Solution manual
The economics of money banking and financial markets
13th global edition Frederic Mishkin
All Chapters 1-26 Covered
, Answers
to End-of- P
Chapter Questions and P P P P
roblems
ChapterP1
ANSWERSPTOPQUESTIONS
1. WhatPisPthePtypicalPrelationshipPamongPinterestPratesPonPthree-
monthPTreasuryPbills,Plong-termPTreasuryPbonds,PandPBaaPcorporatePbonds?
ThePinterestPratePonPthree-
monthPTreasuryPbillsPfluctuatesPmorePthanPthePotherPinterestPratesPandPisPlowerPonPa
verage.PThePinterestPratePonPBaaPcorporatePbondsPisPhigherPonPaveragePthanPthePoth
erPinterestPrates.
2. WhatPeffectPdoesPhighPvolatilityPofPfinancialPmarketsPhavePonPpeople'sPwillingnessPt
oPspend?
ThePhighPvolatilityPofPfinancialPmarketsPdecreasesPpeople'sPwillingnessPtoPspend,Pprim
arilyPbecausePitPdirectlyPaffectsPtheirPwealth,PandPalsoPbecausePhighPvolatilityPindicate
sPthatPthereParePconsiderablePfluctuationsPinPthePpricesPofPsecuritiesPoverPaPshortPtime
Pspan.PItPincreasesPinsecuritiesPaboutPthePfuturePofPanPeconomy.PReferPtoPFigureP2PtoPs
eePthePextremelyPvolatilePnaturePofPstockPpricesPbetweenP1950PandP2020.
3. ExplainPthePmainPdifferencePbetweenPaPbondPandPaPcommonPstock.
APbondPisPaPdebtPinstrument,PwhichPentitlesPthePownerPtoPreceivePperiodicPamountsPof
PmoneyP(predeterminedPbyPthePcharacteristicsPofPthePbond)PuntilPitsPmaturityPdate.PAPc
ommonPstock,Phowever,PrepresentsPaPsharePofPownershipPinPthePinstitutionPthatPhasPi
ssuedPthePstock.PInPadditionPtoPitsPdefinition,PitPisPnotPthePsamePtoPholdPbondsPorPstock
PofPaPgivenPcorporation,PsincePregulationsPstatePthatPstockholdersParePresidualPclaiman
tsP(i.e.,PthePcorporationPhasPtoPpayPallPbondholdersPbeforePpayingPstockholders).
4. WhatPisPthePmainProlePofPaPfinancialPintermediary?PNamePtwoPfinancialP
intermediaries.
APfinancialPintermediaryPisPaPfirmPorPinstitutionPthatPchannelsPsavingsPintoPinvestment
s––
thatPis,PitPborrowsPfundsPfromPindividualsPwhoPhavePsavedPandPprovidesPloansPtoPthos
ePwhoPneedPfunds.PBanksPandPmutualPfundsParePtwoPexamplesPofPsuchPintermediaries
.
,5. WhatPwasPthePmainPcausePofPthePglobalPrecessionPinP2020?
ThePrecessionPinP2020,PsometimesPreferredPtoPasPthePCOVID-
19PRecession,PwasPmainlyPcausedPbyPthePglobalPpandemicPcausedPbyPthePinfectious
PcoronavirusPdiseaseP(Covid-
19).PInPMarchP2020,PthePstockPmarketPfellPbyP25%PinPaPsinglePmonth.
, AccordingPtoPthePWorldPBank’sPJuneP2020PGlobalPEconomicPProspects,PthePvolatilityPi
nducedPbyPthePcoronavirusPpandemic,Plockdowns,PandPotherPpreventivePmeasuresPta
kenPbyPglobalPeconomiesPtoPcontainPitPhavePledPtoPaPseverePcontractionPinPthePglobalPe
conomy.
6. CanPyouPthinkPofPaPreasonPwhyPpeoplePinPgeneralPdoPnotPlendPmoneyPtoPonePanotherPto
PbuyPaPhousePorPaPcar?PHowPwouldPyourPanswerPexplainPthePexistencePofPbanks?
InPgeneral,PpeoplePdoPnotPlendPlargePamountsPofPmoneyPtoPonePanotherPbecausePofPsevera
lPinformationPproblems.PInPparticular,PpeoplePdoPnotPknowPaboutPthePcapacityPofPotherP
peoplePofPrepayingPtheirPdebts,PorPthePeffortPtheyPwillPprovidePtoPrepayPtheirPdebts.
FinancialPintermediaries,PinPparticularPcommercialPbanks,PtendPtoPsolvePthesePproblem
sPbyPacquiringPinformationPaboutPpotentialPborrowersPandPwritingPandPenforcingPcontract
sPthatPencouragePlendersPtoPrepayPtheirPdebtPand/orPmaintainPthePvaluePofPthePcollater
al.
