SOLUTIONg MANUALg FOR
Money,gBanking,gFinancialgMarketsg&gInstitutionsg2ndgEditiongforgBrandlgMichael
Chapterg2-24
CHAPTERg2:gMoney,gMoneygSupply,gandgInterest
2-1 gSectiongReview
1. Whatgisgthegdifferencegbetweengmoneygandgcurrency?gWhengaregtheygthegsame?gWhygmightgtheyg
begdifferent?
ANS:gMoneygisganythingggenerallygacceptedgingexchangegforggoodsg&gservices.gCurrencygisgissuedgbygag
bankgorgtheggovernment,gbutgcurrencygisgnotgnecessarilygmoney.gTheygaregthegsamegwhengtheygare
acceptedgingexchangegforggoodsgandgservices.gCurrenciesgcangstopgbeinggmoneygifgpeoplegdon’tgacceptg
themgingexchangegforggoodsgandgservices.gIfgaggroupgofgpeoplegstopgusinggcurrencygtoggetggoodsgandgs
ervicesgbutginsteadgusegbananas,gthengthegbananasgaregthegmoney.
2. Howgmanygpricesgmustgagbartergeconomyghavegifgthegeconomyghasgfourggoods?gWhatgifgitghasg
400ggoods?gExplaingwhyghavinggagmoneygingthegsecondgcasegisgbeneficial.
ANS:g4ggoodsg=g6gprices;g400ggoodsg=g79,800gprices.gMoneygallowsgusgtogspecializegandgreducegourgsea
rchgcost.g Moneygallowsgusgtogreducegthegnumbergofgstatedgpricesgwegneed.
3. Yougreadgagnewsgstorygaboutgagcountrygthatgisgsufferinggfromgrapid,gongoinggincreasesgingthegcos
tgofgliving.gWhichgcharacteristicgofgmoneygisgbeinggdirectlygnegativelygimpactedgingthatgeconomy?
a. Unitgofgaccount
b. Mediumgofgexchange
c. Storegofgvalue
d. Doublegcoincidencegofgwant
sgANS:g C
2-2 gSectiongReview
1. Bobbygisgconfused.gHegstates:g“Sincegprisonersgaregnotgallowedgtogsmokegingprisonsganyglonger,gR
adford’sg examplesgofgcigarettesgingPOWgcampsgnoglongergapplies.”gHowgwouldgyougexplaingtogBobb
yghowgRadford’sgstorygdemonstratesgthegconceptsgofgthegcriteriagofgmoney,gasgwellgasgthegimportan
cegofgchangesgingthegmoneygsupply?
ANS:g Anygassetgthatgisgablegtogbegstandardized,gdivisible,gdurablegandgingdemandgcouldgbegcurrency,ga
sglonggasgitgisgagmediumgofgexchange,gisgagunitgofgaccountgandghasgstoregofgvalue.g Cigarettesgweregmo
ney.
,2. ProponentsgofgthegGoldgStandard,gorgusingggoldgasgmoney,goftengarguegthatgitgwillgkeepginflationgun
dergcontrol.gHowgdoesgthegexperiencegofgEuropegingthegsixteenthgcenturygraisegdoubtsgaboutgthatgclai
m?
ANS:g Ifgpeoplegstartgtoghoardggoldgorgsilver,gtheregmaygnotgbegenoughgmoney,gandgangeconomygcouldg
slidegintogrecession.g Ifggoldgorgsilvergincreasesgtoograpidlygthegeconomygcouldgsufferginflation.
3. RicardogandgFriedmangagreegthatgifgthegmoneygsupplygincreasesg“toogquickly”gthegfollowingghappens:
a. Thegrategofginflationgdecreases.
b. Thegrategofgrealgeconomicggrowthgincreases.
c. Thegrategofginflationgincreases.
d. Theglevelgofgemploymentgdecreases.
ANS:gC
2-3 gSectiongReview
1. Agcriticgofgmoneygeconomicsgoncegstated,g“ifgyougcannotgmeasuregthegmoneygsupplygaccurately,gi
tgisgnotgworthgdiscussinggatgall.”gHowgwouldgyougrefutegthisgstatement?
