Mishkin tb01

Chapter 1
Why Study Money, Banking, and Financial Markets?
)1
Multiple Choice
()a
()b
()c
()d
()e
()f
Financial markets and institutions

involve the movement of huge flows of money.
affect the profits of businesses.
affect the types of goods and services produced in an economy.
do each of the above.
do only (a) and (b) of the above.
Answer:
Question Status: Previous Edition
()g
()h
()i
()j
()k
()l
Financial markets and institutions

involve the movement of huge flows of money.
affect the location of businesses.
affect the types of goods and services produced in an economy.
do each of the above.
do only (a) and (c) of the above.
Answer:
()m
()n
()o
()p
()q
()r
Money, financial institutions, and financial markets in the United States can have a major
impact on
economic well being of other countries besides the United States.
the kinds of goods and services that are produced.
the outcome of political elections.
all of the above.
only (a) and (b) of the above.
Answer:
2Frederic S. MishkinEconomics of Money, Banking, and Financial Markets, Seventh Edition
()s
Markets in which funds are transferred from those who have excess funds available to those
who have a shortage of available funds are called
()t commodity markets.
()u fund-available markets.
()v derivative exchange markets.
()w financial markets.
Answer:
()x
Channeling funds from individuals with surplus funds to those desiring funds when the
saver does not purchase the borrowers security is known as
()y barter.
()z redistribution.
()aatheft.
()bb
taxation.
()ccfinancial intermediation.
Answer:
Question Status: Study Guide
()dd
Financial markets promote economic efficiency by
()eechanneling funds from investors to savers.
()ff creating inflation.
()gg
causing recessions.
()hh
channeling funds from savers to investors.
()ii reducing investment.
Answer:
Question Status: New
()jj
Well-functioning financial markets promote
()kk
inflation.
()ll deflation.
()mm unemployment.
()nn
growth.
()oo
none of the above.
Answer:
()pp
Poorly performing financial markets can be the cause of
()qq
wealth.
()rr poverty.
()ss financial stability.
()tt all of the above.
()uu
none of the above.
Answer:
Chapter 1Why Study Money, Banking, and Financial Markets? 3
()vv
The bond markets are important because
()ww they are easily the most widely followed financial markets in the United States.
()xx
they are the markets where foreign exchange rates are determined.
()yy
they are the markets where interest rates are determined.
()zzof each of the above.
()aaa of only (a) and (b) of the above.
Answer:
()bbb
()ccc
()ddd
()eee
()fff
()ggg
The bond markets are important because

they are the markets where interest rates are determined.
they are the markets where most borrowers get their funds.
they are easily the most widely followed financial markets in the United States.
of each of the above.
of only (a) and (b) of the above.
Answer:
()hhh 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
()iii inflation rate.
()jjj exchange rate.
()kkk interest rate.
()lll aggregate price level.
Answer:
()mmm Compared to interest rates on long-term U.S. government bonds, interest rates on _____
fluctuate more and are lower on average.
()nnn medium-quality corporate bonds
()ooo low-quality corporate bonds
()ppp high-quality corporate bonds
()qqq three-month Treasury bills
()rrr
none of the above
Answer:
()sss Compared to interest rates on long-term U.S. government bonds, interest rates on threemonth Treasury bills fluctuate _____ and are _____ on average.
()ttt more; lower
()uuu less; lower
()vvv more; higher
()www less; higher
Answer:
()xxx 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.
()yyy lower; smaller
()zzz lower; larger
()aaaa higher; smaller
()bbbb higher; larger
Answer:
()cccc
()dddd
()eeee
()ffff
()gggg
()hhhh
A decline in interest rates will cause spending on housing to

fall.
remain unchanged.
cannot be determined.
rise.
none of the above.
Answer:
()iiii
An increase in interest rates on student loans
()jjjj increases the cost of a college education.
()kkkk reduces the cost of a college education.
()llll
has no effect on educational costs.
()mmmm increases costs for students with no loans.
()nnnn none of the above.
Answer:
()oooo
()pppp
()qqqq
()rrrr
()ssss
()tttt
Interest rates affect

individuals.
businesses.
the overall economy.
all of the above.
only (b) and (c) of the above.
Answer:
()uuuu Stock prices boomed in the 1980s until Black Monday in _____ , when the DJIA fell by
more than 500 points, a 22 percent decline.
()vvvv 1985
()wwww 1986
()xxxx 1987
()yyyy 1988
Answer:
()zzzz The stock market is important because

()aaaaa it is where interest rates are determined.
()bbbbb it is the most widely followed financial market in the United States.
()ccccc it is where foreign exchange rates are determined.
()ddddd all of the above.
Answer:
()eeeee Stock prices since the 1950s have been
()fffff relatively stable trending upward at a steady pace.
()ggggg relatively stable trending downward at a moderate rate.
()hhhhh extremely volatile.
()iiiii unstable trending downward at a moderate rate.
Answer:
()jjjjj A rising stock market index due to higher share prices
()kkkkk increases peoples wealth, but is unlikely to increase their willingness to spend.
()lllll increases peoples wealth and as a result may increase their willingness to spend.
()mmmmm
increases the amount of funds that business firms can raise by selling newlyissued stock.
()nnnnn both (b) and (c) of the above.
Answer:
()ooooo A rising stock market index due to higher share prices
()ppppp increases peoples wealth and as a result may increase their willingness to spend.
()qqqqq increases the amount of funds that business firms can raise by selling newly-issued stock.
()rrrrr decreases the amount of funds that business firms can raise by selling newly-issued stock.
()sssss both (a) and (b) of the above.
Answer:
()ttttt A rising stock market index due to higher share prices
()uuuuu increases peoples wealth, but is unlikely to increase their willingness to spend.
()vvvvv increases peoples wealth and as a result may increase their willingness to spend.
()wwwww
decreases the amount of funds that business firms can raise by selling newlyissued stock.
()xxxxx both (a) and (c) of the above.
()yyyyy both (b) and (c) of the above.
Answer:
()zzzzz A declining stock market index due to lower share prices

