Chapter1

WhyStudyFinancialMarketsandInstitutions?
.1

Multiple Choice Questions

1.

Financialmarketsandinstitutions
(a) involvethemovementofhugequantitiesofmoney.
(b) affecttheprofitsofbusinesses.
(c) affectthetypesofgoodsandservicesproducedinaneconomy.
(d) doalloftheabove.
(e) doonly(a)and(b)oftheabove.
Answer:D

2.

Financialmarketactivitiesaffect
(a) personalwealth.
(b) spendingdecisionsbyindividualsandbusinessfirms.
(c) theeconomyslocationinthebusinesscycle.
(d) alloftheabove.
Answer: D

3.

Marketsinwhichfundsaretransferredfromthosewhohaveexcessfundsavailabletothosewho
haveashortageofavailablefundsarecalled
(a) commoditymarkets.
(b) fundsmarkets.
(c) derivativeexchangemarkets.
(d) financialmarkets.
Answer: D

4.

Thepricepaidfortherentalofborrowedfunds(usuallyexpressedasapercentageoftherentalof
$100peryear)iscommonlyreferredtoasthe
(a) inflationrate.
(b) exchangerate.
(c) interestrate.
(d) aggregatepricelevel.
Answer: C

2Mishkin/EakinsFinancialMarketsandInstitutions,FifthEdition

5.

Thebondmarketsareimportantbecause

Chapter1WhyStudyFinancialMarketsandInstitutions?3

(a)
(b)
(c)
(d)

theyareeasilythemostwidelyfollowedfinancialmarketsintheUnitedStates.
theyarethemarketswhereinterestratesaredetermined.
theyarethemarketswhereforeignexchangeratesaredetermined.
alloftheabove.

Answer: B
6.

Interestratesareimportanttofinancialinstitutionssinceaninterestrateincrease_________thecost
ofacquiringfundsand_________theincomefromassets.
(a) decreases;decreases
(b) increases;increases
(c) decreases;increases
(d) increases;decreases
Answer: B

7.

Typically,increasinginterestrates
(a) discourageindividualsfromsaving.
(b) discouragecorporateinvestments.
(c) encouragecorporateexpansion.
(d) encouragecorporateborrowing.
(e) noneoftheabove.
Answer: B

8.

ComparedtointerestratesonlongtermU.S.governmentbonds,interestrateson_________
fluctuatemoreandareloweronaverage.
(a) mediumqualitycorporatebonds
(b) lowqualitycorporatebonds
(c) highqualitycorporatebonds
(d) threemonthTreasurybills
(e) noneoftheabove
Answer: D

9.

ComparedtointerestratesonlongtermU.S.governmentbonds,interestratesonthreemonth
Treasurybillsfluctuate_________andare_________onaverage.
(a) more;lower
(b) less;lower
(c) more;higher
(d) less;higher
Answer: A

10.

Thestockmarketisimportantbecause
(a) itiswhereinterestratesaredetermined.
(b) itisthemostwidelyfollowedfinancialmarketintheUnitedStates.
(c) itiswhereforeignexchangeratesaredetermined.
(d) alloftheabove.
Answer: B

4Mishkin/EakinsFinancialMarketsandInstitutions,FifthEdition

11.

Stockpricessincethe1950shavebeen
(a) relativelystable,trendingupwardatasteadypace.
(b) relativelystable,trendingdownwardatamoderaterate.
(c) extremelyvolatile.
(d) unstable,trendingdownwardatamoderaterate.
Answer: C

12.

ThelargestonedaydropinthehistoryoftheAmericanstockmarketsoccurredin
(a) 1929.
(b) 1987.
(c) 2000.
(d) 2001
Answer: B

13.

Arisingstockmarketindexduetohighershareprices
(a) increasespeopleswealthandasaresultmayincreasetheirwillingnesstospend.
(b) increasestheamountoffundsthatbusinessfirmscanraisebysellingnewlyissuedstock.
(c) decreasestheamountoffundsthatbusinessfirmscanraisebysellingnewlyissuedstock.
(d) both(a)and(b)oftheabove.
Answer: D

14.