ANS:gDuegtogchangesgingfinancialgmarkets,gfinancialginnovationgandgchangesgingthegwaygbanksgoperate,
gledgtogthegdeclinegingthegusefulnessgofgM2gasgagmonetarygaggregate.
2. Economistsgaregsearchinggforgag“good”gmeasurementgofgthegmoneygsupply.gWhatgconstitutesgaggo
odgmeasurementgofgthegmoneygsupply?
ANS:gTogeconomists,gag“good”gmeasurementgofgthegmoneygsupplygisgonegthatgconformsgtogeconomicgt
heoriesgregardingginflationgandgthegeconomy.gForgexample,gifgthegmoneygsupplyg(accordinggtogagpartic
ulargmeasurement)gincreasesgfastergthangtheggrowthgrategofgthegeconomy,gthengeconomicgtheorygsugg
estsgthatginflationgshouldgoccur.gOngthegotherghand,gifgthegmoneygsupplyg(accordinggtogagparticulargme
asurement)gincreasesgtoogslowlygrelativegtogtheggrowthgrategofgthegeconomy,gthengeconomicgtheorygsu
ggestsgthatgthisgwillgresultgingagrecession.gWhengthegmeasurementgofgthegmoneygsupplygcoincidesgwith
gthesegeconomicgpredictions,gthengthatgparticulargmeasurementghasgthegpotentialgtogbegag“good”gmea
surementgofgthegmoneygsupply.gDuringgcertaingperiodsgofgtime,gbothgM1gandgM2ghavegbeengconsidere
dgtogbeg“good”gmeasurementsgofgthegmoneygsupply.gHowever,gthereghavegalsogbeengperiodsgofgtimegw
heregthegchangesgingM1gorgM2gdidgnotgcoincidegwithgeconomicgtheory.
3. Whichgofgthegfollowinggisgthegbroadestgorgmostginclusivegmeasurementgofgthegmoneygsupply?
a. M1
b. M2
c. M3
d. M0
ANS:g B
,2-4 gSectiongReview
1. Eachgpersongmightghavegagdifferentgtimegpreference.gExplaingwhygangoldergpersongmightghavegaghig
hergorglowergtimegpreferencegthangagyounggperson.
ANS:gAngoldergpersongmightghavegaghighgtimegpreference,gconsumergnowgvs.gingthegfuture.g Thegoldergp
ersongwillgplaceghighergvaluegongthegabilitygtogconsumegnowgmoregthangmoneygingthegfuture.
2. Whatgisgthegfuturegvaluegofg$500gingtwogyearsgifgtheginterestgrategisg4%?gHowgwouldgyougexplaingthi
sgtogsomeonegwhoghasgnogtraininggingeconomics?
ANS:g500(1.04)2g=g$540.80.gForgsomeonegwithoutgagbackgroundgingeconomics,gonegcouldgexplaingthatg
moneyginvestedgtodaygwillggrowgovergtime.gThus,gingordergtoghaveg$500gingthegfuture,gtodaygyougwoul
dgonlygneedgtoginvestgsomegamountgthatgisglessgthang$500.gHowgmuchglessgdependsgongthegreturngongy
ourginvestmentg(theginterestgrate).
3. Ifgthegannualginterestgrategisg2%,gwhatgisgthegquarterlyginterestgrate?
a. 0.0204
b. 0.0166
c. 0.005
d. 0.001
ANS:g C
CHAPTERg3:gBondsgandgLoanablegFunds
3-1 gSectiongReview
1. Today,gshoppersg“clipgcoupons”gbeforegtheyggogshopping.gExplainghowgthesegmoderngcouponsga
regsimilargandgdissimilargtogtheg“coupons”greferredgtogingthegbondgmarket.
ANS:gToday,gthough,gmostgbondsgaregnotgphysicalgprintedgpiecesgofgpapergwithgcouponsgthatgmustgbegc
lippedgoffgandgmailedgtogthegissuer.
2. Thegfactgthatgthegfacegvaluegofgagbondgdoesgnotgchangegovergtheglifegofgthegbondgisggener
allygconsideredgagbenefitgtogthegborrower.gCangyougexplaingwhy?
