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Chapter 1
Introducing Money and the Financial System
 Multiple Choice Questions
1.
Why was Russia in the news during late 1998?
(a) Its GDP had become greater than that of the United States.
(b) It had defaulted on its debt.
(c) It had decided to adopt the U.S. dollar as its domestic currency.
(d) It was accepted into the European Economic Union.
2.
The financial system is primarily a means by which
(a) borrowers can use savers’ funds until the savers themselves need the funds.
(b) money is put into circulation.
(c) the government puts into operation its plans for the economy.
(d) business firms distribute their goods.
3.
Which of the following is NOT a financial instrument?
(a) A share of stock in General Motors
(b) The Chase Manhattan Bank
(c) A car loan
(d) A savings account
4.
If you take out a car loan from a bank, the loan is a (an)
(a) liability to you and an asset to the bank.
(b) liability to the bank and an asset to you.
(c) liability to both you and the bank.
(d) asset to both you and the bank.
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Hubbard • Money, the Financial System, and the Economy, Fifth Edition
5.
Why would a saver with $10,000 be more likely to put it into a bank account than to lend it directly
to a borrower?
(a) Direct loans of that sort are not legal in the United States.
(b) Banks pay higher interest rates on deposits than individual borrowers are likely to pay to
individual lenders.
(c) It is easier and less risky to save money in a bank account and allow the bank to serve as a gobetween with potential borrowers.
(d) Interest received from a bank is deductible on the federal income tax, whereas interest received
from an individual borrower is not.
6.
Formerly in Eastern Europe and the Soviet Union, funds were transferred between savers and
borrowers primarily through the
(a) banking system.
(b) stock market.
(c) bond market.
(d) government.
7.
The experiences of Eastern Europe and the former Soviet Union have demonstrated that
(a) using private networks in a financial system to channel funds from savers to borrowers is not a
good approach.
(b) using the government to channel funds from savers to borrowers is not a good approach.
(c) the government can be very effective in increasing private saving.
(d) savers are usually willing to lend greater amounts than borrowers wish to borrow.
8.
Which of the following is not a key financial service provided by the financial system?
(a) Risk sharing
(b) Profitability
(c) Liquidity
(d) Information
9.
Economists define risk as
(a) the difference between the interest rate borrowers pay and the interest rate lenders receive.
(b) the degree of uncertainty of an asset’s return.
(c) the ease with which an asset can be exchanged for other assets or for goods and services.
(d) the difference between the return on common stock and the return on corporate bonds.
Chapter 1
Introducing Money and the Financial System
3
10.
Economists define liquidity as
(a) the difference between the return on the asset and the return on a long-term U.S. Treasury bond.
(b) the fraction the asset makes up of an investor’s portfolio.
(c) the ease with which an asset can be exchanged for other assets or for goods and services.
(d) the difference between the total demand for an asset and the total supply of the asset.
11.
Which of the following assets is the most liquid?
(a) Checking account
(b) Painting by Picasso
(c) Share of common stock
(d) House
12.
By providing and communicating information, the financial system
(a) reduces the difference between the return on three-month U.S. Treasury bills and the return on
thirty-year U.S. Treasury bonds.
(b) relieves individual savers from the necessity of searching out individual borrowers.
(c) eliminates the risk in investing in the stock market.
(d) guarantees investors a reasonable return on their money.
13.
Which of the following statements is correct?
(a) The financial sector is a large source of jobs in the U.S. economy, but a relatively small source
of jobs in other major economies.
(b) The financial sector is a relatively small source of jobs in the U.S. economy, but a large source
of jobs in other major economies.
(c) The financial sector is a large source of jobs in the U.S. and other major economies.
(d) The financial sector is a relatively small but important source of jobs in the U.S. and other major
economies.
14.
The financial system accounts for about what fraction of the U.S. economy’s value added (GDP)?
(a) 2%
(b) 22%
(c) 42%
(d) 72%
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Hubbard • Money, the Financial System, and the Economy, Fifth Edition
15.
The average pay for jobs is highest in which of the following sectors?
(a) The financial sector
(b) The wholesale and retail trade sector
(c) The manufacturing sector
(d) The construction sector
16.
The “international capital market” refers to
(a) the London Stock Exchange.
(b) the market for lending and borrowing across national boundaries.
(c) the buying and selling of machinery and equipment across national boundaries.
(d) the international section of the New York Stock Exchange.
17.
During the 1980s and 1990s
(a) the volume of worldwide cross-border transactions in stocks and bonds grew very rapidly, but
the volume of international bank lending declined.
(b) the volume of international bank lending grew very rapidly, but the volume of worldwide crossborder transactions in stocks and bonds declined.