Adecliningstockmarketindexduetolowershareprices
(a) reducespeopleswealthandasaresultmayreducetheirwillingnesstospend.
(b) increasespeopleswealthandasaresultmayincreasetheirwillingnesstospend.
(c) decreasestheamountoffundsthatbusinessfirmscanraisebysellingnewlyissuedstock.
(d) both(a)and(c)oftheabove.
(e) both(b)and(c)oftheabove.
Answer: D

15.

Changesinstockprices
(a) affectpeopleswealthandtheirwillingnesstospend.
(b) affectfirmsdecisionstosellstocktofinanceinvestmentspending.
(c) arecharacterizedbyconsiderablefluctuations.
(d) alloftheabove.
(e) only(a)and(b)oftheabove.
Answer: D

16.

(I)Debtmarketsareoftenreferredtogenericallyasthebondmarket.(II)Abondisasecuritythatis
aclaimontheearningsandassetsofacorporation.
(a) (I)istrue,(II)false.
(b) (I)isfalse,(II)true.
(c) Botharetrue.
(d) Botharefalse.
Answer: A

Chapter1WhyStudyFinancialMarketsandInstitutions?5

17.

(I)Abondisadebtsecuritythatpromisestomakepaymentsperiodicallyforaspecifiedperiodof
time.(II)Astockisasecuritythatisaclaimontheearningsandassetsofacorporation.
(a) (I)istrue,(II)false.
(b) (I)isfalse,(II)true.
(c) Botharetrue.
(d) Botharefalse.
Answer: C

18.

Thepriceofonecountryscurrencyintermsofanothersiscalled
(a) theexchangerate.
(b) theinterestrate.
(c) theDowJonesindustrialaverage.
(d) noneoftheabove.
Answer: A

19.

Astrongerdollarbenefits_________andhurts_________
(a) Americanbusinesses;Americanconsumers.
(b) Americanbusinesses;foreignbusinesses.
(c) Americanconsumers;Americanbusinesses.
(d) foreignbusinesses;Americanconsumers.
Answer: C

20.

Aweakerdollarbenefits_________andhurts_________
(a) Americanbusinesses;Americanconsumers.
(b) Americanbusinesses;foreignconsumers.
(c) Americanconsumers;Americanbusinesses.
(d) foreignbusinesses;Americanconsumers.
Answer: A

21.

From1980toearly1985thedollar_________invalue,therebybenefitingAmerican_________
(a) appreciated;businesses.
(b) appreciated;consumers.
(c) depreciated;businesses.
(d) depreciated;consumers.
Answer: B

22.

Moneyisdefinedas
(a) anythingthatisgenerallyacceptedinpaymentforgoodsandservicesorintherepaymentof
debt.
(b) billsofexchange.
(c) arisklessrepositoryofspendingpower.
(d) alloftheabove.
(e) only(a)and(b)oftheabove.
Answer: A

6Mishkin/EakinsFinancialMarketsandInstitutions,FifthEdition

23.

TheorganizationresponsiblefortheconductofmonetarypolicyintheUnitedStatesisthe
(a) ComptrolleroftheCurrency.
(b) U.S.Treasury.
(c) FederalReserveSystem.
(d) BureauofMonetaryAffairs.
Answer: C

24.

ThecentralbankoftheUnitedStatesis
(a) Citicorp.
(b) TheFed.
(c) BankofAmerica.
(d) TheTreasury.
(e) noneoftheabove.
Answer: B

25.

Monetarypolicyischieflyconcernedwith
(a) howmuchmoneybusinessesearn.
(b) thelevelofinterestratesandthenationsmoneysupply.
(c) howmuchmoneypeoplepayintaxes.
(d) whetherpeoplehavesavedenoughmoneyforretirement.
Answer: B

26.

Economistsgroupcommercialbanks,savingsandloanassociations,creditunions,mutualfunds,
mutualsavingsbanks,insurancecompanies,pensionfunds,andfinancecompaniestogetherunder
theheadingfinancialintermediaries.Financialintermediaries
(a) actasmiddlemen,borrowingfundsfromthosewhohavesavedandlendingthesefundsto
others.
(b) producenothingofvalueandarethereforeadrainonsocietysresources.
(c) helppromoteamoreefficientanddynamiceconomy.
(d) doalloftheabove.
(e) doonly(a)and(c)oftheabove.
Answer: E

27.