ANS:gIfgthegmarketgconditionsgchange,gsaygratesgdrop,gthegfacegvaluegwillgnotgchange.
3. Thegrategofginterestgagbondgpaysgisgcalledgthegbond’s:
a. facegvalue.
b. coupongrate.
c. bondgrating.
d. ratinggrate.
, ANS:g B
3-2 gSectiongReview
1. Ifgyoughavegagbondgwithgagfacegvaluegofg$1,000gandgagcoupongrategofg2.25%,gbutgthegmarketginter
estgrategforgsuchgbondsgisg2.5%,gwillgyourgbondgsellgatgpar,gatgagpremium,gorgatgagdiscount?gExplaing
why.
ANS:gWhengmarketginterestgratesgrisegrelativegtogcoupongratesgongexistinggbonds,gthegpricegofgthesegex
istinggbondsgdecreasegbelowgfacegvalue.gThisgmeansgthatgthisgbondgwillgbegsoldgatgagdiscount,gsincegthe
gmarketgpricegisgbelowgthegfacegvaluegofgthegbond.
2. Ifgyoughavegagbondgwithgagfacegvaluegofg$1,000gandgagcoupongrategofg2.5%,gbutgthegmarketginte
restgrategforgsuchgbondsgisg2.25%,gwillgyourgbondgsellgatgpar,gatgagpremium,gorgatgagdiscount?gExpl
aingwhy.
ANS:gPremiumgbecausegthegcoupongrategisglessgthangthegmarketgrate.
3. Ifgagthree-
yeargbondgwithgag$1,000gfacegvalueghasgagcoupongrategofg3.5%,gandgthegcurrentgmarketginterestg
rategisg2%,gwhatgisgthegmarketgpricegofgthegbond?
a. $956.75
b. $1,035.00
c. $1,043.30
d. $1,148.34
gANS:g c
3-3 gSectiongReview
1. Yougreadgingthegfinancialgpressgthatgmarketgparticipantsgexpectgstockgpricesgtogincreasegdramatically
gingthegneargfuture,gwhilegatgthegsamegtimegbusinessgconfidencegisgincreasing.gExplaingingwordsgandgsh
owggraphicallygwhatgwillghappengingthegbondgmarketgifgthegfirstgchangegisglargergingmagnitudegthangth
egsecond.
ANS:gStocksgandgbondsgaregconsideredgsubstitutes,gthegreturngongholdinggstocksgareggoinggtogincrease,
gyougdognotgwantgtogholdgbonds.g Demandgforgbondsgwillgfall,grelativegreturngtogbondsgisgdeclining.
Businessgconfidencegisgincreasinggsogfirmsgareggoinggtogfundgmoregprojects.g Theygwillgneedgtogborrowg
moregmoney,gorgsellgmoregbondsgtograisegthosegfunds.g Thegsupplygofgbondsgisgincreasing.g Duegtogtheg
decreasegingdemandgforgbondsgisgbiggergthangthegsecond,gwegcangconcludegequilibriumgpricegwillgfallga
ndgequilibriumgquantitygwillgincrease.
2. Storiesgappeargingthegfinancialgpressgreportinggtwogeconomicgdevelopments:gWealthglevelsgingtheg
UnitedgStatesgaregincreasing,gwhilegatgthegsamegtimegthegrelativegriskinessgofgbondsgissuedgbygAmeric
angcorporationsgisgdecreasing.gExplaingingwordsgwhatgwillghappengingthegUSgbondgmarketgbecausegofg
thesegtwogevents.
ANS:gIncreasinggwealthglevelsgcausegangincreasegingthegdemandgforgbondsgbecauseghouseholdsgcangus
egthisgwealthgnotgonlygtogincreasegconsumptiongbutgalsogsave.gSomegportiongofgthesegnewgsavingsgwill
find
its gwaygintogthegbondgmarketgasghouseholdsgwillgpurchasegmoregbondsgatgeverygprice.gAtgthegsamegti
me,
ifgdefaultgriskgdecreases,gsaversgwillgbuygmoregbondsgasgtheygaregconsideredgagrelativelygsafergasset.g
So,
Money,gBanking,gFinancialgMarketsg&gInstitutionsg2ndgEditiongforgBrandlgMichael
Chapterg2-24
CHAPTERg2:gMoney,gMoneygSupply,gandgInterest
2-1 gSectiongReview
1. Whatgisgthegdifferencegbetweengmoneygandgcurrency?gWhengaregtheygthegsame?gWhygmightgtheyg
begdifferent?
