Instructor’s Resource Manual
Solutions Manual
Money, Banking, and the Financial System
Fifth Edition
R. Glenn Hubbard
Columbia University
Anthony Patrick O’Brien
Lehigh University
Copyright © 2027
,Contents
Preface ..................................................................................................................................... v
Part 1: Foundations
Chapter 1 Introducing Money and the Financial System .............................................................
Chapter 2 Money and the Payments System................................................................................
Chapter 3 Interest Rates and Rates of Return ..............................................................................
Chapter 4 Determining Interest Rates ..........................................................................................
Part 2: Financial Markets
Chapter 5 The Risk Structure and Term Structure of Interest Rates ...........................................
Chapter 6 The Stock Market, Information, and Financial Market Efficiency .............................
Chapter 7 Derivatives and Derivatives Markets ..........................................................................
Chapter 8 The Market for Foreign Exchange ..............................................................................
Part 3: Financial Institutions
Chapter 9 Transactions Costs, Asymmetric Information,
and the Structure of the Financial System ...................................................................
Chapter 10 The Economics of Banking .........................................................................................
Chapter 11 Beyond Commercial Banks: Shadow Banks and Nonbank Financial Institutions ......
Chapter 12 Financial Crises and Financial Regulation ..................................................................
Part 4: Monetary Policy
Chapter 13 The Federal Reserve and Central Banking ..................................................................
Chapter 14 The Federal Reserve’s Balance Sheet and the Money Supply Process .......................
Chapter 15 Monetary Policy ..........................................................................................................
Chapter 16 The International Financial System and Monetary Policy ..........................................
Part 5: The Financial system and the Macroeconomy
Chapter 17 Monetary Theory I: The Aggregate Demand and Aggregate Supply Model ..............
Chapter 18 Monetary Theory II: The IS–MP Model .....................................................................
Copyright © 2027
,Preface
Revisions to the Main Textbook
If you used Hubbard/O’Brien MONEY, BANKING, AND THE FINANCIAL SYSTEM, Fourth Edition,
here is a summary of the changes the authors made to the main text. Knowing about these changes will
help you revise your teaching notes and class presentations.
The authors have added coverage of new topics and revised and updated our coverage of other topics.
Most notably, the authors have thoroughly revised Chapter 14, “The Federal Reserve’s Balance Sheet and
the Money Supply Process,” and Chapter 15, “Monetary Policy,” in two respects. First, they have updated
these chapters to reflect the challenges the Fed has faced in dealing with the highest inflation rates since
the 1980s. Second, it is now clear that the Fed may not return to the scarce-reserves regime that prevailed
prior to 2008. Accordingly, the authors now carefully present how the Fed conducts monetary policy in an
abundant-reserves regime. It is important for students to learn how the Fed’s current floor operating
system works rather than to spend class time on tools and procedures that the Fed no longer uses. The
authors have carefully developed the best way to present this new approach, including soliciting feedback
from instructors. The authors believe their revised and updated discussion of monetary policy will be
accessible to students and will provide them with the tools necessary to understand media discussions of
the Fed’s operations.
Other changes in this edition include:
• How generative artificial intelligence (AI) is affecting most aspects of the financial system
• The continuing problem with instability in the banking system, as shown by, among other events,
the failure of Silicon Valley Bank
• The increasing importance of fintech and other alternative funding methods both for business
startups and for households financing purchases
• Developments in modernizing the payments system, particularly progress toward a real-time
payments system
• The Fed’s efforts to deal with the effects on the economy of increasing tariffs
• The continuing debate over the structure and operation of the Federal Reserve System, including
whether presidents have—or Congress should give them—the power to remove Fed chairs at will
• Analysis of using interest rates to predict economic downturns, providing a deeper understanding
of the relationship between interest rates and economic cycles
• Examination of the potential disappearance of physical bank branches, reflecting the ongoing shift
toward digital banking and its implications for the industry
Here is an overview of the changes the authors made to the key features:
• Replaced or updated all chapter-opening cases.
• Revised or updated all of the Apply the Concept features, including those that are particularly
relevant to students’ personal lives and decisions (which appear with the subtitle In Your Interest).
• Revised and updated the Solved Problem features, including those Solved Problems that involve
subjects that are particularly relevant to students’ personal lives and financial decisions (which
appear with the subtitle In Your Interest).
• Added new figures and updated the remaining figures and tables with the latest available data.
Copyright © 2027
, • Replaced or updated many of the end-of-chapter Review Questions and Problems and
Applications, which students can complete on MyLab Economics.
• Revised extensively the end-of-chapter Data Exercises. Students can complete these exercises on
MyLab Economics, where they can also view the very latest data from FRED, the online
macroeconomic data bank of the Federal Reserve Bank of St. Louis.