()aaaaaa reduces peoples wealth and as a result may reduce their willingness to spend.
()bbbbbb increases peoples wealth and as a result may increase their willingness to spend.
()cccccc increases the amount of funds that business firms can raise by selling newly-issued stock.
()dddddd both (a) and (c) of the above.
()eeeeee both (b) and (c) of the above.
Answer:
()ffffff A declining stock market index due to lower share prices
()gggggg reduces peoples wealth and as a result may reduce their willingness to spend.
()hhhhhh increases peoples wealth and as a result may increase their willingness to spend.
()iiiiii decreases the amount of funds that business firms can raise by selling newly-issued stock.
()jjjjjj both (a) and (c) of the above.
()kkkkkk both (b) and (c) of the above.
Answer:
()llllll Changes in stock prices
()mmmmmm
affect peoples wealth and their willingness to spend
()nnnnnn affect firms decisions to sell stock to finance investment spending.
()oooooo are characterized by considerable fluctuations.
()pppppp all of the above.
()qqqqqq only (a) and (b) of the above.
Answer:
()rrrrrr Fear of a major recession causes stock prices to fall, which in turn causes consumer
spending to
()ssssss increase.
()tttttt remain unchanged.
()uuuuuu decrease.
()vvvvvv cannot be determined.
()wwwwww
none of the above.
Answer:
()xxxxxx A common stock is a claim on a corporations
()yyyyyy debt.
()zzzzzz liabilities.
()aaaaaaa expenses.
()bbbbbbb
employees.
()ccccccc earnings and assets.
Answer:
()ddddddd
The decline in stock prices from 2000 through 2002
()eeeeeee increased individuals willingness to spend.
()fffffff had no effect on individual spending.
()ggggggg
reduced individuals willingness to spend.
()hhhhhhh
increased individual wealth.
()iiiiiii both (a) and (d) are correct.
Answer:
()jjjjjjj The price of one countrys currency in terms of anothers is called
()kkkkkkk
the exchange rate.
()lllllll the interest rate.
()mmmmmmm the Dow Jones industrial average.
()nnnnnnn
none of the above.
Answer:
()ooooooo
Everything else constant, a stronger dollar will mean that
()ppppppp
vacationing in England becomes more expensive.
()qqqqqqq
vacationing in England becomes less expensive.
()rrrrrrr French cheese becomes more expensive.
()sssssss Japanese cars become more expensive.
Answer:
()ttttttt All else constant, as the dollar becomes stronger,
()uuuuuuu
Americans will purchase fewer foreign goods.
()vvvvvvv
U.S. goods exported abroad will cost less in foreign countries, and so foreigners
will buy more of them.
()wwwwwww
the U.S. is unquestionably made better off.
()xxxxxxx
none of the above.
Answer:
()yyyyyyy
Which of the following is most likely to result from a stronger dollar?
()zzzzzzz U.S. goods exported aboard will cost less in foreign countries, and so foreigners will buy
more of them.
()aaaaaaaa
U.S. goods exported aboard will cost more in foreign countries and so foreigners
will buy more of them.
()bbbbbbbb
U.S. goods exported abroad will cost more in foreign countries, and so foreigners
will buy fewer of them.
()cccccccc
Americans will purchase fewer foreign goods.
Answer:
()dddddddd
A change in the exchange rate has a direct effect on Americans because it affects
()eeeeeeee
the price of foreign goods to American consumers.
()ffffffffthe price of American goods to foreign consumers.
()gggggggg
the price Americans will pay to travel abroad.
()hhhhhhhh
the price foreigners will pay to travel to the U.S.
()iiiiiiii all of the above.
Answer:
()jjjjjjjj A stronger dollar will likely hurt
()kkkkkkkk
textile producers in South Carolina.
()llllllll wheat farmers in Montana.
()mmmmmmmm automobile manufacturers in Michigan.
()nnnnnnnn
all of the above since their exports will decline.
()oooooooo
none of the above since their exports will increase.
Answer:
()pppppppp
A weaker dollar will likely hurt
()qqqqqqqq
textile producers in South Carolina.
()rrrrrrrr wheat farmers in Montana.
()ssssssss automobile manufacturers in Michigan.
()tttttttt all of the above since their exports will decline.
()uuuuuuuu
none of the above since their exports will increase.
Answer:
()vvvvvvvv
()wwwwwwww
()xxxxxxxx
()yyyyyyyy
()zzzzzzzz
A stronger dollar benefits _____ and hurts _____.

American businesses; American consumers
American businesses; foreign businesses
American consumers; American businesses
foreign businesses; American consumers
Answer:
()aaaaaaaaa
()bbbbbbbbb
()ccccccccc
()ddddddddd
()eeeeeeeee
A weaker dollar benefits _____ and hurts _____.