ANS:gMoneygisganythingggenerallygacceptedgingexchangegforggoodsg&gservices.gCurrencygisgissuedgbygag
bankgorgtheggovernment,gbutgcurrencygisgnotgnecessarilygmoney.gTheygaregthegsamegwhengtheygare
acceptedgingexchangegforggoodsgandgservices.gCurrenciesgcangstopgbeinggmoneygifgpeoplegdon’tgacceptg
themgingexchangegforggoodsgandgservices.gIfgaggroupgofgpeoplegstopgusinggcurrencygtoggetggoodsgandgs
ervicesgbutginsteadgusegbananas,gthengthegbananasgaregthegmoney.
2. Howgmanygpricesgmustgagbartergeconomyghavegifgthegeconomyghasgfourggoods?gWhatgifgitghasg
400ggoods?gExplaingwhyghavinggagmoneygingthegsecondgcasegisgbeneficial.
ANS:g4ggoodsg=g6gprices;g400ggoodsg=g79,800gprices.gMoneygallowsgusgtogspecializegandgreducegourgsea
rchgcost.g Moneygallowsgusgtogreducegthegnumbergofgstatedgpricesgwegneed.
3. Yougreadgagnewsgstorygaboutgagcountrygthatgisgsufferinggfromgrapid,gongoinggincreasesgingthegcos
tgofgliving.gWhichgcharacteristicgofgmoneygisgbeinggdirectlygnegativelygimpactedgingthatgeconomy?
a. Unitgofgaccount
b. Mediumgofgexchange
c. Storegofgvalue
d. Doublegcoincidencegofgwant
sgANS:g C
2-2 gSectiongReview
1. Bobbygisgconfused.gHegstates:g“Sincegprisonersgaregnotgallowedgtogsmokegingprisonsganyglonger,gR
adford’sg examplesgofgcigarettesgingPOWgcampsgnoglongergapplies.”gHowgwouldgyougexplaingtogBobb
yghowgRadford’sgstorygdemonstratesgthegconceptsgofgthegcriteriagofgmoney,gasgwellgasgthegimportan
cegofgchangesgingthegmoneygsupply?
ANS:g Anygassetgthatgisgablegtogbegstandardized,gdivisible,gdurablegandgingdemandgcouldgbegcurrency,ga
sglonggasgitgisgagmediumgofgexchange,gisgagunitgofgaccountgandghasgstoregofgvalue.g Cigarettesgweregmo
ney.
,2. ProponentsgofgthegGoldgStandard,gorgusingggoldgasgmoney,goftengarguegthatgitgwillgkeepginflationgun
dergcontrol.gHowgdoesgthegexperiencegofgEuropegingthegsixteenthgcenturygraisegdoubtsgaboutgthatgclai
m?
ANS:g Ifgpeoplegstartgtoghoardggoldgorgsilver,gtheregmaygnotgbegenoughgmoney,gandgangeconomygcouldg
slidegintogrecession.g Ifggoldgorgsilvergincreasesgtoograpidlygthegeconomygcouldgsufferginflation.
3. RicardogandgFriedmangagreegthatgifgthegmoneygsupplygincreasesg“toogquickly”gthegfollowingghappens:
a. Thegrategofginflationgdecreases.
b. Thegrategofgrealgeconomicggrowthgincreases.
c. Thegrategofginflationgincreases.
d. Theglevelgofgemploymentgdecreases.
ANS:gC
2-3 gSectiongReview
1. Agcriticgofgmoneygeconomicsgoncegstated,g“ifgyougcannotgmeasuregthegmoneygsupplygaccurately,gi
tgisgnotgworthgdiscussinggatgall.”gHowgwouldgyougrefutegthisgstatement?
