SOLUTIONS
Solutions Manual for Money, Banking and Financial Markets 2024 Release by Stephen
Cecchetti and Kermit Schoenholtz
MANUAL
Solutions Manual for Money, Banking and Financial Markets 2024 Release by Stephen
Cecchetti and Kermit Schoenholtz
,Solutions Manual for Money, Banking and Financial Markets 2024 Release by Stephen Cecchetti and Kermit Schoenholtz
Chapter 1
An Introduction to Money and the Financial System
Problems
1. List some financial transactions you have engaged in over the past week and note how you paid
for them. How might each one have been carried out 50 years ago? (LO1)
Answer: Commercial purchases that you made likely used credit or debit cards. You may have
split a restaurant bill with friends by using a payment app such as Venmo. Fifty years ago they
would have all used cash. Payment of utilities (if you do it) might have been done by electronic
transfer, rather than a check (which would have been the method 50 years ago).
2. How were you, or your family or your friends, affected by the failure of the financial system to
function normally during the COVID pandemic? (LO1)
Answer: While the COVID-pandemic did not lead to the widespread failure of financial
institutions like the financial crisis of 2007-2009 did, the forced closure of bank branches may
have changed the way you interacted with your bank. For example, you may have carried out
transactions online instead of going to the bank in person. You or someone you know may have
been refused a business loan or a mortgage, as financial institutions dealt with higher rates of
defaults on existing loans in light of business failures and high unemployment due to the
pandemic.
3. List three items you used to buy with cash but you now purchase with a debit card. (LO1)
Answer: Among the possibilities: purchases of cappuccino at the local coffee shop, gasoline for
your car, and groceries for the week.
4. Various financial instruments usually serve one of two distinct purposes: to store value or to
transfer risk. Name a financial instrument used for each purpose. (LO1)
Answer: Financial instruments used to store value include bank accounts, stocks and bonds.
Instruments used to transfer risk include car insurance and life insurance.
5. Financial innovation has reduced individuals’ need to carry cash. Explain how. (LO1)
Solutions Manual for Money, Banking and Financial Markets 2024 Release by Stephen Cecchetti and Kermit Schoenholtz
,Solutions Manual for Money, Banking and Financial Markets 2024 Release by Stephen Cecchetti and Kermit Schoenholtz
Answer: Everyone has a number of alternative methods of payment. Electronic forms, like
credit and debit cards, are the primary ones that have reduced the need to carry cash. Mobile
payment services, such as Venmo and Apply Pay, have also become increasingly popular.
6. * Many people believe that, despite ongoing financial innovations, cash will always be with us
to some degree as a form of money. What core principle could justify this view? (LO2)
Answer: Core Principle 3 – information is the basis for decisions. When cash is used to settle a
transaction, it is a final payment, not some form of a promise to pay. No information is needed
about the payer once cash has been handed over to settle a transaction. This has obvious
advantages for the recipient, as the information costs are negligible. In some circumstances, one
or both parties to a transaction may wish to preserve their anonymity, and cash allows this.
7. When you apply for a loan, you are required to answer lots of questions. Why? Why is the set of
questions you must answer standardized? (LO2)
Answer: The reasons for the questions relate to Core Principle 3 – information is the basis for
decisions, and Core Principle 2 – risk requires compensation. The questions are aimed at
figuring out how likely you are to repay the loan. Standardizing the questions reduces the cost
of gathering information and therefore of making the loan.
8. Name two distinct financial markets and describe the kind of asset traded in each. (LO1)
Answer: Among the best-known financial markets are those for stocks and for bonds. In the
stock markets, equities or ownership shares in companies are bought and sold. In the bond
market, debt issues of government units or companies are traded.
9. * Why do you think the global financial system has become more globally integrated over time?
Can you think of any downside to this increased integration? (LO1)
Answer: Technological progress is one obvious reason. According to Core Principle 3,
information is the basis for decisions. Improvements in technology have allowed for huge
volumes of information to be collected and disseminated quickly and cheaply on a global basis,
facilitating long distance financial transactions. A downside of this increased integration is that
it allows for problems that arise in the financial system of one country to spread more quickly
and easily to other countries, as we saw during the financial crisis of 2007-2009.
10. The government is heavily involved in the financial system. Explain why. (LO1)
Answer: For markets to work there have to be rules. And the rules need to be enforced. The
government both makes the rules and enforces them so that we all trust the markets to work as
they should. Without the government to monitor the financial system, ensuring that people
behave themselves, the system would collapse.
