TEST BANK FOR The Economics of Money, Banking and Financial Markets, Global Edition 13th Edition by Frederic Mishkin ISBN: 978-1292409481 COMPLETE GUIDE ALL CHAPTERS COVERED 100% VERIFIED A+ GRADE ASSURED!!!!!NEW LATEST UPDATE!!!!!

,Chapter 1 cn




ANSWERS TO QUESTIONS cn cn




1. What is the typical relationship among interest rates on three-
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month Treasury bills, long-term Treasury bonds, and Baa corporate bonds?
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The interest rate on three-
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month Treasury bills fluctuates more than the other interest rates and is lower on aver
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age. The interest rate on Baa corporate bonds is higher on average than the other int
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erest rates. cn




2. What effect does high volatility of financial markets have on people's willingness to
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spend?
The high volatility of financial markets decreases people's willingness to spend, prim
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arily because it directly affects their wealth, and also because high volatility indicates
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that there are considerable fluctuations in the prices of securities over a short time sp
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an. It increases insecurities about the future of an economy. Refer to Figure 2 to see th
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e extremely volatile nature of stock prices between 1950 and 2020.
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3. Explain the main difference between a bond and a common stock.
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A bond is a debt instrument, which entitles the owner to receive periodic amounts of
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money (predetermined by the characteristics of the bond) until its maturity date. A co
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mmon stock, however, represents a share of ownership in the institution that has issue
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d the stock. In addition to its definition, it is not the same to hold bonds or stock of a gi
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ven corporation, since regulations state that stockholders are residual claimants (i.e., th
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e corporation has to pay all bondholders before paying stockholders).
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4. What is the main role of a financial intermediary? Name two financial i
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ntermediaries.
A financial intermediary is a firm or institution that channels savings into investment
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s––
that is, it borrows funds from individuals who have saved and provides loans to those
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who need funds. Banks and mutual funds are two examples of such intermediaries.
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5. What was the main cause of the global recession in 2020?
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The recession in 2020, sometimes referred to as the COVID-
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19 Recession, was mainly caused by the global pandemic caused by the infectious c
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oronavirus disease (Covid- cn cn



19). In March 2020, the stock market fell by 25% in a single month.
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, According to the World Bank’s June 2020 Global Economic Prospects, the volatility i
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nduced by the coronavirus pandemic, lockdowns, and other preventive measures take
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n by global economies to contain it have led to a severe contraction in the global econ
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omy.
6. Can you think of a reason why people in general do not lend money to one another to
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buy a house or a car? How would your answer explain the existence of banks?
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In general, people do not lend large amounts of money to one another because of several in
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formation problems. In particular, people do not know about the capacity of other people
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of repaying their debts, or the effort they will provide to repay their debts.
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Financial intermediaries, in particular commercial banks, tend to solve these problems b
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y acquiring information about potential borrowers and writing and enforcing contracts th
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at encourage lenders to repay their debt and/or maintain the value of the collateral.
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7. Why are banks important to the financial system?
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Banks are one of the major financial intermediaries. They channel savings from privat
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e institutions or the general public to other institutions or people who need a loan. Wel
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l-functioning banks are very important for the savings-to- cn cn cn cn cn cn cn



loans cycle and for the housing market.
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8. Can you date the latest financial crisis in the United States or in Europe? Are there
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reasons to think that these crises might have been related? Why?
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The latest financial crisis in the United States and Europe occurred in 2007–
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2009. At the beginning, it hit mostly the U.S. financial system, but it then quickly mo
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ved to Europe, since financial markets are highly interconnected. One specific way in
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which these markets were related is that some financial intermediaries in Europe held
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securities backed by mortgages originated in the United States, and when these secur
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ities lost their a considerable part of their value, the balance sheet of European financi
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al intermediaries was adversely affected.
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9. Has the inflation rate in the United States increased or decreased in the past few
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years? What about interest rates? cn cn cn cn




Since 2015, inflation has been around 2%, with some brief dips in 2015 and 2020. In 20
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15, the interest rate on three-
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month Treasury bills was near zero, and it then rose to just over 2% in 2019, only to fa
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ll back near to zero in 2020.-
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10. If history repeats itself and we see a decline in the rate of money growth, what might
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you expect to happen tocn cn cn cn




a. real output? cn




b. the inflation rate? cn cn




c. interest rates? cn




The data in Figures 3, 5, and 6 suggest that real output, the inflation rate, and interest r
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ates would all fall. cn cn cn




11. When interest rates decrease, how might businesses and consumers change their
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economic behavior? cn

, Businesses would increase investment spending because the cost of financing this spe
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nding is now lower, and consumers would be more likely to purchase a house or a car
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because the cost of financing their purchase is lower.
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12. Is everybody worse off when interest rates rise?
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No. It is true that people who borrow to purchase a house or a car are worse off becaus
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e it costs them more to finance their purchase; however, savers benefit because they ca
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n earn higher interest rates on their savings.
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13. What is the main role of a central bank? Why are central banks, like the European
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Central Bank (ECB), important to financial analysts?
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Central banks oversee the monetary policy for a specific country or a group of nations (
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as in the case of the ECB). This is done by setting a base interest rate or by forward gu
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idance, which impacts the financial and real economy. Since money affects many eco
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nomic variables that are important to the health of an economy, financial analysts (incl
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uding politicians and policymakers) take an interest in the conduct of monetary policy
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, as well as in the management of money and interest rates.
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14. Germany is one of the few countries that has maintained a budget surplus in the last f
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ive years, and according to Reuters, the federal government made a record surplus
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of €13.5 billion in 2019. How does a budget surplus arise?
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A budget surplus results from tax revenues exceeding government expenditure, which l
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eads to lower government debt burdens.
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15. How would a fall in the value of the pound sterling affect British consumers?
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It makes foreign goods more expensive, so British consumers will buy fewer foreign g
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oods and more domestic goods.
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16. How would an increase in the value of the pound sterling affect American
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businesses?
It makes British goods more expensive relative to American goods. Thus, American
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businesses will find it easier to sell their goods in the United States and abroad, and
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the demand for their products will rise.
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17. How can changes in foreign exchange rates affect the profitability of financial i
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nstitutions?
Changes in foreign exchange rates change the value of assets held by financial institu
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tions and thus lead to gains and losses on these assets. Also changes in foreign exchange
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rates affect the profits made by traders in foreign exchange who work for financial ins
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titutions.

18. According to Figure 8, in which years would you have chosen to visit the Grand C
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anyon in Arizona rather than the Tower of London?
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In the mid-to-
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late 1970s, the late 1980s to early 1990s, and 2008 to 2015, the value of the dollar was l
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ow, making travel abroad relatively more expensive; thus, it was a good time to vacation i
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n the United States and see the Grand Canyon. With the rise in the dollar’s value in the
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early 1980s, late 1990s, and after 2015, travel abroad became
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