ANS:gDuegtogchangesgingfinancialgmarkets,gfinancialginnovationgandgchangesgingthegwaygbanksgoperate,
gledgtogthegdeclinegingthegusefulnessgofgM2gasgagmonetarygaggregate.
2. Economistsgaregsearchinggforgag“good”gmeasurementgofgthegmoneygsupply.gWhatgconstitutesgaggo
odgmeasurementgofgthegmoneygsupply?
ANS:gTogeconomists,gag“good”gmeasurementgofgthegmoneygsupplygisgonegthatgconformsgtogeconomicgt
heoriesgregardingginflationgandgthegeconomy.gForgexample,gifgthegmoneygsupplyg(accordinggtogagpartic
ulargmeasurement)gincreasesgfastergthangtheggrowthgrategofgthegeconomy,gthengeconomicgtheorygsugg
estsgthatginflationgshouldgoccur.gOngthegotherghand,gifgthegmoneygsupplyg(accordinggtogagparticulargme
asurement)gincreasesgtoogslowlygrelativegtogtheggrowthgrategofgthegeconomy,gthengeconomicgtheorygsu
ggestsgthatgthisgwillgresultgingagrecession.gWhengthegmeasurementgofgthegmoneygsupplygcoincidesgwith
gthesegeconomicgpredictions,gthengthatgparticulargmeasurementghasgthegpotentialgtogbegag“good”gmea
surementgofgthegmoneygsupply.gDuringgcertaingperiodsgofgtime,gbothgM1gandgM2ghavegbeengconsidere
dgtogbeg“good”gmeasurementsgofgthegmoneygsupply.gHowever,gthereghavegalsogbeengperiodsgofgtimegw
heregthegchangesgingM1gorgM2gdidgnotgcoincidegwithgeconomicgtheory.
3. Whichgofgthegfollowinggisgthegbroadestgorgmostginclusivegmeasurementgofgthegmoneygsupply?
a. M1
b. M2
c. M3
d. M0
ANS:g B
,2-4 gSectiongReview
1. Eachgpersongmightghavegagdifferentgtimegpreference.gExplaingwhygangoldergpersongmightghavegaghig
hergorglowergtimegpreferencegthangagyounggperson.
ANS:gAngoldergpersongmightghavegaghighgtimegpreference,gconsumergnowgvs.gingthegfuture.g Thegoldergp
ersongwillgplaceghighergvaluegongthegabilitygtogconsumegnowgmoregthangmoneygingthegfuture.
2. Whatgisgthegfuturegvaluegofg$500gingtwogyearsgifgtheginterestgrategisg4%?gHowgwouldgyougexplaingthi
sgtogsomeonegwhoghasgnogtraininggingeconomics?
ANS:g500(1.04)2g=g$540.80.gForgsomeonegwithoutgagbackgroundgingeconomics,gonegcouldgexplaingthatg
moneyginvestedgtodaygwillggrowgovergtime.gThus,gingordergtoghaveg$500gingthegfuture,gtodaygyougwoul
dgonlygneedgtoginvestgsomegamountgthatgisglessgthang$500.gHowgmuchglessgdependsgongthegreturngongy
ourginvestmentg(theginterestgrate).
3. Ifgthegannualginterestgrategisg2%,gwhatgisgthegquarterlyginterestgrate?
a. 0.0204
b. 0.0166
c. 0.005
d. 0.001
ANS:g C
CHAPTERg3:gBondsgandgLoanablegFunds
3-1 gSectiongReview
1. Today,gshoppersg“clipgcoupons”gbeforegtheyggogshopping.gExplainghowgthesegmoderngcouponsga
regsimilargandgdissimilargtogtheg“coupons”greferredgtogingthegbondgmarket.
ANS:gToday,gthough,gmostgbondsgaregnotgphysicalgprintedgpiecesgofgpapergwithgcouponsgthatgmustgbegc
lippedgoffgandgmailedgtogthegissuer.
2. Thegfactgthatgthegfacegvaluegofgagbondgdoesgnotgchangegovergtheglifegofgthegbondgisggener
allygconsideredgagbenefitgtogthegborrower.gCangyougexplaingwhy?