Revisions Transition Guide: 4e vs. 5e
New and revised content appear in a second font color in the first column of the tables that follow.
Chapter 1: Introducing Money and the Financial System
5th Edition 4th Edition
The Covid Pandemic, Financial Markets, and the The Coronavirus, Financial Markets, and the Flow
Flow of Funds of Funds
1.1 Key Components of the Financial System 1.1 Key Components of the Financial System
Financial Assets Financial Assets
Financial Institutions Financial Institutions
Apply The Concept: The Rise of Peer-to-Peer Apply The Concept: The Rise of Peer-to-Peer
Lending and Fintech Lending and Fintech
Apply The Concept: What Do People Do with Their Apply The Concept: What Do People Do with Their
Savings? Savings?
The Federal Reserve and Other Financial Regulators The Federal Reserve and Other Financial Regulators
What Does the Financial System Do? What Does the Financial System Do?
Solved Problem 1.1: The Services That Securitized Solved Problem 1.1: The Services That Securitized
Loans Provide Loans Provide
1.2 The Crises of 2007–2009 and 2020 1.2 The Crises of 2007–2009 and 2020
Origins of the 2007–2009 Financial Crisis Origins of the 2007–2009 Financial Crisis
The Deepening Crisis and the Response of the Fed The Deepening Crisis and the Response of the Fed
and Treasury and Treasury
The Financial Crisis Caused by the Covid-19 The Financial Crisis Caused by the Covid-19
Pandemic Pandemic
1.3 Key Issues and Questions About Money, 1.3 Key Issues and Questions About Money,
Banking, and the Financial System Banking, and the Financial System
Chapter 2: Money and the Payments System
5th Edition 4th Edition
Why Was the Federal Reserve Making Life The Federal Reserve: Good for Main Street or Wall
Hard for Home Buyers? Street or Both?
2.1 Do We Need Money? 2.1 Do We Need Money?
Barter Barter
The Invention of Money The Invention of Money
Apply The Concept: What’s Money? Ask a Taxi Apply The Concept: What’s Money? Ask a Taxi Driver
Driver in Moscow! in Moscow!
2.2 The Key Functions of Money 2.2 The Key Functions of Money
Medium of Exchange Medium of Exchange
Unit of Account Unit of Account
Store of Value Store of Value
Copyright © 2027
Solutions Manual
Money, Banking, and the Financial System
Fifth Edition
R. Glenn Hubbard
Columbia University
Anthony Patrick O’Brien
Lehigh University
Copyright © 2027
,Contents
Preface ..................................................................................................................................... v
Part 1: Foundations
Chapter 1 Introducing Money and the Financial System .............................................................
Chapter 2 Money and the Payments System................................................................................
Chapter 3 Interest Rates and Rates of Return ..............................................................................
Chapter 4 Determining Interest Rates ..........................................................................................
Part 2: Financial Markets
Chapter 5 The Risk Structure and Term Structure of Interest Rates ...........................................
Chapter 6 The Stock Market, Information, and Financial Market Efficiency .............................
Chapter 7 Derivatives and Derivatives Markets ..........................................................................
Chapter 8 The Market for Foreign Exchange ..............................................................................
Part 3: Financial Institutions
Chapter 9 Transactions Costs, Asymmetric Information,
and the Structure of the Financial System ...................................................................
Chapter 10 The Economics of Banking .........................................................................................
Chapter 11 Beyond Commercial Banks: Shadow Banks and Nonbank Financial Institutions ......
Chapter 12 Financial Crises and Financial Regulation ..................................................................
Part 4: Monetary Policy
Chapter 13 The Federal Reserve and Central Banking ..................................................................
Chapter 14 The Federal Reserve’s Balance Sheet and the Money Supply Process .......................
Chapter 15 Monetary Policy ..........................................................................................................
Chapter 16 The International Financial System and Monetary Policy ..........................................
Part 5: The Financial system and the Macroeconomy
Chapter 17 Monetary Theory I: The Aggregate Demand and Aggregate Supply Model ..............
Chapter 18 Monetary Theory II: The IS–MP Model .....................................................................
Copyright © 2027
,Preface
Revisions to the Main Textbook
If you used Hubbard/O’Brien MONEY, BANKING, AND THE FINANCIAL SYSTEM, Fourth Edition,
here is a summary of the changes the authors made to the main text. Knowing about these changes will
help you revise your teaching notes and class presentations.
The authors have added coverage of new topics and revised and updated our coverage of other topics.