American businesses; foreign consumers
American consumers; American businesses
foreign businesses; American consumers
Answer:
()fffffffff From 1980 to early 1985 the dollar appreciated in value, thereby benefiting _____ and
harming _____.
()ggggggggg
()hhhhhhhhh
American businesses; foreign businesses
()iiiiiiiii American consumers; American businesses
()jjjjjjjjj foreign businesses; American consumers
Answer:
()kkkkkkkkk
From 1980 to early 1985 the dollar _____ in value, thereby benefiting American
_____.
()lllllllll appreciated; consumers
()mmmmmmmmm
appreciated, businesses
()nnnnnnnnn
depreciated; consumers
()ooooooooo
depreciated, businesses
Answer:
()ppppppppp
From 1980 to 1985 the dollar appreciated relative to the British pound. Holding
everything else constant, one would expect that, when compared to 1980,
()qqqqqqqqq
more Americans traveled to England in 1985.
()rrrrrrrrr Americans imported more Shetland sweaters from England in 1985.
()sssssssss
Britons imported more wine from California in 1985.
()ttttttttt all of the above.
()uuuuuuuuu
Answer:
()vvvvvvvvv
()wwwwwwwww more Britons traveled to the United States in 1985.
()xxxxxxxxx
()yyyyyyyyy
Americans imported more Shetland sweaters from England in 1985.
()zzzzzzzzz
Answer:
()aaaaaaaaaa
()bbbbbbbbbb
more Britons traveled to the United States in 1985.
()cccccccccc
()dddddddddd
Americans exported more wheat to England in 1985.
()eeeeeeeeee
all of the above.
()ffffffffff none of the above.
Answer:
()gggggggggg
()hhhhhhhhhh
fewer Britons traveled to the United States in 1985.
()iiiiiiiiii Britons imported more wine from California in 1985.
()jjjjjjjjjj Americans exported more wheat to England in 1985.
()kkkkkkkkkk
more Britons traveled to the United States in 1985.
Answer:
()llllllllll When in 1980 a British pound cost approximately $2.40, a Shetland sweater that cost 50
British pounds would have cost $120. With a stronger dollar, the same Shetland sweater would
have cost
()mmmmmmmmmm
less than $120.
()nnnnnnnnnn
more than $120.
()oooooooooo
$120, since the exchange rate does not affect the prices that American consumers
pay for foreign goods.
()pppppppppp
$120, since the demand for Shetland sweaters will decrease to prevent an increase
in price due to the stronger dollar.
Answer:
()qqqqqqqqqq
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
()rrrrrrrrrrless than $130.
()ssssssssss
more than $130.
()tttttttttt $130, since the exchange rate does not affect the prices that American consumers pay for
foreign goods.
()uuuuuuuuuu
Answer:
()vvvvvvvvvv
In 1980 a Shetland sweater would have cost $120. With a stronger dollar, the
same Shetland sweater would have cost
()wwwwwwwwww
less than $120.
()xxxxxxxxxx
more than $120.
()yyyyyyyyyy
$120, since the exchange rate does not affect the prices that American consumers
()zzzzzzzzzz
Answer:
()aaaaaaaaaaa
In 1985 a Shetland sweater would have cost $130. With a weaker dollar, the same
Shetland sweater would have cost
()bbbbbbbbbbb less than $130.
()ccccccccccc
more than $130.
()ddddddddddd $130, since the exchange rate does not affect the prices that American consumers
()eeeeeeeeeee
Answer:
()fffffffffff
A decrease in the value of the dollar relative to all foreign currencies means that
the price of foreign goods purchased by Americans
()ggggggggggg increases.
()hhhhhhhhhhh decreases.
()iiiiiiiiiii remains unchanged.
()jjjjjjjjjjj unable to determine.
()kkkkkkkkkkk none of the above.
Answer:
()lllllllllll If the price of a euro (the European currency) increases from $1.00 to $1.10, then
()mmmmmmmmmmm a European vacation becomes less expensive.
()nnnnnnnnnnn a European vacation becomes more expensive.
()ooooooooooo the cost of a European vacation is not affected.
()ppppppppppp foreign travel becomes impossible.
()qqqqqqqqqqq none of the above.
Answer:
()rrrrrrrrrrr
Americans who love French wine benefit most from
()sssssssssss
a decrease in the dollar price of euros.
()ttttttttttt an increase in the dollar price of euros.
()uuuuuuuuuuu a constant dollar price for euros.
()vvvvvvvvvvv a ban on imports from Europe.
()wwwwwwwwwww
none of the above.
Answer:
()xxxxxxxxxxx
()yyyyyyyyyyy
()zzzzzzzzzzz
()aaaaaaaaaaaa
()bbbbbbbbbbbb
()cccccccccccc
American farmers who sell beef to Europe benefit most from