Economistsgroupcommercialbanks,savingsandloanassociations,creditunions,mutualfunds,
mutualsavingsbanks,insurancecompanies,pensionfunds,andfinancecompaniestogetherunder
theheadingfinancialintermediaries.Financialintermediaries
(a) actasmiddlemen,borrowingfundsfromthosewhohavesavedandlendingthesefundsto
others.
(b) playanimportantroleindeterminingthequantityofmoneyintheeconomy.
(c) helppromoteamoreefficientanddynamiceconomy.
(d) doalloftheabove.
(e) doonly(a)and(c)oftheabove.
Answer: D

Chapter1WhyStudyFinancialMarketsandInstitutions?7

28.

Banksareimportanttothestudyofmoneyandtheeconomybecausethey
(a) provideachannelforlinkingthosewhowanttosavewiththosewhowanttoinvest.
(b) havebeenasourceofrapidfinancialinnovationthatisexpandingthealternativesavailableto
thosewantingtoinvesttheirmoney.
(c) aretheonlyfinancialinstitutiontoplayaroleindeterminingthequantityofmoneyinthe
economy.
(d) doalloftheabove.
(e) doonly(a)and(b)oftheabove.
Answer: E

29.

Banks,savingsandloanassociations,mutualsavingsbanks,andcreditunions
(a) arenolongerimportantplayersinfinancialintermediation.
(b) havebeenprovidingservicesonlytosmalldepositorssincederegulation.
(c) havebeenadeptatinnovatinginresponsetochangesintheregulatoryenvironment.
(d) alloftheabove.
(e) only(a)and(c)oftheabove.
Answer: C

30.

(I)Banksarefinancialintermediariesthatacceptdepositsandmakeloans.(II)Thetermbanks
includesfirmssuchascommercialbanks,savingsandloanassociations,mutualsavingsbanks,
creditunions,insurancecompanies,andpensionfunds.
(a) (I)istrue,(II)false.
(b) (I)isfalse,(II)true.
(c) Botharetrue.
(d) Botharefalse.
Answer: A

8Mishkin/EakinsFinancialMarketsandInstitutions,FifthEdition

.2

True/False

1.

Moneyisanythingacceptedbyanyoneaspaymentforservicesorgoods.
Answer: FALSE

2.

Interestratesaredeterminedinthebondmarkets.
Answer: TRUE

3.

Astockisadebtsecuritythatpromisestomakeperiodicpaymentsforaspecificperiodoftime.
Answer: FALSE

4.

Monetarypolicyaffectsinterestratesbuthaslittleeffectoninflationorbusinesscycles.
Answer: FALSE

5.

ThegovernmentorganizationresponsiblefortheconductofmonetarypolicyintheUnitedStatesis
theU.S.Treasury.
Answer: FALSE

6.

Interestratescanbeaccuratelydescribedastherentalpriceofmoney.
Answer: TRUE

7.

Holdingeverythingelseconstant,asthedollarweakensvacationsabroadbecomelessattractive.
Answer: TRUE

8.

Inrecentyears,financialmarketshavebecomemorestableandlessrisky.
Answer: FALSE

9.

Financialinnovationhasprovidedmoreoptionstobothinvestorsandborrowers.
Answer: TRUE

10.

Afinancialintermediaryborrowsfundsfrompeoplewhohavesaved.
Answer: TRUE

11.

Holdingeverythingelseconstant,asthedollarstrengthensforeignerswillbuymoreU.S.exports.
Answer: FALSE

12.

Inabullmarketstockpricesarerising,onaverage.
Answer: TRUE

Chapter1WhyStudyFinancialMarketsandInstitutions?9

.3

Essay

1.

Haveinterestratesbeenmoreorlessvolatileinrecentyears?Why?

2.

Whyshouldconsumersbeconcernedwithmovementsinforeignexchangerates?

3.

HowdoesthevalueofthedollaraffectaffectthecompetitivenessofAmericanbusinesses?

4.

Whatismonetarypolicyandwhoisresponsibleforitsimplementation?

5.

Whatarefinancialintermediariesandwhatdotheydo?

6.

Whatismoney?

7.

Howdoesabonddifferfromastock?

8.

Whyisthestockmarketsoimportanttoindividuals,firms,andtheeconomy?