Most notably, the authors have thoroughly revised Chapter 14, “The Federal Reserve’s Balance Sheet and
the Money Supply Process,” and Chapter 15, “Monetary Policy,” in two respects. First, they have updated
these chapters to reflect the challenges the Fed has faced in dealing with the highest inflation rates since
the 1980s. Second, it is now clear that the Fed may not return to the scarce-reserves regime that prevailed
prior to 2008. Accordingly, the authors now carefully present how the Fed conducts monetary policy in an
abundant-reserves regime. It is important for students to learn how the Fed’s current floor operating
system works rather than to spend class time on tools and procedures that the Fed no longer uses. The
authors have carefully developed the best way to present this new approach, including soliciting feedback
from instructors. The authors believe their revised and updated discussion of monetary policy will be
accessible to students and will provide them with the tools necessary to understand media discussions of
the Fed’s operations.
Other changes in this edition include:
• How generative artificial intelligence (AI) is affecting most aspects of the financial system
• The continuing problem with instability in the banking system, as shown by, among other events,
the failure of Silicon Valley Bank
• The increasing importance of fintech and other alternative funding methods both for business
startups and for households financing purchases
• Developments in modernizing the payments system, particularly progress toward a real-time
payments system
• The Fed’s efforts to deal with the effects on the economy of increasing tariffs
• The continuing debate over the structure and operation of the Federal Reserve System, including
whether presidents have—or Congress should give them—the power to remove Fed chairs at will
• Analysis of using interest rates to predict economic downturns, providing a deeper understanding
of the relationship between interest rates and economic cycles
• Examination of the potential disappearance of physical bank branches, reflecting the ongoing shift
toward digital banking and its implications for the industry
Here is an overview of the changes the authors made to the key features:
• Replaced or updated all chapter-opening cases.
• Revised or updated all of the Apply the Concept features, including those that are particularly
relevant to students’ personal lives and decisions (which appear with the subtitle In Your Interest).
• Revised and updated the Solved Problem features, including those Solved Problems that involve
subjects that are particularly relevant to students’ personal lives and financial decisions (which
appear with the subtitle In Your Interest).
• Added new figures and updated the remaining figures and tables with the latest available data.
Copyright © 2027
, • Replaced or updated many of the end-of-chapter Review Questions and Problems and
Applications, which students can complete on MyLab Economics.
• Revised extensively the end-of-chapter Data Exercises. Students can complete these exercises on
MyLab Economics, where they can also view the very latest data from FRED, the online
macroeconomic data bank of the Federal Reserve Bank of St. Louis.
Revisions Transition Guide: 4e vs. 5e
New and revised content appear in a second font color in the first column of the tables that follow.
Chapter 1: Introducing Money and the Financial System
5th Edition 4th Edition
The Covid Pandemic, Financial Markets, and the The Coronavirus, Financial Markets, and the Flow
Flow of Funds of Funds
1.1 Key Components of the Financial System 1.1 Key Components of the Financial System
Financial Assets Financial Assets
Financial Institutions Financial Institutions
Apply The Concept: The Rise of Peer-to-Peer Apply The Concept: The Rise of Peer-to-Peer
Lending and Fintech Lending and Fintech
Apply The Concept: What Do People Do with Their Apply The Concept: What Do People Do with Their
Savings? Savings?
The Federal Reserve and Other Financial Regulators The Federal Reserve and Other Financial Regulators
What Does the Financial System Do? What Does the Financial System Do?
Solved Problem 1.1: The Services That Securitized Solved Problem 1.1: The Services That Securitized
Loans Provide Loans Provide
1.2 The Crises of 2007–2009 and 2020 1.2 The Crises of 2007–2009 and 2020
Origins of the 2007–2009 Financial Crisis Origins of the 2007–2009 Financial Crisis
The Deepening Crisis and the Response of the Fed The Deepening Crisis and the Response of the Fed
and Treasury and Treasury
The Financial Crisis Caused by the Covid-19 The Financial Crisis Caused by the Covid-19
Pandemic Pandemic
1.3 Key Issues and Questions About Money, 1.3 Key Issues and Questions About Money,
Banking, and the Financial System Banking, and the Financial System
Chapter 2: Money and the Payments System
5th Edition 4th Edition
Why Was the Federal Reserve Making Life The Federal Reserve: Good for Main Street or Wall
Hard for Home Buyers? Street or Both?
2.1 Do We Need Money? 2.1 Do We Need Money?
Barter Barter
The Invention of Money The Invention of Money
Apply The Concept: What’s Money? Ask a Taxi Apply The Concept: What’s Money? Ask a Taxi Driver
Driver in Moscow! in Moscow!
2.2 The Key Functions of Money 2.2 The Key Functions of Money
Medium of Exchange Medium of Exchange
Unit of Account Unit of Account
Store of Value Store of Value
Copyright © 2027
