SOLUTION MANUAL for Money, Banking, Financial
xx!! xx!! xx!! xx!! xx!!
Markets & Institutions 2nd Edition
xx!! xx!! xx!! xx!! xx!! xx!!
by Brandl Michael, All Chapters 1 - 24
xx!! xx!! xx!! xx!! xx!! xx!! xx!!
,TABLE OF CONTENTS xx!! xx!! xx!!
Part I: MONEY AND ITS PRICES.
xx!! xx!! xx!! xx!! xx!!
1. Introduction and Overview.
xx!! xx!! xx!!
2. Money, Money Supply and Interest.
xx!! xx!! xx!! xx!! xx!!
3. Bonds, Loanable Funds & Interest Rates.
xx!! xx!! xx!! xx!! xx!! xx!!
4. Interest Rates in More Detail.
xx!! xx!! xx!! xx!! xx!!
Part II: MONEY AND OVERALL ECONOMY.
xx!! xx!! xx!! xx!! xx!!
5. Financial Markets through Time.
xx!! xx!! xx!! xx!!
6. Aggregate Supply & Aggregate Demand.
xx!! xx!! xx!! xx!! xx!!
7. Banks and Money.
xx!! xx!! xx!!
Part III: CENTRAL BANKS.
xx!! xx!! xx!!
8. Central Banks.
xx!! xx!!
9. Monetary Policy Tools.
xx!! xx!! xx!!
10. The Money Supply Process.
xx!! xx!! xx!! xx!!
11. Monetary Policy & Debates.
xx!! xx!! xx!! xx!!
Part IV: THE BANKING SYSTEM.
xx!! xx!! xx!! xx!!
12. Bank Management.
xx!! xx!!
13. Bank Risk Management & Performance.
xx!! xx!! xx!! xx!! xx!!
14. Banking Regulation.
xx!! xx!!
Part V: FINANCIAL MARKETS.
xx!! xx!! xx!!
15. Money Markets.
xx!! xx!!
16. Bond Markets.
xx!! xx!!
17. Stock Market & Efficiency.
xx!! xx!! xx!! xx!!
18. Mortgage Market.
xx!! xx!!
Part VI: GLOBAL FINANCIAL MARKETS.
xx!! xx!! xx!! xx!!
19. FX. xx!!
20. Global Financial Architecture.
xx!! xx!! xx!!
Part VII: FINANCIAL INSTITUTIONS.
xx!! xx!! xx!!
21. Thrifts and Finance Companies.
xx!! xx!! xx!! xx!!
22. Insurance and Pensions.
xx!! xx!! xx!!
23. Mutual Funds.
xx!! xx!!
24. Investment Banks and Private Equity.
xx!! xx!! xx!! xx!! xx!!
, CHAPTER 2: Money, Money Supply, and Interest xx!! xx!! xx!! xx!! xx!! xx!!
2-1 Section Review xx!!
1. What is the difference between money and currency? When are they the same? Why might they
xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!!
bedifferent?
xx!! x!
ANS: Money is anything generally accepted in exchange for goods & services. Currency is issued by a
xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!!
bank or the government, but currency is not necessarily money. They are the same when they are
xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!!
accepted in exchange for goods and services. Currencies can stop being money if people don’t
xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!!
acceptthem in exchange for goods and services. If a group of people stop using currency to get goods
xx!! x! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!!
and services but instead use bananas, then the bananas are the money.
xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!!
2. How many prices must a barter economy have if the economy has four goods? What if it has
xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!!
400goods? Explain why having a money in the second case is beneficial.
xx!! x! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!!
ANS: 4 goods = 6 prices; 400 goods = 79,800 prices. Money allows us to specialize and reduce our
xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!!
searchcost.
xx!! Money allows us to reduce the number of stated prices we need.
x! x x ! ! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!!
3. You read a news story about a country that is suffering from rapid, ongoing increases in the cost
xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!!
ofliving. Which characteristic of money is being directly negatively impacted in that economy?
xx!! x! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!!
a. Unit of account xx!! xx!!
b. Medium of exchange xx!! xx!!
c. Store of value xx!! xx!!
d. Double coincidence of xx!! xx!!
xx!! wantsANS: C x! xx!!
2-2 Section Review xx!!
1. Bobby is confused. He states: “Since prisoners are not allowed to smoke in prisons any longer,
xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!!
Radford’s examples of cigarettes in POW camps no longer applies.” How would you explain to
xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!!
Bobby how Radford’s story demonstrates the concepts of the criteria of money, as well as the
xx!! x! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!!
importance ofchanges in the money supply?
xx!! xx!! x! xx!! xx!! xx!! xx!!
ANS: Any asset that is able to be standardized, divisible, durable and in demand could be currency, as
xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!!
long as it is a medium of exchange, is a unit of account and has store of value.
xx!! xx!! xx!! xx!! xx!!Cigarettes were
xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! x x ! ! xx!!
money.
xx!!