a decrease in the dollar price of euros.
an increase in the dollar price of euros.
a constant dollar price for euros.
a European ban on imports of American beef.
none of the above.
Answer:
()dddddddddddd Banks are important to the study of money and the economy because they
()eeeeeeeeeeee provide a channel for linking those who want to save with those who want to
invest.
()ffffffffffff
have been a source of rapid financial innovation that is expanding the alternatives
available to those wanting to invest their money.
()gggggggggggg hold a large proportion of individuals wealth.
()hhhhhhhhhhhh do each of the above.
()iiiiiiiiiiiido only (a) and (b) of the above.
Answer:
Question Status: Revised
()jjjjjjjjjjjjBanks are important to the study of money and the economy because they
()kkkkkkkkkkkk provide a channel for linking those who want to save with those who want to
invest.
()llllllllllllhave been a source of rapid financial innovation that is expanding the alternatives
available to those wanting to invest their money.
()mmmmmmmmmmmm are the only important financial institution in the U.S. economy.
()nnnnnnnnnnnn each of the above.
()oooooooooooo only (a) and (b) of the above.
Answer:
()pppppppppppp Economists group commercial banks, savings and loan associations, credit unions,
mutual funds, mutual savings banks, insurance companies, pension funds, and finance
companies together under the heading financial intermediaries. Financial intermediaries
()qqqqqqqqqqqq act as middlemen, borrowing funds from those who have saved and lending these
funds to others.
()rrrrrrrrrrrr
produce nothing of value and are therefore a drain on societys resources.
()ssssssssssss
help promote a more efficient and dynamic economy.
()ttttttttttttdo each of the above.
()uuuuuuuuuuuu do only (a) and (c) of the above.
Answer:
()vvvvvvvvvvvv Economists group commercial banks, savings and loan associations, credit unions,
mutual funds, mutual savings banks, insurance companies, pension funds, and finance
companies together under the heading financial intermediaries. Financial intermediaries
()wwwwwwwwwwww act as middlemen, borrowing funds from those who have saved and
lending these funds to others.
()xxxxxxxxxxxx hold a significant proportion of individuals wealth.
()yyyyyyyyyyyy help promote a more efficient and dynamic economy.
()zzzzzzzzzzzz do each of the above.
()aaaaaaaaaaaaa do only (a) and (c) of the above.
Answer:
()bbbbbbbbbbbbb Banks, savings and loan associations, mutual savings banks, and credit unions
()ccccccccccccc link those who want to save with these who want to invest.
()ddddddddddddd hold a large proportion of individuals wealth.
()eeeeeeeeeeeee have been adept at innovating in response to changes in the regulatory
environment.
()fffffffffffff
all of the above.
()ggggggggggggg only (a) and (c) of the above.
Answer:
()hhhhhhhhhhhhh Banks, savings and loan associations, mutual savings banks, and credit unions
()iiiiiiiiiiiii
are no longer important players in financial intermediation.
()jjjjjjjjjjjjj
since deregulation now provide services only to small depositors.
()kkkkkkkkkkkkk have been adept at innovating in response to changes in the regulatory
environment.
()lllllllllllll
all of the above.
()mmmmmmmmmmmmm
only (a) and (c) of the above.
Answer:
()nnnnnnnnnnnnn Banks and other financial institutions engage in financial intermediation, which
()ooooooooooooo can hurt the performance of the economy.
()ppppppppppppp can benefit economic performance.
()qqqqqqqqqqqqq has no effect on economic performance.
()rrrrrrrrrrrrr
involves borrowing from investors and lending to savers.
()sssssssssssss
none of the above.
Answer:
()ttttttttttttt
Money is defined as
()uuuuuuuuuuuuu bills of exchange.
()vvvvvvvvvvvvv anything that is generally accepted in payment for goods and services or in the
repayment of debt.
()wwwwwwwwwwwww a risk-free repository of spending power.
()xxxxxxxxxxxxx the unrecognized liability of governments.
Answer:
()yyyyyyyyyyyyy Money is defined as
()zzzzzzzzzzzzz anything that is generally accepted in payment for goods and services or in the
repayment of debt.
()aaaaaaaaaaaaaa bills of exchange.
()bbbbbbbbbbbbbb
a risk-free repository of spending power.
()cccccccccccccc all of the above.
()dddddddddddddd
Answer:
()eeeeeeeeeeeeee Economists take the study of money seriously because evidence suggests that
()ffffffffffffff
the money supply and the price level move closely together.
()gggggggggggggg
money and interest rate movements are related.
()hhhhhhhhhhhhhh
business cycle downturns are preceded by downturns in money growth.
()iiiiiiiiiiiiii
all of the above are true.
()jjjjjjjjjjjjjj
only (a) and (b) of the above are true.
Answer:
()kkkkkkkkkkkkkk
Money has a major impact on
()llllllllllllll
inflation.
()mmmmmmmmmmmmmm
the business cycle.
()nnnnnnnnnnnnnn
interest rates.
()oooooooooooooo
each of the above.
()pppppppppppppp
none of the above.
Answer:
()qqqqqqqqqqqqqq
A decrease in the rate of growth of money often results in
()rrrrrrrrrrrrrr
inflation.
()ssssssssssssss economic expansion.
()tttttttttttttt
recession.
()uuuuuuuuuuuuuu
falling unemployment.
()vvvvvvvvvvvvvv
both (b) and (d).
Answer:
()wwwwwwwwwwwwww
Evidence from the United States and other foreign countries
indicates that
()xxxxxxxxxxxxxx
there is a strong positive association between inflation and growth rate of
money over long periods of time.
()yyyyyyyyyyyyyy
there is little support for the assertion that inflation is always and
everywhere a monetary phenomenon.
()zzzzzzzzzzzzzz countries with low monetary growth rates tend to experience higher rates of
inflation, all else being constant.
()aaaaaaaaaaaaaaamoney growth is clearly unrelated to inflation.
Answer:
()bbbbbbbbbbbbbbb
Sustained downward movements in the business cycle are referred to as
()cccccccccccccccinflation.
()ddddddddddddddd
recessions.
()eeeeeeeeeeeeeeeeconomic recoveries.
()fffffffffffffff
expansions.
Answer:
()ggggggggggggggg
Prior to all recessions since 1900, there has been a drop in
()hhhhhhhhhhhhhhh
inflation.
()iiiiiiiiiiiiiii
the money stock.
()jjjjjjjjjjjjjjj
the growth rate of the money stock.
()kkkkkkkkkkkkkkk
interest rates.
Answer:
()lllllllllllllll
Prior to recessions since 1900, there has been a drop in
()mmmmmmmmmmmmmmm
the stock market.
()nnnnnnnnnnnnnnn
the money stock.
()ooooooooooooooo
the growth rate of the money stock.
()ppppppppppppppp
both (a) and (b) of the above.
()qqqqqqqqqqqqqqq
both (a) and (c) of the above.
Answer:
()rrrrrrrrrrrrrrr
Every recession in the United States since 1900 has been preceded by a decline in
()sssssssssssssss the hemline of womens fashions.
()ttttttttttttttt
the rate of money growth.
()uuuuuuuuuuuuuuu
the level of sunspot activity.
()vvvvvvvvvvvvvvv
the money stock.
Answer:
()wwwwwwwwwwwwwww
Every recession in the United States since 1900 has been
preceded by a decline in
()xxxxxxxxxxxxxxx
the average price level.
()yyyyyyyyyyyyyyy
the exchange rate.
()zzzzzzzzzzzzzzzthe rate of money growth.
()aaaaaaaaaaaaaaaa
the money stock.
Answer:
()bbbbbbbbbbbbbbbb
Evidence from business cycle fluctuations in the United States indicates
that changes in money might be a driving force behind these fluctuations. Specifically, the
evidence suggests that
()cccccccccccccccc
a negative relationship between money growth and general economic
activity exists.
()dddddddddddddddd
recessions have been preceded by a decline in the growth rate of money.
()eeeeeeeeeeeeeeee
recessions have been preceded by a increase in the growth rate of money.
()ffffffffffffffff
recessions have been preceded by an increase in the growth rate of money and
followed by a substantial decrease in money growth.
Answer:
()gggggggggggggggg
Evidence from business cycle fluctuations in the United States indicates
that
()hhhhhhhhhhhhhhhh
a negative relationship between money growth and general economic
activity exists.
()iiiiiiiiiiiiiiii
recessions have been preceded by declines in share prices on the stock exchange.
()jjjjjjjjjjjjjjjj
recessions have been preceded by dollar depreciation.
()kkkkkkkkkkkkkkkk
recessions have been preceded by a decline in the growth rate of money.
Answer:
()llllllllllllllll
A decrease in the growth rate of the money supply is likely followed by
()mmmmmmmmmmmmmmmm a recession.
()nnnnnnnnnnnnnnnn
a recovery.
()oooooooooooooooo
a boom.
()pppppppppppppppp
inflation.
()qqqqqqqqqqqqqqqq
all of the above.
Answer:
()rrrrrrrrrrrrrrrr A sharp increase in the growth of the money supply is likely followed by
()ssssssssssssssss a recession.
()tttttttttttttttt
a depression.
()uuuuuuuuuuuuuuuu
inflation.
()vvvvvvvvvvvvvvvv
no change in the economy.
()wwwwwwwwwwwwwwww
none of the above.
Answer:
()xxxxxxxxxxxxxxxx
()yyyyyyyyyyyyyyyy
()zzzzzzzzzzzzzzzz
()aaaaaaaaaaaaaaaaa
()bbbbbbbbbbbbbbbbb
()ccccccccccccccccc
It is true that inflation is