Solutions Manual for Money, Banking and Financial Markets 2024 Release by Stephen Cecchetti and Kermit Schoenholtz
,Solutions Manual for Money, Banking and Financial Markets 2024 Release by Stephen Cecchetti and Kermit Schoenholtz
11. If offered the choice of receiving $1,000 today or $1,000 in one year’s time, which option
would you choose, and why? (LO2)
Solutions Manual for Money, Banking and Financial Markets 2024 Release by Stephen Cecchetti and Kermit Schoenholtz
Solutions Manual for Money, Banking and Financial Markets 2024 Release by Stephen
Cecchetti and Kermit Schoenholtz
MANUAL
Solutions Manual for Money, Banking and Financial Markets 2024 Release by Stephen
Cecchetti and Kermit Schoenholtz
,Solutions Manual for Money, Banking and Financial Markets 2024 Release by Stephen Cecchetti and Kermit Schoenholtz
Chapter 1
An Introduction to Money and the Financial System
Problems
1. List some financial transactions you have engaged in over the past week and note how you paid
for them. How might each one have been carried out 50 years ago? (LO1)
Answer: Commercial purchases that you made likely used credit or debit cards. You may have
split a restaurant bill with friends by using a payment app such as Venmo. Fifty years ago they
would have all used cash. Payment of utilities (if you do it) might have been done by electronic
transfer, rather than a check (which would have been the method 50 years ago).
2. How were you, or your family or your friends, affected by the failure of the financial system to
function normally during the COVID pandemic? (LO1)
Answer: While the COVID-pandemic did not lead to the widespread failure of financial
institutions like the financial crisis of 2007-2009 did, the forced closure of bank branches may
have changed the way you interacted with your bank. For example, you may have carried out
transactions online instead of going to the bank in person. You or someone you know may have
been refused a business loan or a mortgage, as financial institutions dealt with higher rates of
defaults on existing loans in light of business failures and high unemployment due to the
pandemic.
3. List three items you used to buy with cash but you now purchase with a debit card. (LO1)
Answer: Among the possibilities: purchases of cappuccino at the local coffee shop, gasoline for
your car, and groceries for the week.
4. Various financial instruments usually serve one of two distinct purposes: to store value or to
transfer risk. Name a financial instrument used for each purpose. (LO1)
Answer: Financial instruments used to store value include bank accounts, stocks and bonds.
Instruments used to transfer risk include car insurance and life insurance.
5. Financial innovation has reduced individuals’ need to carry cash. Explain how. (LO1)
Solutions Manual for Money, Banking and Financial Markets 2024 Release by Stephen Cecchetti and Kermit Schoenholtz
,Solutions Manual for Money, Banking and Financial Markets 2024 Release by Stephen Cecchetti and Kermit Schoenholtz
Answer: Everyone has a number of alternative methods of payment. Electronic forms, like
credit and debit cards, are the primary ones that have reduced the need to carry cash. Mobile
payment services, such as Venmo and Apply Pay, have also become increasingly popular.
6. * Many people believe that, despite ongoing financial innovations, cash will always be with us
to some degree as a form of money. What core principle could justify this view? (LO2)
Answer: Core Principle 3 – information is the basis for decisions. When cash is used to settle a
transaction, it is a final payment, not some form of a promise to pay. No information is needed
about the payer once cash has been handed over to settle a transaction. This has obvious
advantages for the recipient, as the information costs are negligible. In some circumstances, one
or both parties to a transaction may wish to preserve their anonymity, and cash allows this.
7. When you apply for a loan, you are required to answer lots of questions. Why? Why is the set of
questions you must answer standardized? (LO2)
Answer: The reasons for the questions relate to Core Principle 3 – information is the basis for
decisions, and Core Principle 2 – risk requires compensation. The questions are aimed at
figuring out how likely you are to repay the loan. Standardizing the questions reduces the cost
of gathering information and therefore of making the loan.
8. Name two distinct financial markets and describe the kind of asset traded in each. (LO1)
Answer: Among the best-known financial markets are those for stocks and for bonds. In the
stock markets, equities or ownership shares in companies are bought and sold. In the bond
market, debt issues of government units or companies are traded.
9. * Why do you think the global financial system has become more globally integrated over time?
Can you think of any downside to this increased integration? (LO1)
Answer: Technological progress is one obvious reason. According to Core Principle 3,
information is the basis for decisions. Improvements in technology have allowed for huge
volumes of information to be collected and disseminated quickly and cheaply on a global basis,
facilitating long distance financial transactions. A downside of this increased integration is that
it allows for problems that arise in the financial system of one country to spread more quickly
and easily to other countries, as we saw during the financial crisis of 2007-2009.
10. The government is heavily involved in the financial system. Explain why. (LO1)
Answer: For markets to work there have to be rules. And the rules need to be enforced. The
government both makes the rules and enforces them so that we all trust the markets to work as
they should. Without the government to monitor the financial system, ensuring that people
behave themselves, the system would collapse.
Solutions Manual for Money, Banking and Financial Markets 2024 Release by Stephen Cecchetti and Kermit Schoenholtz
,Solutions Manual for Money, Banking and Financial Markets 2024 Release by Stephen Cecchetti and Kermit Schoenholtz
11. If offered the choice of receiving $1,000 today or $1,000 in one year’s time, which option
would you choose, and why? (LO2)
Solutions Manual for Money, Banking and Financial Markets 2024 Release by Stephen Cecchetti and Kermit Schoenholtz