, 2. Proponents of the Gold Standard, or using gold as money, often argue that it will keep inflation
xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!!
undercontrol. How does the experience of Europe in the sixteenth century raise doubts about that claim?
xx!! x! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!!
ANS: If people start to hoard gold or silver, there may not be enough money, and an economy
xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!!
couldslide into recession.
xx!! If gold or silver increases too rapidly the economy could suffer inflation.
x! xx!! xx!! x x ! ! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!!
3. Ricardo and Friedman agree that if the money supply increases “too quickly” the following happens:
xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!!
a. The rate of inflation decreases.
xx!! xx!! xx!! xx!!
b. The rate of real economic growth increases.
xx!! xx!! xx!! xx!! xx!! xx!!
c. The rate of inflation increases.
xx!! xx!! xx!! xx!!
d. The level of employment decreases.
xx!! xx!! xx!! xx!!
ANS: C xx!!
2-3 Section Review xx!!
1. A critic of money economics once stated, “if you cannot measure the money supply accurately, it
xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!!
isnot worth discussing at all.” How would you refute this statement?
xx!! x! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!!
ANS: Due to changes in financial markets, financial innovation and changes in the way banks
xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!!
operate,led to the decline in the usefulness of M2 as a monetary aggregate.
xx!! x! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!!
2. Economists are searching for a “good” measurement of the money supply. What constitutes a
xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!!
goodmeasurement of the money supply?
xx!! x! xx!! xx!! xx!! xx!!
ANS: To economists, a “good” measurement of the money supply is one that conforms to economic
xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!!
theories regarding inflation and the economy. For example, if the money supply (according to a
xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!!
particular measurement) increases faster than the growth rate of the economy, then economic theory
xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!!
suggests that inflation should occur. On the other hand, if the money supply (according to a particular
xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!!
measurement) increases too slowly relative to the growth rate of the economy, then economic theory
xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!!
suggests that this will result in a recession. When the measurement of the money supply coincides
xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!!
withthese economic predictions, then that particular measurement has the potential to be a “good”
xx!! x! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!!
measurement of the money supply. During certain periods of time, both M1 and M2 have been
xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!!
considered to be “good” measurements of the money supply. However, there have also been periods
xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!!
oftime where the changes in M1 or M2 did not coincide with economic theory.
xx!! x! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!!
3. Which of the following is the broadest or most inclusive measurement of the money supply?
xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!!
a. M1
b. M2
c. M3
d. M0
ANS: x x ! ! B
xx!! xx!! xx!! xx!! xx!!
Markets & Institutions 2nd Edition
xx!! xx!! xx!! xx!! xx!! xx!!
by Brandl Michael, All Chapters 1 - 24
xx!! xx!! xx!! xx!! xx!! xx!! xx!!
,TABLE OF CONTENTS xx!! xx!! xx!!
Part I: MONEY AND ITS PRICES.
xx!! xx!! xx!! xx!! xx!!
1. Introduction and Overview.
xx!! xx!! xx!!
2. Money, Money Supply and Interest.
xx!! xx!! xx!! xx!! xx!!
3. Bonds, Loanable Funds & Interest Rates.
xx!! xx!! xx!! xx!! xx!! xx!!
4. Interest Rates in More Detail.
xx!! xx!! xx!! xx!! xx!!
Part II: MONEY AND OVERALL ECONOMY.
xx!! xx!! xx!! xx!! xx!!
5. Financial Markets through Time.
xx!! xx!! xx!! xx!!
6. Aggregate Supply & Aggregate Demand.
xx!! xx!! xx!! xx!! xx!!
7. Banks and Money.
xx!! xx!! xx!!
Part III: CENTRAL BANKS.
xx!! xx!! xx!!
8. Central Banks.
xx!! xx!!
9. Monetary Policy Tools.
xx!! xx!! xx!!
10. The Money Supply Process.
xx!! xx!! xx!! xx!!
11. Monetary Policy & Debates.
xx!! xx!! xx!! xx!!
Part IV: THE BANKING SYSTEM.
xx!! xx!! xx!! xx!!
12. Bank Management.
xx!! xx!!
13. Bank Risk Management & Performance.
xx!! xx!! xx!! xx!! xx!!
14. Banking Regulation.
xx!! xx!!
Part V: FINANCIAL MARKETS.
xx!! xx!! xx!!
15. Money Markets.
xx!! xx!!
16. Bond Markets.
xx!! xx!!
17. Stock Market & Efficiency.
xx!! xx!! xx!! xx!!
18. Mortgage Market.
xx!! xx!!
Part VI: GLOBAL FINANCIAL MARKETS.
xx!! xx!! xx!! xx!!
19. FX. xx!!
20. Global Financial Architecture.
xx!! xx!! xx!!
Part VII: FINANCIAL INSTITUTIONS.
xx!! xx!! xx!!
21. Thrifts and Finance Companies.
xx!! xx!! xx!! xx!!
