Chapter 1 Why Study Financial Markets and Institutions?

6) Typically, increasing interest rates

A) discourage corporate investments.
B) discourage individuals from saving.
1.1 Multiple Choice Questions C) encourage corporate expansion.
D) encourage corporate borrowing.
1) Financial markets and institutions E) none of the above.
A) involve the movement of huge quantities of money. Answer: A
B) affect the profits of businesses.
7) Compared to interest rates on long-term U.S. government bonds, interest rates on
C) affect the types of goods and services produced in an economy.
____ fluctuate more and are lower on average.
D) do all of the above.
A) medium-quality corporate bonds
E) do only (A) and (B) of the above.
B) low-quality corporate bonds
Answer: D
C) high-quality corporate bonds
2) Markets in which funds are transferred from those who have excess funds available D) three-month Treasury bills
to those who have a shortage of available funds are called E) none of the above
A) commodity markets. Answer: D
B) fund-available markets.
8) Compared to interest rates on long-term U.S. government bonds, interest rates on
C) derivative exchange markets.
three-month Treasury bills fluctuate _____ and are _____ on average.
D) financial markets.
A) more; lower
Answer: D
B) less; lower
3) The price paid for the rental of borrowed funds (usually expressed as a percentage C) more; higher
of the rental of $100 per year) is commonly referred to as the D) less; higher
A) inflation rate. Answer: A
B) exchange rate.
9) The stock market is important because
C) interest rate.
D) aggregate price level. A) it is where interest rates are determined.
B) it is the most widely followed financial market in the United States.
Answer: C
C) it is where foreign exchange rates are determined.
4) The bond markets are important because D) all of the above.
A) they are easily the most widely followed financial markets in the United States. Answer: B
B) they are the markets where foreign exchange rates are determined.
10) Stock prices since the 1950s have been
C) they are the markets where interest rates are determined.
D) of all of the above. A) relatively stable, trending upward at a steady pace.
E) of only (A) and (B) of the above. B) relatively stable, trending downward at a moderate rate.
C) extremely volatile.
Answer: C
D) unstable, trending downward at a moderate rate.
5) Interest rates are important to financial institutions since an interest rate increase Answer: C
A) decreases the cost of acquiring funds.
11) A rising stock market index due to higher share prices
B) increases the cost of acquiring funds.
C) raises the income from assets. A) increases people’s wealth and as a result may increase their willingness to spend.
D) (B) and (C) of the above. B) increases the amount of funds that business firms can raise by selling newly
issued stock.
E) (A) and (C) of the above.
C) decreases the amount of funds that business firms can raise by selling newly
Answer: D
issued stock.
D) both (A) and (B) of the above.
Answer: D
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12) A declining stock market index due to lower share prices 17) A stronger dollar benefits _____ and hurts _____
A) reduces people’s wealth and as a result may reduce their willingness to spend. A) American businesses; American consumers.
B) increases people’s wealth and as a result may increase their willingness to B) American businesses; foreign businesses.
spend. C) American consumers; American businesses.
C) decreases the amount of funds that business firms can raise by selling newly D) foreign businesses; American consumers.
issued stock. Answer: C
D) both (A) and (C) of the above.
E) both (B) and (C) of the above. 18) A weaker dollar benefits _____ and hurts _____
Answer: D A) American businesses; American consumers.
B) American businesses; foreign consumers.
13) Changes in stock prices C) American consumers; American businesses.
A) affect people’s wealth and their willingness to spend. D) foreign businesses; American consumers.
B) affect firm’s decisions to sell stock to finance investment spending. Answer: A
C) are characterized by considerable fluctuations.
D) all of the above. 19) From 1980 to early 1985 the dollar _____ in value, thereby benefiting American
E) only (A) and (B) of the above. _____
Answer: D A) appreciated; consumers.
B) appreciated; businesses.
14) (I) Debt markets are often referred to generically as the bond market. (II) A bond is C) depreciated; consumers.
a security that is a claim on the earnings and assets of a corporation. D) depreciated; businesses.
A) (I) is true, (II) false. Answer: A
B) (I) is false, (II) true.
C) Both are true. 20) Money is defined as
D) Both are false. A) anything that is generally accepted in payment for goods and services or in the
Answer: A repayment of debt.
B) bills of exchange.
15) (I) A bond is a debt security that promises to make payments periodically for a C) a riskless repository of spending power.
specified period of time. (II) A stock is a security that is a claim on the earnings and D) all of the above.
assets of a corporation. E) only (A) and (B) of the above.
A) (I) is true, (II) false. Answer: A
B) (I) is false, (II) true.
C) Both are true. 21) The organization responsible for the conduct of monetary policy in the United
D) Both are false. States is the
Answer: C A) Comptroller of the Currency.
B) U.S. Treasury.
16) The price of one country’s currency in terms of another’s is called C) Federal Reserve System.
A) the exchange rate. D) Bureau of Monetary Affairs.
B) the interest rate. Answer: C
C) the Dow Jones industrial average.
D) none of the above. 22) The central bank of the United States is
Answer: A A) Citicorp.
B) Bank America.
C) The treasury.
D) The Fed.
E) none of the above.
Answer: D

