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TB_599810_Mishkin_TP.qxd:Layout 1 6/4/09 9:45 AM Page 2 Contents Chapter1 WhyStudyMoney,Banking,andFinancialMarkets? 1 Chapter2 AnOverviewoftheFinancialSystem 20 Chapter3 WhatIsMoney? 43 Chapter4 UnderstandingInterestRates 60 Chapter5 TheBehaviorofInterestRates 78 Chapter6 TheRiskandTermStructureofInterestRates 111 Chapter7 TheStockMarket,theTheory ofRationalExpectations,  andtheEfficientMarketHypothesis 133 Chapter8 AnEconomicAnalysisofFinancialStructure 150 Chapter9 FinancialCrisesandtheSubprimeMeltdown 169 Chapter10 BankingandtheManagementofFinancialInstitutions 181  Chapter11 EconomicAnalysisofFinancialRegulation 208 Chapter12 BankingIndustry:StructureandCompetition 229 Chapter13  CentralBanksandtheFederalReserveSystem 253 Chapter14 TheMoneySupplyProcess 274 Chapter15 ToolsforMonetaryPolicy 319 Chapter16 TheConductofMonetaryPolicy:StrategyandTactics 343 Chapter17 TheForeignExchangeMarket 363 Chapter18 TheInternationalFinancialSystem 389 Chapter19 TheDemandforMoney 418 Chapter20 The ISLMModel 440 Chapter21 MonetaryandFiscalPolicyintheISLMModel 466 Chapter22 AggregateDemandandSupplyAnalysis 493 Chapter23 TransmissionMechanismsofMonetaryPolicy:TheEvidence 511 Chapter24 MoneyandInflation 529 Chapter25 RationalExpectations:ImplicationsforPolicy 549 Chapter1 WhyStudyMoney,Banking,andFinancialMarkets? 1.1 WhyStudyFinancialMarkets? 1) Financialmarketspromoteeconomicefficiencyby A) channelingfundsfrominvestorstosavers. B) creatinginflation. C) channelingfundsfromsaverstoinvestors. D) reducinginvestment. Answer: C QuesStatus: PreviousEdition 2) Financialmarketspromotegreatereconomicefficiencybychannelingfundsfrom________to ________. A) investors;savers B) b orrowers;savers C) savers;borrowers D) savers;lenders Answer: C QuesStatus: PreviousEdition 3) Well - functioningfinancialmarketspromote A) inflation. B) deflation. C) unemployment. D) growth. Answer: D QuesStatus: PreviousEdition 4) Akeyfactorinproducinghigheconomicgrowthis A) eliminatingforeigntrade. B) well - functioningfinancialmarkets. C) highinterestrates. D) stockmarketvolatility. Answer: B QuesStatus: New 5) Marketsinwhichfundsaretransferredfromthosewhohaveexcessfundsavailabletothose whohaveashortageofavailablefundsarecalled A) commoditymarkets. B) fund - availablemarkets. C) derivativeexchangemarkets. D) financialmarkets. Answer: D QuesStatus: PreviousEdition 2Mishkin · TheEconomicsofMoney,Banking,andFinancialMarkets,9 th Edition 6) ________marketstransferfundsfrompeoplewhohaveanexcessofavailablefundstopeople whohaveashortage. A) Commodity B) Fund - available C) Financial D) Derivativeexchange Answer: C QuesStatus: PreviousEdition 7) Poorlyperformingfinancialmarketscanbethecauseof A) wealth. B) poverty. C) financialstability. D) financialexpansion. Answer: B QuesStatus: PreviousEdition 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 QuesStatus: PreviousEdition 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 QuesStatus: PreviousEdition 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 QuesStatus: PreviousEdition Chapter1WhyStudyMoney,Banking,andFinancialMarkets? 3 11) TheinterestrateonBaa(mediumquality)corporatebondsis________,onaverage,thanother interestrates,andthespreadbetweenitandotherratesbecame________inthe1970s. A) lower;smaller B) lower;larger C) higher;smaller D) higher;larger Answer: D QuesStatus: PreviousEdition 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 QuesStatus: PreviousEdition 13) Highinterestratesmight________purchasingahouseorcarbutatthesametimehighinterest ratesmight________saving. A) discourage;encourage B) discourage;discourage C) encourage;encourage D) encourage;discourage Answer: A QuesStatus: New 14) Anincreaseininterestratesmight________savingbecausemorecanbeearnedininterest income. A) encourage B) discourage C) disallow D) invalidate Answer: A QuesStatus: PreviousEdition 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 QuesStatus: PreviousEdition 4Mishkin · TheEconomicsofMoney,Banking,andFinancialMarkets,9 th Edition 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 QuesStatus: PreviousEdition 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 QuesStatus: PreviousEdition 18) Stockpricesare A) relativelystabletrendingupwardatasteadypace. B) relativelystabletrendingdownwardatamoderaterate. C) extremelyvolatile. D) unstabletrendingdownwardatamoderaterate. Answer: C QuesStatus: Revised 19) Arisingstockmarketindexduetohighershareprices A) increases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 QuesStatus: PreviousEdition 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 QuesStatus: PreviousEdition 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 QuesStatus: PreviousEdition Chapter1WhyStudyMoney,Banking,andFinancialMarkets? 5 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 QuesStatus: PreviousEdition 23) Lowstockmarketpricesmight________consumerswillingnesstospendandmight________ businesseswillingnesstoundertakeinvestmentprojects. A) increase;increase B) increase;decrease C) decrease;decrease D) decrease;increase Answer: C QuesStatus: New 24) Fearofamajorrecessioncausesstockpricestofall,everythingelseheldconstant,whichinturn causesconsumerspendingto A) increase. B) remainunchanged. C) decrease. D) cannotbedetermined. Answer: C QuesStatus: PreviousEdition 25) Ashareofcommonstockisaclaimonacorporationʹs A) debt. B) liabilities. C) expenses. D) earningsandassets. Answer: D QuesStatus: Revised 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 QuesStatus: PreviousEdition 6Mishkin · TheEconomicsofMoney,Banking,andFinancialMarkets,9 th Edition 27) Thedeclineinstockpricesfrom2000through2002 A) increasedindividualsʹwillingnesstospend. B) hadnoeffectonindividualspending. C) reducedindividualsʹwillingnesstospend. D) increasedindividualwealth. Answer: C QuesStatus: PreviousEdition 28) TheDowreachedapeakofover11,000beforethecollapseofthe________bubblein2000. A) housing B) manufacturing C) high - tech D) b anking Answer: C QuesStatus: PreviousEdition 29) Whatisastock?Howdostocksaffecttheeconomy? Answer: Astockrepresentsashareofownershipofacorporation,oraclaimonafirmʹs earnings/assets.Stocksarepartofwealth,andchangesintheirvalueaffectpeopleʹs willingnesstospend.Changesinstockpricesaffectafirmʹs abilitytoraisefunds,and thustheirinvestment. QuesStatus: PreviousEdition 30) Whyisitimportanttounderstandthebondmarket? Answer: Thebondmarketsupportseconomicactivitybyenablingthegovernmentand corporationstoborrowtoundertaketheirprojectsanditisthemarketwhereinterest ratesaredetermined. QuesStatus: New 1.2 WhyStudyFinancialInstitutionsandBanking? 1) Channelingfundsfromindividualswithsurplusfundstothosedesiringfundswhenthesaver doesnotpurchasetheborrowerʹssecurityisknownas A) b arter. B) redistribution. C) financialintermediation. D) taxation. Answer: C QuesStatus: PreviousEdition 2) Afinancialcrisisis A) notpossibleinthemodernfinancialenvironment. B) amajordisruptioninthefinancialmarkets. C) afeatureofdevelopingeconomiesonly. D) typicallyfollowedbyaneconomicboom. Answer: B QuesStatus: New [...]... this type of market, dealers in different locations buy and sell securities to anyone who comes to them and is willing to accept their prices.  An example of an over -the- counter market is the federal funds market Ques Status: New 28   Mishkin · The Economics of Money, Banking, and Financial Markets, 9th Edition 2.3 Financial Market Instruments 1) Prices of money market instruments undergo the least price fluctuations because of. .. Chapter 2   An Overview of the Financial System    23 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) ...  