Solutions Manual – Money, Banking, Financial Markets and Institutions, 2nd Edition – Michael Brandl – ISBN 9781337902724 (All Chapters Covered 2–24)

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Money, Banking, Financial
Markets and Institutions,
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2nd Edition
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SOLUTIONS
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MANUAL
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Michael Brandl
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Comprehensive Solutions Manual for
Instructors and Students
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9781337902724

© Michael Brandl. All rights reserved. Reproduction or distribution
without permission is prohibited.




© MEDCONNOISSEUR

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Money, Banking, Financial Markets and Institutions —
Solutions Manual
Michael Brandl
ISBN: 9781337902724
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Chapter 2: Money, Money Supply, and Interest
Chapter 3: Bonds and Loanable Funds
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Chapter 4: Interest Rates in More Detail
Chapter 5: Financial Markets through Time
Chapter 6: Aggregate Supply and Aggregate Demand
Chapter 7: Banks and Money
Chapter 8: Central Banks
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Chapter 9: Monetary Policy Tools
Chapter 10: The Money Supply Process
Chapter 11: Monetary Policy Debates
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Chapter 12: Bank Management
Chapter 13: Bank Risk Management and Performance
Chapter 14: Banking Regulation
Chapter 15: Money Markets
Chapter 16: Bond Markets
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Chapter 17: The Stock Market
Chapter 18: The Mortgage Market
Chapter 19: Foreign Exchange Markets
Chapter 20: Global Financial Architecture
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Chapter 21: Thrifts and Finance Companies
Chapter 22: Insurance and Pensions
Chapter 23: Mutual Funds
Chapter 24: Investment Banks and Private Equity
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© MEDCONNOISSEUR

, CHAPTER 2: Money, Money Supply, and
Interest
24-1 Section
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Review

1. What is the difference between money and currency? When are they the same? Why
might they beiidifferent?
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ANS: Money is anything generally accepted in exchange for goods & services.
Currency is issued by a bank or the government, but currency is not necessarily
money. They are the same when they are accepted in exchange for goods and
services. Currencies can stop being money if people don’t acceptiithem in exchange for
goods and services. If a group of people stop using currency to get goods and
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services but instead use bananas, then the bananas are the money.
2. How many prices must a barter economy have if the economy has four goods?
What if it has 400iigoods? Explain why having a money in the second case is
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beneficial.

ANS: 4 goods = 6 prices; 400 goods = 79,800 prices. Money allows us to specialize and
reduce our searchiicost. Money allows us to reduce the number of stated prices we
need.
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3. You read a news story about a country that is suffering from rapid, ongoing
increases in the cost ofliving. Which characteristic of money is being directly
negatively impacted in that economy?

a. Unit of account
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b. Medium of exchange
c. Store of value

d. Double coincidence of
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wantsANS: C

24-2 Section Review

1. Bobby is confused. He states: “Since prisoners are not allowed to smoke in prisons any
longer,
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Radford’s examples of cigarettes in POW camps no longer applies.” How would you
explain to Bobby how Radford’s story demonstrates the concepts of the criteria of
money, as well as the importance ofchanges in the money supply?

ANS: Any asset that is able to be standardized, divisible, durable and in demand
could be currency, as long as it is a medium of exchange, is a unit of account and
has store of value. Cigarettes were money.

, 2. Proponents of the Gold Standard, or using gold as money, often argue that it will
keep inflation underiicontrol. How does the experience of Europe in the sixteenth century
raise doubts about that claim?

ANS: If people start to hoard gold or silver, there may not be enough money, and an
economy couldslide into recession. If gold or silver increases too rapidly the
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economy could suffer inflation.

3. Ricardo and Friedman agree that if the money supply increases “too quickly” the
following happens:
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a. The rate of inflation decreases.

b. The rate of real economic growth increases.

c. The rate of inflation increases.

d. The level of employment decreases.
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ANS: C

24-3 Section Review
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1. A critic of money economics once stated, “if you cannot measure the money supply
accurately, it isiinot worth discussing at all.” How would you refute this statement?

ANS: Due to changes in financial markets, financial innovation and changes in the
way banks operate,iiled to the decline in the usefulness of M2 as a monetary
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aggregate.
2. Economists are searching for a “good” measurement of the money supply. What
constitutes a goodiimeasurement of the money supply?

ANS: ii To iieconomists, iia ii“good” iimeasurement iiof iithe iimoney iisupply iiis iione iithat iiconforms
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iito iieconomic iitheories iiregarding iiinflation iiand iithe iieconomy. iiFor iiexample, iiif iithe iimoney

iisupply ii(according iito iia particular iimeasurement) iiincreases iifaster iithan iithe iigrowth iirate iiof

iithe iieconomy, iithen iieconomic iitheory suggests iithat iiinflation iishould iioccur. iiOn iithe iiother
iihand, iiif iithe iimoney iisupply ii(according iito iia iiparticular measurement) iiincreases iitoo iislowly
iirelative iito iithe iigrowth iirate iiof iithe iieconomy, iithen iieconomic iitheory suggests iithat iithis
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iiwill iiresult iiin iia iirecession. iiWhen iithe iimeasurement iiof iithe iimoney iisupply iicoincides iiwith

iithese iieconomic iipredictions, iithen iithat iiparticular iimeasurement iihas iithe iipotential iito iibe iia


ii“good” measurement iiof iithe iimoney iisupply. iiDuring iicertain iiperiods iiof iitime, iiboth iiM1 iiand

iiM2 iihave iibeen


considered iito iibe ii“good” iimeasurements iiof iithe iimoney iisupply. iiHowever, iithere iihave iialso
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iibeen iiperiods iiofiitime iiwhere iithe iichanges iiin iiM1 iior iiM2 iidid iinot iicoincide iiwith iieconomic


iitheory.



3. Which of the following is the broadest or most inclusive measurement of the money
supply?

a. M1

b. M2