they look for better jobs, the resulting
unemployment is called
A) structural unemployment.
B) frictional unemployment.
C) cyclical unemployment.
D) underemployment.
Answer: B
4) Unemployment resulting from a mismatch of workersʹ skills and job requirements is
called
A) frictional unemployment.
B) structural unemployment.
C) seasonal unemployment.
D) cyclical unemployment.
Answer: B
5) The goal for high employment should be a level of unemployment at which the demand
for labor equals the supply of labor. Economists call this level of unemployment the
A) frictional level of unemployment.
B) structural level of unemployment.
C) natural rate level of unemployment.
D) Keynesian rate level of unemployment.
Answer: C
6) Supply-side economic policies seek to
A) raise interest rates through contractionary monetary policy.
B) increase federal government expenditures.
C) increase consumption expenditures by increasing taxes.
D) increase saving and investment using tax incentives.
Answer: D
7) The Federal Reserve System was created to
A) make it easier to finance budget deficits.
B) promote financial market stability.
C) lower the unemployment rate.
D) promote rapid economic growth.
Answer: B
8) Having interest rate stability
A) allows for less uncertainty about future planning.
B) leads to demands to curtail the Fedʹs power.
C) guarantees full employment.
D) leads to problems in financial markets.
Answer: A
9) Foreign exchange rate stability is important because a decline in the value of the
domestic currency will ________ the inflation rate, and an increase in the value of the
domestic currency makes domestic industries ________ competitive with competing
foreign industries.
A) increase; more
B) increase; less
C) decrease; more
D) decrease; less
Answer: B
13.3 Should Price Stability be the Primary Goal of Monetary Policy?
1) Which set of goals can, at times, conflict in the short run?
A) High employment and economic growth.
B) Interest rate stability and financial market stability.
C) High employment and price level stability.
D) Exchange rate stability and financial market stability.
Answer: C
 Chapter 14
The Money Supply Process
14.1 Three Players in the Money Supply Process
1) The government agency that oversees the banking system and is responsible for the
conduct of monetary policy in the United States is
A) the Federal Reserve System.
B) the United States Treasury.
C) the U.S. Gold Commission.
D) the House of Representatives.
Answer: A
2) Individuals that lend funds to a bank by opening a checking account are called
A) policyholders.
B) partners.
C) depositors.
D) debt holders.
Answer: C
3) The three players in the money supply process include
A) banks, depositors, and the U.S. Treasury.
B) banks, depositors, and borrowers.
C) banks, depositors, and the central bank.
D) banks, borrowers, and the central bank.
Answer: C
4) Of the three players in the money supply process, most observers agree that the most
important player is
A) the United States Treasury.
B) the Federal Reserve System.
C) the FDIC.
D) the Office of Thrift Supervision.
Answer: B
14.2 The Fedʹs Balance Sheet
1) Both ________ and ________ are Federal Reserve assets.
A) currency in circulation; reserves
B) currency in circulation; government securities
C) government securities; discount loans
D) government securities; reserves
Answer: C
2) The monetary liabilities of the Federal Reserve include
A) government securities and discount loans.
B) currency in circulation and reserves.
C) government securities and reserves.
D) currency in circulation and discount loans.
Answer: B
3) Both ________ and ________ are monetary liabilities of the Fed.
A) government securities; discount loans
B) currency in circulation; reserves
C) government securities; reserves
D) currency in circulation; discount loans
Answer: B
4) The sum of the Fedʹs monetary liabilities and the U.S. Treasuryʹs monetary liabilities is
called
A) the money supply.
B) currency in circulation.
C) bank reserves.
D) the monetary base.
Answer: D
5) The monetary base consists of
A) currency in circulation and Federal Reserve notes.
B) currency in circulation and the U.S. Treasuryʹs monetary liabilities.
C) currency in circulation and reserves.
D) reserves and Federal Reserve Notes.
Answer: C
6) Total reserves minus bank deposits with the Fed equals
A) vault cash.
B) excess reserves.
C) required reserves.
D) currency in circulation.