association between inflation and the growth rate of money A) positive; demand B) positive; supply C) negative; demand D) negative; supply Answer: B Ques Status: New Chapter 1   Why Study Money, Banking, and Financial Markets?    11 15) Evidence from the United States and other foreign countries indicates that A) there is a strong positive association between inflation and growth rate of money over long periods of time B) there is little support for the assertion that ʺinflation is always and everywhere a monetary... Previous Edition 10) Which of the following is a true statement? A) Money or the money supply is defined as Federal Reserve notes B) The average price of goods and services in an economy is called the aggregate price level C) The inflation rate is measured as the rate of change in the federal government budget deficit D) The aggregate price level is measured as the rate of change in the inflation rate Answer:... Previous Edition 8) A sharp increase in the growth of the money supply is likely followed by A) a recession B) a depression C) an increase in the inflation rate D) no change in the economy Answer: C Ques Status: Previous Edition 10   Mishkin · The Economics of Money, Banking, and Financial Markets, 9th Edition 9) It is true that inflation is a A) continuous increase in the money supply B) continuous fall in prices... Ques Status: Previous Edition 30   Mishkin · The Economics of Money, Banking, and Financial Markets, 9th Edition 12) Which of the following instruments are traded in a money market? A) Bank commercial loans B) Commercial paper C) State and local government bonds D) Residential mortgages Answer: B Ques Status: Revised 13) Which of the following instruments is not traded in a money market? A) Residential mortgages... channels the funds to the borrower/investor.  Financial intermediaries (indirect finance) are the major source of funds for corporations in the U.S Ques Status: Previous Edition 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... finance companies Answer: B Ques Status: Previous Edition 8   Mishkin · The Economics of Money, Banking, and Financial Markets, 9th Edition 9) The financial intermediaries that the average person interacts with most frequently are A) exchanges B) over -the- counter markets C) finance companies D) banks Answer: D Ques Status: Previous Edition 10) Which of the following is not a financial institution? A) a life insurance company... Why Study Money and Monetary Policy? 1) Money is defined as A) bills of exchange B) anything that is generally accepted in payment for goods and services or in the repayment of debt C) a risk-free repository of spending power D) the unrecognized liability of governments Answer: B Ques Status: Previous Edition 2) The upward and downward movement of aggregate output produced in the economy is referred to as the ... Bonds that are sold in a foreign country and are denominated in the countryʹs currency in which they are sold are known as A) foreign bonds B) Eurobonds C) equity bonds D) country bonds Answer: A Ques Status: Previous Edition 32   Mishkin · The Economics of Money, Banking, and Financial Markets, 9th Edition 4) Bonds that are sold in a foreign country and are denominated in a currency other than that of the country in which it is sold are known as . text in their classes. All recipients of this work are expected to abide by these restrictions and to honor the intended pedagogical purposes and the needs of other instructors who rely on these. PreviousEdition 10) Which of the followingisatruestatement? A) Money or the money supplyisdefinedasFederalReservenotes. B) The averageprice of goodsandservicesinaneconomyiscalled the aggregatepricelevel. C). Between1950and1980in the U.S.,interestratestrendedupward.Duringthissametimeperiod, A) the rate of money growthdeclined. B) the rate of money growthincreased. C) the governmentbudgetdeficit(expressedasapercentage of GNP)trendeddownward. D)