7. WhyParePbanksPimportantPtoPthePfinancialPsystem?
BanksParePonePofPthePmajorPfinancialPintermediaries.PTheyPchannelPsavingsPfromPprivat
ePinstitutionsPorPthePgeneralPpublicPtoPotherPinstitutionsPorPpeoplePwhoPneedPaPloan.PW
ell-functioningPbanksParePveryPimportantPforPthePsavings-to-
loansPcyclePandPforPthePhousingPmarket.
8. CanPyouPdatePthePlatestPfinancialPcrisisPinPthePUnitedPStatesPorPinPEurope?PArePthereP
reasonsPtoPthinkPthatPthesePcrisesPmightPhavePbeenPrelated?PWhy?
ThePlatestPfinancialPcrisisPinPthePUnitedPStatesPandPEuropePoccurredPinP2007–
2009.PAtPthePbeginning,PitPhitPmostlyPthePU.S.PfinancialPsystem,PbutPitPthenPquicklyPmo
vedPtoPEurope,PsincePfinancialPmarketsParePhighlyPinterconnected.POnePspecificPwayPin
PwhichPthesePmarketsPwerePrelatedPisPthatPsomePfinancialPintermediariesPinPEuropePh
eldPsecuritiesPbackedPbyPmortgagesPoriginatedPinPthePUnitedPStates,PandPwhenPtheseP
securitiesPlostPtheirPaPconsiderablePpartPofPtheirPvalue,PthePbalancePsheetPofPEuropean
PfinancialPintermediariesPwasPadverselyPaffected.
9. HasPthePinflationPratePinPthePUnitedPStatesPincreasedPorPdecreasedPinPthePpastPfe
wPyears?PWhatPaboutPinterestPrates?
SinceP2015,PinflationPhasPbeenParoundP2%,PwithPsomePbriefPdipsPinP2015PandP2020.PI
nP2015,PthePinterestPratePonPthree-
monthPTreasuryPbillsPwasPnearPzero,PandPitPthenProsePtoPjustPoverP2%PinP2019,PonlyPto
PfallPbackPnearPtoPzeroPinP2020.-
10. IfPhistoryPrepeatsPitselfPandPwePseePaPdeclinePinPthePratePofPmoneyPgrowth,PwhatPmigh
tPyouPexpectPtoPhappenPto
a. realPoutput?
b. thePinflationPrate?
c. interestPrates?
ThePdataPinPFiguresP3,P5,PandP6PsuggestPthatPrealPoutput,PthePinflationPrate,PandPinterest
PratesPwouldPallPfall.
The economics of money banking and financial markets
13th global edition Frederic Mishkin
All Chapters 1-26 Covered
, Answers
to End-of- P
Chapter Questions and P P P P
roblems
ChapterP1
ANSWERSPTOPQUESTIONS
1. WhatPisPthePtypicalPrelationshipPamongPinterestPratesPonPthree-
monthPTreasuryPbills,Plong-termPTreasuryPbonds,PandPBaaPcorporatePbonds?
ThePinterestPratePonPthree-
monthPTreasuryPbillsPfluctuatesPmorePthanPthePotherPinterestPratesPandPisPlowerPonPa
verage.PThePinterestPratePonPBaaPcorporatePbondsPisPhigherPonPaveragePthanPthePoth
erPinterestPrates.
2. WhatPeffectPdoesPhighPvolatilityPofPfinancialPmarketsPhavePonPpeople'sPwillingnessPt
oPspend?
ThePhighPvolatilityPofPfinancialPmarketsPdecreasesPpeople'sPwillingnessPtoPspend,Pprim
arilyPbecausePitPdirectlyPaffectsPtheirPwealth,PandPalsoPbecausePhighPvolatilityPindicate
sPthatPthereParePconsiderablePfluctuationsPinPthePpricesPofPsecuritiesPoverPaPshortPtime
Pspan.PItPincreasesPinsecuritiesPaboutPthePfuturePofPanPeconomy.PReferPtoPFigureP2PtoPs
eePthePextremelyPvolatilePnaturePofPstockPpricesPbetweenP1950PandP2020.
3. ExplainPthePmainPdifferencePbetweenPaPbondPandPaPcommonPstock.
APbondPisPaPdebtPinstrument,PwhichPentitlesPthePownerPtoPreceivePperiodicPamountsPof
PmoneyP(predeterminedPbyPthePcharacteristicsPofPthePbond)PuntilPitsPmaturityPdate.PAPc
ommonPstock,Phowever,PrepresentsPaPsharePofPownershipPinPthePinstitutionPthatPhasPi
ssuedPthePstock.PInPadditionPtoPitsPdefinition,PitPisPnotPthePsamePtoPholdPbondsPorPstock
PofPaPgivenPcorporation,PsincePregulationsPstatePthatPstockholdersParePresidualPclaiman
tsP(i.e.,PthePcorporationPhasPtoPpayPallPbondholdersPbeforePpayingPstockholders).