ANS:gIfgthegmarketgconditionsgchange,gsaygratesgdrop,gthegfacegvaluegwillgnotgchange.
3. Thegrategofginterestgagbondgpaysgisgcalledgthegbond’s:
a. facegvalue.
b. coupongrate.
c. bondgrating.
d. ratinggrate.
, ANS:g B
3-2 gSectiongReview
1. Ifgyoughavegagbondgwithgagfacegvaluegofg$1,000gandgagcoupongrategofg2.25%,gbutgthegmarketginter
estgrategforgsuchgbondsgisg2.5%,gwillgyourgbondgsellgatgpar,gatgagpremium,gorgatgagdiscount?gExplaing
why.
ANS:gWhengmarketginterestgratesgrisegrelativegtogcoupongratesgongexistinggbonds,gthegpricegofgthesegex
istinggbondsgdecreasegbelowgfacegvalue.gThisgmeansgthatgthisgbondgwillgbegsoldgatgagdiscount,gsincegthe
gmarketgpricegisgbelowgthegfacegvaluegofgthegbond.
2. Ifgyoughavegagbondgwithgagfacegvaluegofg$1,000gandgagcoupongrategofg2.5%,gbutgthegmarketginte
restgrategforgsuchgbondsgisg2.25%,gwillgyourgbondgsellgatgpar,gatgagpremium,gorgatgagdiscount?gExpl
aingwhy.
ANS:gPremiumgbecausegthegcoupongrategisglessgthangthegmarketgrate.
3. Ifgagthree-
yeargbondgwithgag$1,000gfacegvalueghasgagcoupongrategofg3.5%,gandgthegcurrentgmarketginterestg
rategisg2%,gwhatgisgthegmarketgpricegofgthegbond?
a. $956.75
b. $1,035.00
c. $1,043.30
d. $1,148.34
gANS:g c
3-3 gSectiongReview
1. Yougreadgingthegfinancialgpressgthatgmarketgparticipantsgexpectgstockgpricesgtogincreasegdramatically
gingthegneargfuture,gwhilegatgthegsamegtimegbusinessgconfidencegisgincreasing.gExplaingingwordsgandgsh
owggraphicallygwhatgwillghappengingthegbondgmarketgifgthegfirstgchangegisglargergingmagnitudegthangth
egsecond.
ANS:gStocksgandgbondsgaregconsideredgsubstitutes,gthegreturngongholdinggstocksgareggoinggtogincrease,
gyougdognotgwantgtogholdgbonds.g Demandgforgbondsgwillgfall,grelativegreturngtogbondsgisgdeclining.
Businessgconfidencegisgincreasinggsogfirmsgareggoinggtogfundgmoregprojects.g Theygwillgneedgtogborrowg
moregmoney,gorgsellgmoregbondsgtograisegthosegfunds.g Thegsupplygofgbondsgisgincreasing.g Duegtogtheg
decreasegingdemandgforgbondsgisgbiggergthangthegsecond,gwegcangconcludegequilibriumgpricegwillgfallga
ndgequilibriumgquantitygwillgincrease.
2. Storiesgappeargingthegfinancialgpressgreportinggtwogeconomicgdevelopments:gWealthglevelsgingtheg
UnitedgStatesgaregincreasing,gwhilegatgthegsamegtimegthegrelativegriskinessgofgbondsgissuedgbygAmeric
angcorporationsgisgdecreasing.gExplaingingwordsgwhatgwillghappengingthegUSgbondgmarketgbecausegofg
thesegtwogevents.
ANS:gIncreasinggwealthglevelsgcausegangincreasegingthegdemandgforgbondsgbecauseghouseholdsgcangus
egthisgwealthgnotgonlygtogincreasegconsumptiongbutgalsogsave.gSomegportiongofgthesegnewgsavingsgwill
find
its gwaygintogthegbondgmarketgasghouseholdsgwillgpurchasegmoregbondsgatgeverygprice.gAtgthegsamegti
me,
ifgdefaultgriskgdecreases,gsaversgwillgbuygmoregbondsgasgtheygaregconsideredgagrelativelygsafergasset.g
So,