a continuous increase in the money supply.
a continuous fall in prices.
a decline in interest rates.
constant prices.
a continually rising price level.
Answer:
()ddddddddddddddddd A rapid rate of growth of money results in
()eeeeeeeeeeeeeeeee
inflation.
()fffffffffffffffff constant prices.
()ggggggggggggggggg deflation.
()hhhhhhhhhhhhhhhhh recession.
()iiiiiiiiiiiiiiiii
depression.
Answer:
()jjjjjjjjjjjjjjjjj
The organization responsible for the conduct of monetary policy in the United
States is the
()kkkkkkkkkkkkkkkkk Comptroller of the Currency.
()lllllllllllllllll
U.S. Treasury.
()mmmmmmmmmmmmmmmmm
Federal Reserve System.
()nnnnnnnnnnnnnnnnn Bureau of Monetary Affairs.
Answer:
()ooooooooooooooooo Which of the following are true statements?
()ppppppppppppppppp Money or the money supply is defined as anything that is generally
accepted in payment for goods and services or in the repayment of debts.
()qqqqqqqqqqqqqqqqq Inflation is a condition of a continually rising price level.
()rrrrrrrrrrrrrrrrr The inflation rate is measured as the rate of change in the aggregate price level.
()sssssssssssssssssAll of the above are true statements.
()ttttttttttttttttt
Only (a) and (b) of the above are true statements.
Answer:
()uuuuuuuuuuuuuuuuu Which of the following are true statements?
()vvvvvvvvvvvvvvvvv Money or the money supply is defined as Federal Reserve notes.
()wwwwwwwwwwwwwwwww The average price of goods and services in an economy is called
the aggregate price level.
()xxxxxxxxxxxxxxxxx The inflation rate is measured as the rate of change in the federal
government budget deficit.
()yyyyyyyyyyyyyyyyy
All of the above are true statements.
()zzzzzzzzzzzzzzzzz
Answer:
()aaaaaaaaaaaaaaaaaa
Which of the following are true statements?
()bbbbbbbbbbbbbbbbbb Money or the money supply is defined as anything that is generally
()cccccccccccccccccc
The inflation rate is measured as the rate of change in the aggregate price
level.
()dddddddddddddddddd Inflation occurs whenever the price level rises.
()eeeeeeeeeeeeeeeeee
()ffffffffffffffffff Only (a) and (b) of the above are true statements.
Answer:
()gggggggggggggggggg Which of the following are true statements?

