Section (3)

Chapter(1)
Why Study Money ,Banking and Financial Markets?

Money and banking

2nd level

Prepared by: Zahraa Awad Mansour

 Multiple Choice Questions: Money, Banking, and Financial Markets
1. How is money defined in economics?
a) Only physical currency
b) Only digital transactions
c) Anything generally accepted in payment for goods/services or debt repayment
d) Only government-issued currency
Answer : c
2. What is the relationship between money growth and recessions?
a) Money growth increases during every recession
b) Money growth has declined before every recession
c) There is no relationship between money growth and recessions
d) Recessions cause money growth to remain stable
Answer: b
3. What happens to interest rates when the money supply increases?
a) Interest rates increase
b) Interest rates decrease
c) Interest rates remain constant
d) Interest rates become unpredictable
Answer: b
4. What is a budget deficit?
a) When tax revenues exceed government expenditures
b) When government expenditures equal tax revenues
c) When government expenditures exceed tax revenues
d) When there is no government spending
Answer: c
5. How does a weaker dollar affect American consumers?
a) Makes imported goods cheaper
b) Makes imported goods more expensive
c) Has no effect on import prices
d) Only affects domestic goods
Answer: b
6. What is the relationship between money supply and price level?
a) They move in opposite directions
b) They generally rise together
c) They have no relationship
d) Price level is independent of money supply
Answer: b
7. What is the foreign exchange rate?
a) The price of domestic goods
b) The price of one currency in terms of another
c) The interest rate between countries
d) The inflation rate difference
Answer: b
8. How does a stronger currency affect exports?
a) Leads to higher exports
b) Leads to lower exports
c) Has no effect on exports
d) Only affects imports
Answer: b
9. What is monetary policy?
a) Management of government spending only
b) Management of taxation only
c) Management of the money supply and interest rates
d) Management of foreign exchange only
Answer: c
10. What happens when banks have excess reserves?
a) They stop lending
b) They can lend out to individuals and businesses
c) They must return the excess to the central bank
d) They must convert it to currency
Answer: b
11. How is inflation defined?
a) A decrease in the price level
b) A continual increase in the price level
c) Stable prices over time
d) Fluctuating exchange rates
Answer: b
12. What characterizes business cycles?
a) Only upward movements in aggregate output
b) Only downward movements in aggregate output
c) Upward and downward movements of aggregate output
d) Stable aggregate output
Answer: c
13. Under a fixed exchange rate system, what must the central bank primarily focus on?
a) Controlling inflation
b) Maintaining currency value relative to another currency
c) Stimulating economic growth
d) Reducing unemployment
Answer: b
14. The "monetary policy trilemma" states that a country cannot simultaneously achieve:
a) Low inflation, high employment, and economic growth
b) Fixed exchange rate, free trade, and price stability
c) Fixed exchange rate, free capital movement, and independent monetary policy
d) Free trade, capital controls, and monetary independence
Answer: c
15. Under a flexible exchange rate system, what advantage does the central bank have?
a) Guaranteed currency stability
b) More freedom to focus on domestic monetary policy
c) Better control over international trade
d) Reduced need for foreign reserves
Answer: b
16. What is one way countries with high inflation might use fixed exchange rates?
a) To increase exports
b) To stabilize prices by "importing" low inflation
c) To attract foreign investment
d) To reduce government spending
Answer: b
17. When defending a fixed exchange rate against depreciation pressure, what must
a central bank do?
a) Print more domestic currency
b) Sell foreign reserves and buy domestic currency
c) Lower interest rates
d) Increase government spending
Answer: b
18. Why is studying money and monetary policy important for controlling inflation?
a) It helps predict stock market trends
b) It determines government spending
c) It affects the purchasing power of money
d) It regulates international trade
Answer: c
19. How does monetary policy influence economic growth?
a) Only through government spending
b) By adjusting interest rates and money supply
c) Through international trade policies
d) By controlling wages directly
Answer: b
20. What role do banks play in the economy as financial intermediaries?
a) They only provide loans to businesses
b) They only accept deposits
c) They channel savings into productive investments
d) They only manage government funds
Answer: c
21. In a fixed exchange rate system with free capital movement, what must a country
sacrifice?
a) Economic growth
b) Trade relations
c) Monetary independence
d) Financial stability
Answer: c
22. What happens to a central bank's ability to control interest rates under a fixed
exchange rate?
a) It becomes completely unrestricted
b) It becomes limited due to exchange rate commitments
c) It only affects domestic loans
d) It only impacts government bonds
Answer: b
23. How can monetary policy affect income distribution?
a) Only through taxation
b) Only through government spending
c) By impacting wealth and income distribution in society
d) Only through minimum wage laws
Answer: c
24. What is a primary concern when studying banking and financial systems?
a) Only international trade
b) Only government revenue
c) Economic stability
d) Only consumer spending
Answer: c
25. Which of the following best describes the primary role of banks in monetary policy?
a) Processing customer payments
b) Managing individual wealth
c) Transmitting policy changes from central banks
d) Creating financial regulations
Answer: c
26. What is a key reason for studying financial regulation according to the text?
a) To increase bank profits
b) To protect depositors and investors
c) To reduce international trade
d) To increase interest rates
Answer: b
27. The text mentions several types of risks that banks face. Which combination represents
the main risks discussed?
a) Legal risk, tax risk, and currency risk
b) Credit risk, market risk, and operational risk
c) Political risk, interest rate risk, and liquidity risk
d) Reputational risk, strategic risk, and systemic risk
Answer: b
28. According to the text, why is understanding banking important for companies?
a) Only for paying employee salaries
b) Only for processing customer payments
c) For lending, payment processing, and risk management
d) Only for international transactions
Answer: c
29. How does the financial system contribute to broader social issues according to
the text?
a) By creating employment opportunities
b) By influencing wealth distribution
c) By controlling inflation rates
d) By regulating market competition
Answer: b
30. What is the primary purpose of studying financial innovation according to the text?
a) To create new banking regulations
b) To increase bank profits
c) To understand its impact on markets and consumers
d) To reduce operational costs

Answer: c