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23) Economists group commercial banks, savings and loan associations, credit unions, 27) (I) Banks are financial intermediaries that accept deposits and make loans.
mutual funds, mutual savings banks, insurance companies, pension funds, and (II) Included under the term banks are firms such as commercial banks, savings and
finance companies together under the heading financial intermediaries. Financial loan associations, mutual savings banks, credit unions, and insurance companies.
intermediaries A) (I) is true, (II) false.
A) act as middlemen, borrowing funds from those who have saved and lending B) (I) is false, (II) true.
these funds to others. C) Both are true.
B) produce nothing of value and are therefore a drain on society’s resources. D) Both are false.
C) help promote a more efficient and dynamic economy. Answer: C
D) do all of the above.
E) do only (A) and (C) of the above.
Answer: E

24) 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
A) act as middlemen, borrowing funds from those who have saved and lending
these funds to others.
B) play an important role in determining the quantity of money in the economy.
C) help promote a more efficient and dynamic economy.
D) do all of the above.
E) do only (A) and (C) of the above.
Answer: D
25) Banks are important to the study of money and the economy because they
A) provide a channel for linking those who want to save with those who want to
invest.
B) have been a source of rapid financial innovation that is expanding the
alternatives available to those wanting to invest their money.
C) are the only financial institution to play a role in determining the quantity of
money in the economy.
D) do all of the above.
E) do only (A) and (B) of the above.
Answer: E
26) Banks, savings and loan associations, mutual savings banks, and credit unions
A) are no longer important players in financial intermediation.
B) have been providing services only to small depositors since deregulation.
C) have been adept at innovating in response to changes in the regulatory
environment.
D) all of the above.
E) only (A) and (C) of the above.
Answer: C

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1.2 True/False 1.3 Essay

1) Money is anything accepted by anyone as payment for services or goods. 1) Have interest rates been more or less volatile in recent years? Why?
Answer: FALSE
2) Why should consumers be concerned with movements in foreign exchange rates?
2) Interest rates are determined in the bond markets.
3) What is monetary policy and who is responsible for its implementation?
Answer: TRUE
4) What are financial intermediaries and what do they do?
3) A stock is a debt security that promises to make periodic payments for a specific
period of time. 5) What is money?
Answer: FALSE
6) How does a bond differ from a stock?
4) Monetary policy affects interest rates but has little effect on inflation or business
7) Why is the stock market so important to individuals, firms, and the economy?
cycles.
Answer: FALSE

5) The government organization responsible for the conduct of monetary policy in the
United States is the U.S. Treasury.
Answer: FALSE

6) Interest rates can be accurately described as the rental price of money.

Answer: TRUE
7) Holding everything else constant, as the dollar weakens vacations abroad become
less attractive.
Answer: TRUE

8) In recent years, financial markets have become more stable and less risky.
Answer: FALSE
9) Financial innovation has provided more options to both investors and borrowers.
Answer: TRUE

10) A financial intermediary borrows funds from people who have saved.
Answer: TRUE

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