()hhhhhhhhhhhhhhhhhh Money or the money supply is defined as anything that is generally
()iiiiiiiiiiiiiiiiii
The average price of goods and services in an economy is called the aggregate
price level.
()jjjjjjjjjjjjjjjjjj
The aggregate price level is measured as the rate of change in the inflation rate.
()kkkkkkkkkkkkkkkkkk All of the above are true statements.
()llllllllllllllllll
Answer:
()mmmmmmmmmmmmmmmmmm
()nnnnnnnnnnnnnnnnnn Money or the money supply is defined as anything that is generally
()oooooooooooooooooo The average price of goods and services in an economy is called the
inflation rate.
()pppppppppppppppppp The aggregate price level is measured as the rate of change in the inflation
rate.
()qqqqqqqqqqqqqqqqqq All of the above are true statements.
()rrrrrrrrrrrrrrrrrr Only (a) and (b) of the above are true statements.
Answer:
()ssssssssssssssssss
()tttttttttttttttttt
Those countries with the highest inflation rates are also the ones with the highest
money growth rates.
()uuuuuuuuuuuuuuuuuu The average price of goods and services in an economy is called the
aggregate price level.
()vvvvvvvvvvvvvvvvvv The inflation rate is measured as the rate of change in the aggregate price
level.
()wwwwwwwwwwwwwwwwww All of the above are true statements.
()xxxxxxxxxxxxxxxxxx Only (a) and (b) of the above are true statements.
Answer:
()yyyyyyyyyyyyyyyyyy Which of the following are true statements?
()zzzzzzzzzzzzzzzzzz
Those countries with the highest inflation rates are also the ones with the
highest money growth rates.
()aaaaaaaaaaaaaaaaaaa
The average price of goods and services in an economy is called the
inflation rate.
()bbbbbbbbbbbbbbbbbbb When the average price of goods and services in an economy increases,
the inflation rate increases.
()ccccccccccccccccccc
()ddddddddddddddddddd Only (a) and (b) of the above are true statements.
Answer:
()eeeeeeeeeeeeeeeeeee
If ten years ago the prices of the items bought last month by the average
consumer would have been much lower, then one can likely conclude that
()fffffffffffffffffff the aggregate price level has risen during this ten-year period.
()ggggggggggggggggggg the average inflation rate for this ten-year period has been positive.
()hhhhhhhhhhhhhhhhhhh the average rate of money growth for this ten-year period has been
positive.
()iiiiiiiiiiiiiiiiiii all of the above.
Answer:
()jjjjjjjjjjjjjjjjjjj 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
()kkkkkkkkkkkkkkkkkkk the aggregate price level has declined during this ten-year period.
()lllllllllllllllllll the average inflation rate for this ten-year period has been positive.
()mmmmmmmmmmmmmmmmmmm
the average rate of money growth for this ten-year period
has been positive.
()nnnnnnnnnnnnnnnnnnn all of the above.
Answer:
()ooooooooooooooooooo One likely explanation for the relatively high rates of inflation
experienced in many Latin American countries is the
()ppppppppppppppppppp relatively slow growth in the money supply in these countries.
()qqqqqqqqqqqqqqqqqqq relatively rapid growth in the money supply in these countries.
()rrrrrrrrrrrrrrrrrrr decline in the prices of basic commodities in these countries.
()sssssssssssssssssss
none of the above.
Answer:
()ttttttttttttttttttt Complete Milton Friedmans famous statement, Inflation is always and
everywhere a _____ phenomenon.
()uuuuuuuuuuuuuuuuuuu recessionary
()vvvvvvvvvvvvvvvvvvv discretionary
()wwwwwwwwwwwwwwwwwww
repressionary
()xxxxxxxxxxxxxxxxxxx monetary
Answer:
()yyyyyyyyyyyyyyyyyyy Milton Friedmans restatement of the notion that sustained inflation can
come only from a continuous increase in the money supply is as follows:
()zzzzzzzzzzzzzzzzzzz
Inflation is always and everywhere a monetary phenomenon.
()aaaaaaaaaaaaaaaaaaaa Inflation, simply stated, is never anything other than a monetary
phenomenon.
()bbbbbbbbbbbbbbbbbbbb
Inflation is ultimately and singularly a monetary phenomenon.
()cccccccccccccccccccc The over-issue of paper money is the initial and singular cause of
inflation.
Answer:
()dddddddddddddddddddd
Countries that experience very high rates of inflation have
()eeeeeeeeeeeeeeeeeeee balanced budgets.
()ffffffffffffffffffff budget surpluses.
()gggggggggggggggggggg
falling money supplies.
()hhhhhhhhhhhhhhhhhhhh
constant money supplies.
()iiiiiiiiiiiiiiiiiiii rapidly growing money supplies.
Answer:
()jjjjjjjjjjjjjjjjjjjj Budgets deficits can be a concern because they might
()kkkkkkkkkkkkkkkkkkkk
ultimately lead to higher inflation.
()llllllllllllllllllll lead to a higher rate of money growth.
()mmmmmmmmmmmmmmmmmmmm lead to higher interest rates.
()nnnnnnnnnnnnnnnnnnnn
cause all of the above to occur.
Answer:
()oooooooooooooooooooo
Budgets deficits can be a concern because they might
()pppppppppppppppppppp
ultimately lead to higher inflation.
()qqqqqqqqqqqqqqqqqqqq
lead to higher interest rates.
()rrrrrrrrrrrrrrrrrrrr
lead to a slower rate of money growth.
()ssssssssssssssssssss
cause all of the above to occur.
()tttttttttttttttttttt cause both (a) and (b) of the above to occur.
Answer:
()uuuuuuuuuuuuuuuuuuuu
Budget deficits are important to monetary authorities because
()vvvvvvvvvvvvvvvvvvvv
the financing of government budget deficits may affect the
conduct of monetary policy.
()wwwwwwwwwwwwwwwwwwww
budget deficits may increase interest rates, putting
pressure on the monetary authorities to expand the quantity of money to keep interest rates from
rising.
()xxxxxxxxxxxxxxxxxxxx
budget deficits may put pressure on Federal Reserve to increase
the growth rate of the money supply.
()yyyyyyyyyyyyyyyyyyyy
of all of the above.
Answer:
()zzzzzzzzzzzzzzzzzzzz Budget deficits are important because
()aaaaaaaaaaaaaaaaaaaaa deficits cause bank failures.
()bbbbbbbbbbbbbbbbbbbbb
banks would not exist without deficits.
()ccccccccccccccccccccc deficits can result in higher rates of monetary growth.
()ddddddddddddddddddddd
deficits always cause prices to fall.
()eeeeeeeeeeeeeeeeeeeee deficits always cause interest rates to fall.
Answer:
()fffffffffffffffffffffBudget deficits can result in