4. WhatPisPthePmainProlePofPaPfinancialPintermediary?PNamePtwoPfinancialP
intermediaries.
APfinancialPintermediaryPisPaPfirmPorPinstitutionPthatPchannelsPsavingsPintoPinvestment
s––
thatPis,PitPborrowsPfundsPfromPindividualsPwhoPhavePsavedPandPprovidesPloansPtoPthos
ePwhoPneedPfunds.PBanksPandPmutualPfundsParePtwoPexamplesPofPsuchPintermediaries
.
,5. WhatPwasPthePmainPcausePofPthePglobalPrecessionPinP2020?
ThePrecessionPinP2020,PsometimesPreferredPtoPasPthePCOVID-
19PRecession,PwasPmainlyPcausedPbyPthePglobalPpandemicPcausedPbyPthePinfectious
PcoronavirusPdiseaseP(Covid-
19).PInPMarchP2020,PthePstockPmarketPfellPbyP25%PinPaPsinglePmonth.
, AccordingPtoPthePWorldPBank’sPJuneP2020PGlobalPEconomicPProspects,PthePvolatilityPi
nducedPbyPthePcoronavirusPpandemic,Plockdowns,PandPotherPpreventivePmeasuresPta
kenPbyPglobalPeconomiesPtoPcontainPitPhavePledPtoPaPseverePcontractionPinPthePglobalPe
conomy.
6. CanPyouPthinkPofPaPreasonPwhyPpeoplePinPgeneralPdoPnotPlendPmoneyPtoPonePanotherPto
PbuyPaPhousePorPaPcar?PHowPwouldPyourPanswerPexplainPthePexistencePofPbanks?
InPgeneral,PpeoplePdoPnotPlendPlargePamountsPofPmoneyPtoPonePanotherPbecausePofPsevera
lPinformationPproblems.PInPparticular,PpeoplePdoPnotPknowPaboutPthePcapacityPofPotherP
peoplePofPrepayingPtheirPdebts,PorPthePeffortPtheyPwillPprovidePtoPrepayPtheirPdebts.
FinancialPintermediaries,PinPparticularPcommercialPbanks,PtendPtoPsolvePthesePproblem
sPbyPacquiringPinformationPaboutPpotentialPborrowersPandPwritingPandPenforcingPcontract
sPthatPencouragePlendersPtoPrepayPtheirPdebtPand/orPmaintainPthePvaluePofPthePcollater
al.
7. WhyParePbanksPimportantPtoPthePfinancialPsystem?
BanksParePonePofPthePmajorPfinancialPintermediaries.PTheyPchannelPsavingsPfromPprivat
ePinstitutionsPorPthePgeneralPpublicPtoPotherPinstitutionsPorPpeoplePwhoPneedPaPloan.PW
ell-functioningPbanksParePveryPimportantPforPthePsavings-to-
loansPcyclePandPforPthePhousingPmarket.
8. CanPyouPdatePthePlatestPfinancialPcrisisPinPthePUnitedPStatesPorPinPEurope?PArePthereP
reasonsPtoPthinkPthatPthesePcrisesPmightPhavePbeenPrelated?PWhy?
ThePlatestPfinancialPcrisisPinPthePUnitedPStatesPandPEuropePoccurredPinP2007–
2009.PAtPthePbeginning,PitPhitPmostlyPthePU.S.PfinancialPsystem,PbutPitPthenPquicklyPmo
vedPtoPEurope,PsincePfinancialPmarketsParePhighlyPinterconnected.POnePspecificPwayPin
PwhichPthesePmarketsPwerePrelatedPisPthatPsomePfinancialPintermediariesPinPEuropePh
eldPsecuritiesPbackedPbyPmortgagesPoriginatedPinPthePUnitedPStates,PandPwhenPtheseP
securitiesPlostPtheirPaPconsiderablePpartPofPtheirPvalue,PthePbalancePsheetPofPEuropean
PfinancialPintermediariesPwasPadverselyPaffected.
9. HasPthePinflationPratePinPthePUnitedPStatesPincreasedPorPdecreasedPinPthePpastPfe
wPyears?PWhatPaboutPinterestPrates?
SinceP2015,PinflationPhasPbeenParoundP2%,PwithPsomePbriefPdipsPinP2015PandP2020.PI
nP2015,PthePinterestPratePonPthree-
monthPTreasuryPbillsPwasPnearPzero,PandPitPthenProsePtoPjustPoverP2%PinP2019,PonlyPto
PfallPbackPnearPtoPzeroPinP2020.-
10. IfPhistoryPrepeatsPitselfPandPwePseePaPdeclinePinPthePratePofPmoneyPgrowth,PwhatPmigh
tPyouPexpectPtoPhappenPto
a. realPoutput?
b. thePinflationPrate?
c. interestPrates?
ThePdataPinPFiguresP3,P5,PandP6PsuggestPthatPrealPoutput,PthePinflationPrate,PandPinterest
PratesPwouldPallPfall.