(c) the volume of worldwide cross-border transactions in stocks and bonds and the volume of
international bank lending both grew rapidly.
(d) global investment in the stock of multinational corporations in 1990 was lower than it had been
in 1980.
18.
The bond market is important because
(a) it is the major source of borrowed funds for U.S. business.
(b) it provides a rate of return significantly greater than the stock market.
(c) it provides foreign purchasers of U.S. products a means to exchange their currencies for U.S.
dollars.
(d) it provides a way for businesses and governments to borrow funds from savers and it is the
market that determines interest rates.
19.
Which of the following is NOT a financial intermediary?
(a) The New York Stock Exchange
(b) The Prudential Insurance Company
(c) The Chase Manhattan Bank
(d) Fidelity Magellan Mutual Fund
Chapter 1
Introducing Money and the Financial System
20.
The main role of financial intermediaries is to
(a) provide funds to the federal government to cover the budget deficit.
(b) borrow funds from savers and lend them to borrowers.
(c) provide advice to consumers on how they should handle their finances.
(d) help ensure that there is enough money in circulation.
21.
A bank lending depositors’ money to a local business and a pension fund investing contributions in
shares of a company are similar financial activities in that
(a) both involve the use of financial markets.
(b) both involve funds being channeled from savers to borrowers through financial intermediaries.
(c) both involve a reduction in the overall level of liquidity in the financial system.
(d) both involve in an increase in the overall level of risk in the financial system.
22.
Which problem in financial institutions was particularly in the news during the 1980s and early
1990s?
(a) Fraud among insurance companies
(b) Low rates of return on mutual funds
(c) The crisis in deposit insurance
(d) Failure of the federal government to pay interest on Treasury bonds
23.
Which of the following was an important consequence of the regulatory reforms that followed the
deposit insurance crisis of the 1980s and early 1990s?
(a) An unprecedented consolidation of the U.S. banking industry
(b) A series of bank panics
(c) Unprecedentedly high interest rates
(d) New restrictions on interstate banking
24.
Which of the following rankings of sources of funds for businesses from the least important to the
most important is correct?
(a) Stock issues, bond issues, loans from financial institutions
(b) Bond issues, stock issues, loans from financial institutions
(c) Loans from financial institutions, stock issues, bond issues
(d) Loans from financial institutions, bond issues, stock issues
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Hubbard • Money, the Financial System, and the Economy, Fifth Edition
25.
Economists define money as
(a) cash in circulation.
(b) deposits in commercial banks.
(c) anything that people are willing to accept in payment for goods and services or to pay off debts.
(d) bonds issued by large corporations.
26.
The Federal Reserve System
(a) is in charge of managing the New York Stock Exchange.
(b) is headed by the Secretary of the Treasury.
(c) is the central bank of the United States.
(d) was dissolved in the late 1980s.
27.
Monetary policy refers to the government’s
(a) decisions on how much money to spend.
(b) decisions on how much money to collect in taxes.
(c) plans for retiring the national debt.
(d) management of the money supply.
28.
In the United States, monetary policy is carried out by
(a) the Federal Reserve System.
(b) Congress.
(c) the President.
(d) Congress and the President acting together.
29.
Economic analysis is useful in
(a) explaining current developments.
(b) predicting future developments.
(c) both explaining current developments and predicting future developments.
(d) explaining current developments but not in predicting future developments.
30.
The best way to determine if the assumptions of an economic model are appropriate is to
(a) examine whether they are consistent with common sense.
(b) determine whether they are similar to assumptions used in other economic models.
(c) test them by comparing the predictions of the model to actual data.
(d) consider whether the assumptions are simple enough to be understood by users of the model.
31.
To be useful, an economic theory should
(a) be based on reasonable assumptions.
(b) generate predictions that can be verified with actual data.
(c) actually have its predictions corroborated with data.
(d) be based on reasonable assumptions, generate predictions that can be verified with actual data,
and actually have its predictions corroborated with data.

Essay Questions
Chapter 1
Introducing Money and the Financial System
7
1.
If you had been advising one of the governments in Eastern Europe following the fall of
Communism, would you have stressed the importance for economic growth of establishing strong
financial markets or the importance of establishing a strong system of financial intermediaries?
Explain.
2.
When a saver deposits funds in a bank, she may earn about 5% on the deposit. When the bank lends
these funds out, it may charge the borrower 9% on the loan. Why don’t the saver and the borrower
get together directly and avoid the bank? In that situation wouldn’t the saver be able to earn more on
her funds and the borrower have to pay less to borrow these funds?
3.
Why are stories about movements in the money supply prominent in the news media?