()ggggggggggggggggggggg
financial crises.
()hhhhhhhhhhhhhhhhhhhhh
low interest rates.
()iiiiiiiiiiiiiiiiiiiii higher bond prices.
()jjjjjjjjjjjjjjjjjjjjj all of the above.
()kkkkkkkkkkkkkkkkkkkkk
none of the above.
Answer:
()lllllllllllllllllllll Between 1950 and 1980 in the U.S., interest rates trended upward. During this
same time period,
()mmmmmmmmmmmmmmmmmmmmm the rate of money growth declined.
()nnnnnnnnnnnnnnnnnnnnn
the rate of money growth increased.
()ooooooooooooooooooooo
the government budget deficit (expressed as a percentage of
GNP) trended downward.
()ppppppppppppppppppppp
the aggregate price level declined quite dramatically.
Answer:
()qqqqqqqqqqqqqqqqqqqqq
In the U.S. between 1950 and 1980, interest rates trended upward.
During this same time period,
()rrrrrrrrrrrrrrrrrrrrr
()sssssssssssssssssssss
the government budget deficit (expressed as a percentage of GNP)
trended upward.
()ttttttttttttttttttttt the aggregate price level continued to increase.
()uuuuuuuuuuuuuuuuuuuuu
all of the above.
()vvvvvvvvvvvvvvvvvvvvv
Answer:
()wwwwwwwwwwwwwwwwwwwww In the U.S. between 1950 and 1980, interest rates trended
upward. During this same time period,
()xxxxxxxxxxxxxxxxxxxxx
the rate of money growth decreased.
()yyyyyyyyyyyyyyyyyyyyy
the government budget deficit (expressed as a percentage of
GNP) trended upward.
()zzzzzzzzzzzzzzzzzzzzz the aggregate price level continued to decrease.
()aaaaaaaaaaaaaaaaaaaaaa all of the above.
()bbbbbbbbbbbbbbbbbbbbbb
Answer:
()cccccccccccccccccccccc In the U.S. between 1950 and 1980, interest rates trended upward. During
this same time period,
()dddddddddddddddddddddd
()eeeeeeeeeeeeeeeeeeeeee the government budget deficit (expressed as a percentage of GNP)
trended upward.
()ffffffffffffffffffffff
the aggregate price level continued to decrease.
()gggggggggggggggggggggg
all of the above.
()hhhhhhhhhhhhhhhhhhhhhh
Answer:
Appendix to Chapter 1
()iiiiiiiiiiiiiiiiiiiiii The most comprehensive measure of aggregate output is
()jjjjjjjjjjjjjjjjjjjjjj gross domestic product.
()kkkkkkkkkkkkkkkkkkkkkk
net national product.
()llllllllllllllllllllll the stock value of the industrial 500.
()mmmmmmmmmmmmmmmmmmmmmm
national income.
Answer:
()nnnnnnnnnnnnnnnnnnnnnn
When the total value of final goods and services is calculated
using current prices, the resulting measure is referred to as
()oooooooooooooooooooooo
real GDP.
()pppppppppppppppppppppp
the GDP deflator.
()qqqqqqqqqqqqqqqqqqqqqq
nominal GDP.
()rrrrrrrrrrrrrrrrrrrrrr
the index of leading indicators.
Answer:
()ssssssssssssssssssssss GDP measured with constant prices is referred to as
()tttttttttttttttttttttt real GDP.
()uuuuuuuuuuuuuuuuuuuuuu
nominal GDP.
()vvvvvvvvvvvvvvvvvvvvvv
the GDP deflator.
()wwwwwwwwwwwwwwwwwwwwww industrial production.
Answer:
()xxxxxxxxxxxxxxxxxxxxxx
If the aggregate price level at time t is denoted by Pt, the inflation rate from
time t 1 to t is defined as
()yyyyyyyyyyyyyyyyyyyyyy
pt (Pt Pt 1)Pt 1.
()zzzzzzzzzzzzzzzzzzzzzz pt (Pt 1 Pt 1)Pt 1.
()aaaaaaaaaaaaaaaaaaaaaaa
pt (Pt 1 Pt)Pt.
()bbbbbbbbbbbbbbbbbbbbbbb
pt (Pt Pt 1)Pt.
Answer:
()ccccccccccccccccccccccc
Gross domestic product includes
()ddddddddddddddddddddddd
purchases of stocks and bonds.
()eeeeeeeeeeeeeeeeeeeeeee
purchases of used cars and houses.
()fffffffffffffffffffffff
purchases of Rembrandt paintings.
()ggggggggggggggggggggggg
purchases of newly produced goods and services.
()hhhhhhhhhhhhhhhhhhhhhhh
all of the above.
Answer:
()iiiiiiiiiiiiiiiiiiiiiii The Gross Domestic Product is the
()jjjjjjjjjjjjjjjjjjjjjjj the value of all wealth in an economy.
()kkkkkkkkkkkkkkkkkkkkkkk
the value of all stocks and bonds sold in an economy in a year.
()lllllllllllllllllllllll the market value of all final goods and services produced in an economy in a year.
()mmmmmmmmmmmmmmmmmmmmmmm
the market value of all intermediate goods and
services produced in an economy in a year.
()nnnnnnnnnnnnnnnnnnnnnnn
the value of all goods and services sold to other nations in a year.
Answer:
()ooooooooooooooooooooooo
If an economy has aggregate output of $20 trillion, then aggregate
income is
()ppppppppppppppppppppppp
$10 trillion.
()qqqqqqqqqqqqqqqqqqqqqqq
$20 trillion.
()rrrrrrrrrrrrrrrrrrrrrrr
$30 trillion.
()sssssssssssssssssssssss $40 trillion.
()ttttttttttttttttttttttt cannot be determined.
Answer:
()uuuuuuuuuuuuuuuuuuuuuuu
If your nominal income in 1996 was $50,000, and prices doubled
between 1996 and 2002, to have the same real income, your nominal income in 2002 must be
()vvvvvvvvvvvvvvvvvvvvvvv
$50,000.
()wwwwwwwwwwwwwwwwwwwwwww
$75,000.
()xxxxxxxxxxxxxxxxxxxxxxx
$90,000.
()yyyyyyyyyyyyyyyyyyyyyyy
$100,000.
()zzzzzzzzzzzzzzzzzzzzzzz
$200,000.
Answer:
()aaaaaaaaaaaaaaaaaaaaaaaa
If your nominal income in 1990 is $50,000, and prices increase
by 50% between 1990 and 2000, then to have the same real income, your nominal income in
2000 must be
()bbbbbbbbbbbbbbbbbbbbbbbb $50,000.
()cccccccccccccccccccccccc
$75,000.
()dddddddddddddddddddddddd $100,000.
()eeeeeeeeeeeeeeeeeeeeeeee
$150,000.
()ffffffffffffffffffffffff
$200,000.
Answer:
()gggggggggggggggggggggggg If nominal GDP in 2001 is $9 trillion, and 2001 real GDP in 1996
prices is $6 trillion, the GDP deflator price index is
()hhhhhhhhhhhhhhhhhhhhhhhh 67.
()iiiiiiiiiiiiiiiiiiiiiiii
100.
()jjjjjjjjjjjjjjjjjjjjjjjj
150.
()kkkkkkkkkkkkkkkkkkkkkkkk 200.
()llllllllllllllllllllllll
cannot be determined.
Answer:
()mmmmmmmmmmmmmmmmmmmmmmmm 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
()nnnnnnnnnnnnnnnnnnnnnnnn 20%.
()oooooooooooooooooooooooo 10%.
()pppppppppppppppppppppppp 11%.
()qqqqqqqqqqqqqqqqqqqqqqqq 120%.
()rrrrrrrrrrrrrrrrrrrrrrrr
220%.
Answer:
()ssssssssssssssssssssssss If real GDP grows from $10 trillion in 2002 to $10.5 trillion in 2003, the
growth rate for real GDP is
()tttttttttttttttttttttttt
5%.
()uuuuuuuuuuuuuuuuuuuuuuuu 10%.
()vvvvvvvvvvvvvvvvvvvvvvvv 50%.
()wwwwwwwwwwwwwwwwwwwwwwww
0.5%.
()xxxxxxxxxxxxxxxxxxxxxxxx cannot be determined.
Answer:
()yyyyyyyyyyyyyyyyyyyyyyyy 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
()zzzzzzzzzzzzzzzzzzzzzzzz
.05%.
()aaaaaaaaaaaaaaaaaaaaaaaaa
5%.
()bbbbbbbbbbbbbbbbbbbbbbbbb 0%.
()ccccccccccccccccccccccccc
5%.
()ddddddddddddddddddddddddd 10%.
Answer:
()eeeeeeeeeeeeeeeeeeeeeeeee
If the CPI is 120 in 1996 and 180 in 2002, then between 1996 and
2002, prices have increased by
()fffffffffffffffffffffffff
180%.
()ggggggggggggggggggggggggg 80%.
()hhhhhhhhhhhhhhhhhhhhhhhhh 60%.
()iiiiiiiiiiiiiiiiiiiiiiiii
50%.
()jjjjjjjjjjjjjjjjjjjjjjjjj
20%.
Answer:
()kkkkkkkkkkkkkkkkkkkkkkkkk If the CPI in 2004 is 200, and in 2005 the CPI is 180, the rate of
inflation from 2004 to 2005 is
()lllllllllllllllllllllllll
20%.
()mmmmmmmmmmmmmmmmmmmmmmmmm 10%.
()nnnnnnnnnnnnnnnnnnnnnnnnn 0%.
()ooooooooooooooooooooooooo 10%.
()ppppppppppppppppppppppppp 20%.
Answer:
)2
Essay Questions
)1
What is a stock? How do stocks affect the economy?