Answer: A
7) Reserves are equal to the sum of
A) required reserves and excess reserves.
B) required reserves and vault cash reserves.
C) excess reserves and vault cash reserves.
D) vault cash reserves and total reserves.
Answer: A
8) Total reserves are the sum of ________ and ________.
A) excess reserves; borrowed reserves
B) required reserves; currency in circulation
C) vault cash; excess reserves
D) excess reserves; required reserves
Answer: D
9) Excess reserves are equal to
A) total reserves minus discount loans.
B) vault cash plus deposits with Federal Reserve banks minus required reserves.
C) vault cash minus required reserves.
D) deposits with the Fed minus vault cash plus required reserves.
Answer: B
10) Total Reserves minus vault cash equals
A) bank deposits with the Fed.
B) excess reserves.
C) required reserves.
D) currency in circulation.
Answer: A
11) The amount of deposits that banks must hold in reserve is
A) excess reserves.
B) required reserves.
C) total reserves.
D) vault cash.
Answer: B
12) The percentage of deposits that banks must hold in reserve is the
A) excess reserve ratio.
B) required reserve ratio.
C) total reserve ratio.
D) currency ratio.
Answer: B
13) Suppose that from a new checkable deposit, First National Bank holds two million
dollars in vault cash, eight million dollars on deposit with the Federal Reserve, and one
million dollars in required reserves. Given this information, we can say First National
Bank has ________ million dollars in excess reserves.
A) three
B) nine
C) ten
D) eleven
Answer: B
14) Suppose that from a new checkable deposit, First National Bank holds two million
dollars in vault cash, eight million dollars on deposit with the Federal Reserve, and one
million dollars in required reserves. Given this information, we can say First National
Bank faces a required reserve ratio of ________ percent.
A) ten
B) twenty
C) eighty
D) ninety
Answer: A
15) Suppose that from a new checkable deposit, First National Bank holds two million
dollars in vault cash, eight million dollars on deposit with the Federal Reserve, and nine
million dollars in excess reserves. Given this information, we can say First National Bank
has ________ million dollars in required reserves.
A) one
B) two
C) eight
D) ten
Answer: A
16) Suppose that from a new checkable deposit, First National Bank holds two million
dollars in vault cash, eight million dollars on deposit with the Federal Reserve, and nine
million dollars in excess reserves. Given this information, we can say First National Bank
faces a required reserve ratio of ________ percent.
A) ten
B) twenty
C) eighty
D) ninety
Answer: A
17) Suppose that from a new checkable deposit, First National Bank holds eight million
dollars on deposit with the Federal Reserve, one million dollars in required reserves, and
faces a required reserve ratio of ten percent. Given this information, we can say First
National Bank has________ million dollars in excess reserves.
A) two
B) eight
C) nine
D) ten
Answer: C
18) Suppose that from a new checkable deposit, First National Bank holds eight million
dollars on deposit with the Federal Reserve, one million dollars in required reserves, and
faces a required reserve ratio of ten percent. Given this information, we can say First
National Bank has________ million dollars in vault cash.
A) two
B) eight
C) nine
D) ten
Answer: A
19) Suppose that from a new checkable deposit, First National Bank holds two million
dollars in vault cash, nine million dollars in excess reserves, and faces a required reserve
ratio of ten percent. Given this information, we can say First National Bank has ________
million dollars in required reserves.
A) one
B) two
C) eight
D) ten
Answer: A
20) Suppose that from a new checkable deposit, First National Bank holds two million
dollars in vault cash, nine million dollars in excess reserves, and faces a required reserve
ratio of ten percent. Given this information, we can say First National Bank has ________
million dollars on deposit with the Federal Reserve.
A) one
B) two
C) eight
D) ten
Answer: C
21) Suppose that from a new checkable deposit, First National Bank holds two million
dollars in vault cash, one million dollars in required reserves, and faces a required reserve
ratio of ten percent. Given this information, we can say First National Bank has ________
million dollars in excess reserves.
A) one
B) two
C) nine
D) ten
Answer: C