22. Insurance and Pensions.
xx!! xx!! xx!!
23. Mutual Funds.
xx!! xx!!
24. Investment Banks and Private Equity.
xx!! xx!! xx!! xx!! xx!!
, CHAPTER 2: Money, Money Supply, and Interest xx!! xx!! xx!! xx!! xx!! xx!!
2-1 Section Review xx!!
1. What is the difference between money and currency? When are they the same? Why might they
xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!!
bedifferent?
xx!! x!
ANS: Money is anything generally accepted in exchange for goods & services. Currency is issued by a
xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!!
bank or the government, but currency is not necessarily money. They are the same when they are
xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!!
accepted in exchange for goods and services. Currencies can stop being money if people don’t
xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!!
acceptthem in exchange for goods and services. If a group of people stop using currency to get goods
xx!! x! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!!
and services but instead use bananas, then the bananas are the money.
xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!!
2. How many prices must a barter economy have if the economy has four goods? What if it has
xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!!
400goods? Explain why having a money in the second case is beneficial.
xx!! x! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!!
ANS: 4 goods = 6 prices; 400 goods = 79,800 prices. Money allows us to specialize and reduce our
xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!!
searchcost.
xx!! Money allows us to reduce the number of stated prices we need.
x! x x ! ! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!!
3. You read a news story about a country that is suffering from rapid, ongoing increases in the cost
xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!!
ofliving. Which characteristic of money is being directly negatively impacted in that economy?
xx!! x! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!!
a. Unit of account xx!! xx!!
b. Medium of exchange xx!! xx!!
c. Store of value xx!! xx!!
d. Double coincidence of xx!! xx!!
xx!! wantsANS: C x! xx!!
2-2 Section Review xx!!
1. Bobby is confused. He states: “Since prisoners are not allowed to smoke in prisons any longer,
xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!!
Radford’s examples of cigarettes in POW camps no longer applies.” How would you explain to
xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!!
Bobby how Radford’s story demonstrates the concepts of the criteria of money, as well as the
xx!! x! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!!
importance ofchanges in the money supply?
xx!! xx!! x! xx!! xx!! xx!! xx!!
ANS: Any asset that is able to be standardized, divisible, durable and in demand could be currency, as
xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!!
long as it is a medium of exchange, is a unit of account and has store of value.
xx!! xx!! xx!! xx!! xx!!Cigarettes were
xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! x x ! ! xx!!
money.
xx!!
, 2. Proponents of the Gold Standard, or using gold as money, often argue that it will keep inflation
xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!!
undercontrol. How does the experience of Europe in the sixteenth century raise doubts about that claim?
xx!! x! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!!
ANS: If people start to hoard gold or silver, there may not be enough money, and an economy
xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!!
couldslide into recession.
xx!! If gold or silver increases too rapidly the economy could suffer inflation.
x! xx!! xx!! x x ! ! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!!
3. Ricardo and Friedman agree that if the money supply increases “too quickly” the following happens:
xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!!
a. The rate of inflation decreases.
xx!! xx!! xx!! xx!!
b. The rate of real economic growth increases.
xx!! xx!! xx!! xx!! xx!! xx!!
c. The rate of inflation increases.
xx!! xx!! xx!! xx!!
d. The level of employment decreases.
xx!! xx!! xx!! xx!!
ANS: C xx!!
2-3 Section Review xx!!
1. A critic of money economics once stated, “if you cannot measure the money supply accurately, it
xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!!
isnot worth discussing at all.” How would you refute this statement?
xx!! x! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!!
ANS: Due to changes in financial markets, financial innovation and changes in the way banks
xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!!
operate,led to the decline in the usefulness of M2 as a monetary aggregate.
xx!! x! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!!
2. Economists are searching for a “good” measurement of the money supply. What constitutes a
xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!!
goodmeasurement of the money supply?
xx!! x! xx!! xx!! xx!! xx!!
ANS: To economists, a “good” measurement of the money supply is one that conforms to economic
xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!!
theories regarding inflation and the economy. For example, if the money supply (according to a
xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!!
particular measurement) increases faster than the growth rate of the economy, then economic theory
xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!!
suggests that inflation should occur. On the other hand, if the money supply (according to a particular
xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!!
measurement) increases too slowly relative to the growth rate of the economy, then economic theory
xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!!
suggests that this will result in a recession. When the measurement of the money supply coincides
xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!!
withthese economic predictions, then that particular measurement has the potential to be a “good”
xx!! x! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!!
measurement of the money supply. During certain periods of time, both M1 and M2 have been
xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!!
considered to be “good” measurements of the money supply. However, there have also been periods
xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!!
oftime where the changes in M1 or M2 did not coincide with economic theory.
xx!! x! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!!
3. Which of the following is the broadest or most inclusive measurement of the money supply?
xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!! xx!!
a. M1
b. M2
c. M3
d. M0
ANS: x x ! ! B
