Solution Manual for The Economics Of Money Banking And Financial Markets 13th Global Edition Frederic Mishkin

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QuestionsandProblems
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ANSWERS TO QUESTIONS v v




1. What is the typical relationship among interest rates on three-month Treasury bills,
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long-term Treasury bonds, and Baa corporate bonds?
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The interest rate on three-month Treasury bills fluctuates more than the other interest
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rates and is lower on average. The interest rate on Baa corporate bonds is higher on
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average than the other interest rates.
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2. Whateffect does high volatilityof financial markets haveon people's willingnessto
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spend?
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The high volatility of financial markets decreases people's willingness to spend,
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primarily because it directly affects their wealth, and also because high volatility
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indicates that there are considerable fluctuations in the prices of securities over a short
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time span. It increases insecurities about the future of an economy. Refer to Figure 2 to
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see the 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
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common stock, however, represents a share of ownership in the institution that has
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issued the stock. In addition to its definition, it is not the same to hold bonds or stock of a
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given corporation, since regulations state that stockholders are residual claimants (i.e.,
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the corporation has to pay all bondholders before paying stockholders).
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4. Whatis the main role of a financial intermediary? Nametwofinancial
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intermediaries.
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A financial intermediary is a firm or institution that channels savings into investments– –
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that is, it borrows funds from individuals who have saved and provides loans to those
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vwho 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-19 Recession, was
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mainly caused by the global pandemic caused by the infectious coronavirus disease
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(Covid-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
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induced by the coronavirus pandemic, lockdowns, and other preventive measures
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taken by global economies to contain it have led to a severe contraction in the global
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economy.
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6. Can you think of a reason whypeople in general do not lend moneyto one another to buy a
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house or a car? How would your answer explain the existence of banks?
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In general, peopledonotlendlargeamountsofmoneytooneanother becauseofseveral
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vinformation problems. In particular, peopledo notknowaboutthecapacityof other people
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vofrepaying their debts, ortheeffort theywill providetorepaytheir debts.
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Financialintermediaries,inparticularcommercialbanks,tend to solvetheseproblems by i i v


vacquiringinformationaboutpotentialborrowersand writingandenforcingcontracts that i v


vencouragelenderstorepaytheirdebtand/ormaintainthevalueofthecollateral.
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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 private
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institutions or the general public to other institutions or people who need a loan. Well-
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functioning banks areveryimportant for the savings-to-loans cycle and for the housing
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market.
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8. Can you date the latest financial crisis in theUnited States or in Europe? Arethere
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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 2007–2009. At the
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beginning, it hit mostly the U.S. financial system, but it then quickly moved to
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Europe, since financial markets are highlyinterconnected. One specific wayin which
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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
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securities lost their a considerable part of their value, the balance sheet of European
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financial 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?
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Since 2015, inflation has been around 2%, with some brief dips in 2015 and 2020. In
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2015,theinterest rateon three-month Treasurybills wasnearzero, and it thenrose to just
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over 2% in 2019, only to fall back near to zero in 2020.-
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10. If history repeats itself and we seea decline in the rateof money growth, whatmight
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vyou expect to happen to
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a. real output? v




b. the inflation rate? v v



c. interest rates? v




The data in Figures 3, 5, and 6 suggest that real output, the inflation rate, and interest rates
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would all fall.
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11. When interest rates decrease, how might businesses and consumers change their
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economic behavior?
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