()a
List three economic magnitudes affected by the money stock and state how money affects
each of them.
()b
Shortly after his election, President George W. Bush proposed legislation that resulted in a
cut in income taxes. Explain how this tax cut affected the federal budget deficit. What are the
possible economic consequences of this change in the budget deficit?

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Chapter 1

Why Study Money, Banking, and Financial Markets?

Financial markets and institutions

Financial markets and institutions

2Frederic S. MishkinEconomics of Money, Banking, and Financial Markets, Seventh Edition

Chapter 1Why Study Money, Banking, and Financial Markets? 3

The bond markets are important because

4Frederic S. MishkinEconomics of Money, Banking, and Financial Markets, Seventh Edition

A decline in interest rates will cause spending on housing to

Interest rates affect

Chapter 1Why Study Money, Banking, and Financial Markets? 5

()zzzz The stock market is important because

6Frederic S. MishkinEconomics of Money, Banking, and Financial Markets, Seventh Edition

()zzzzz A declining stock market index due to lower share prices

Chapter 1Why Study Money, Banking, and Financial Markets? 7

8Frederic S. MishkinEconomics of Money, Banking, and Financial Markets, Seventh Edition

A stronger dollar benefits _____ and hurts _____.

A weaker dollar benefits _____ and hurts _____.

Chapter 1Why Study Money, Banking, and Financial Markets? 9

10Frederic S. MishkinEconomics of Money, Banking, and Financial Markets, Seventh Edition

Chapter 1Why Study Money, Banking, and Financial Markets? 11

American farmers who sell beef to Europe benefit most from

12Frederic S. MishkinEconomics of Money, Banking, and Financial Markets, Seventh Edition

Chapter 1Why Study Money, Banking, and Financial Markets? 13

14Frederic S. MishkinEconomics of Money, Banking, and Financial Markets, Seventh Edition

Chapter 1Why Study Money, Banking, and Financial Markets? 15

16Frederic S. MishkinEconomics of Money, Banking, and Financial Markets, Seventh Edition

It is true that inflation is

Chapter 1Why Study Money, Banking, and Financial Markets? 17

18Frederic S. MishkinEconomics of Money, Banking, and Financial Markets, Seventh Edition

()gggggggggggggggggg Which of the following are true statements?

Chapter 1Why Study Money, Banking, and Financial Markets? 19

20Frederic S. MishkinEconomics of Money, Banking, and Financial Markets, Seventh Edition

Chapter 1Why Study Money, Banking, and Financial Markets? 21

()fffffffffffffffffffffBudget deficits can result in

22Frederic S. MishkinEconomics of Money, Banking, and Financial Markets, Seventh Edition

Chapter 1Why Study Money, Banking, and Financial Markets? 23

24Frederic S. MishkinEconomics of Money, Banking, and Financial Markets, Seventh Edition

Chapter 1Why Study Money, Banking, and Financial Markets? 25

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

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A stronger dollar benefits _ and hurts _.

A weaker dollar benefits _ and hurts _.