Solution manual for the economics of money banking and financial markets 13th global edition frederic mishkin

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Instructor’s Resource Manual
M M M




for
The Economics of Money, Banki
M M M M




ng, and Financial Markets
M M M




The Economics of
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Money, Banking, and
M M M




Financial Markets M




Thirteenth Edition, Global Edition
M M M




Frederic S. Mishkin
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, Answers
to End-of- M




Chapter Questions and P M M M




roblems
ChapterM1
ANSWERSMTOMQUESTIONS

1. WhatMisMtheMtypicalMrelationshipMamongMinterestMratesMonMthree-
monthMTreasuryMbills,Mlong-termMTreasuryMbonds,MandMBaaMcorporateMbonds?
TheMinterestMrateMonMthree-
monthMTreasuryMbillsMfluctuatesMmoreMthanMtheMotherMinterestMratesMandMisMlowerMon
Maverage.MTheMinterestMrateMonMBaaMcorporateMbondsMisMhigherMonM averageMthanMthe
MotherMinterestMrates.




2. WhatMeffectMdoesMhighMvolatilityMofMfinancialMmarketsMhaveMonMpeople'sMwillingness
MtoM
spend?
TheMhighMvolatilityMofMfinancialMmarketsMdecreasesMpeople'sMwillingnessMtoMspend,M
primarilyMbecauseMitMdirectlyMaffectsMtheirMwealth,MandMalsoMbecauseMhighMvolatility
MindicatesMthatMthereMareMconsiderableMfluctuations MinMtheMpricesMofMsecuritiesMoverM

aMshortMtimeMspan.MItMincreasesMinsecuritiesMaboutMtheMfutureMofManMeconomy.MRefer
MtoMFigureM2MtoMseeMtheMextremelyMvolatileMnatureMofMstockMpricesMbetweenM1950M a

ndM2020.

3. ExplainMtheMmainMdifferenceMbetweenMaMbondMandMaMcommonMstock.
AMbondMisMaMdebtMinstrument,MwhichMentitlesMtheMownerMtoMreceiveMperiodicMamount
sMofMmoneyM(predeterminedMbyMtheMcharacteristicsMofMtheMbond)MuntilMitsMmaturityMd
ate.MAMcommonMstock,Mhowever,MrepresentsMaMshareMofMownershipMinMtheMinstitutionM
thatMhasMissuedMtheMstock.MInMadditionMtoMitsMdefinition,MitMisMnotMtheMsameMtoMholdMb
ondsMorMstockMofMaMgivenMcorporation,MsinceMregulationsMstateMthatMstockholdersMareMr
esidualMclaimantsM(i.e.,MtheMcorporationMhasMtoMpayMallMbondholdersMbeforeMpayingMst
ockholders).

4. WhatMisMtheMmainMroleMofMaMfinancialMintermediary?MNameMtwoMfinanc
ialMintermediaries.
AMfinancialMintermediaryMisMaMfirmMorMinstitutionMthatMchannelsMsavingsMintoMinvest
ments––
thatMis,MitMborrowsMfundsMfromMindividualsMwhoMhaveMsavedMandMprovidesMloansMtoMt
hoseMwhoMneedMfunds.MBanksMandMmutualMfundsMareMtwoMexamplesMofMsuchMinterme
diaries.

,5. WhatMwasMtheMmainMcauseMofMtheMglobalMrecessionMinM2020?
TheMrecessionMinM2020,MsometimesMreferredMtoMasMtheMCOVID-
19MRecession,MwasMmainlyMcausedMbyMtheMglobalMpandemicMcausedMbyMtheMinfectio
usMcoronavirusMdiseaseM(Covid-
19).MInMMarchM2020,MtheMstockMmarketMfellMbyM25%MinMaMsingleMmonth.

, AccordingMtoMtheMWorldMBank’sMJuneM2020MGlobalMEconomicMProspects,MtheMvolati
lityMinducedMbyMtheMcoronavirusMpandemic,Mlockdowns,MandMotherMpreventiveMmeasu
resMtakenMbyMglobalMeconomiesMtoMcontainMitMhaveMledMtoMaMsevereMcontractionMinMth
eMglobalMeconomy.
6. CanMyouMthinkMofMaMreasonMwhyMpeopleMinMgeneralMdoMnotMlendMmoneyMtoMoneManoth
erMtoMbuyMaMhouseMorMaMcar?MHowMwouldMyourManswerMexplainMtheMexistenceMofMbank
s?
InMgeneral,MpeopleMdoMnotMlendMlargeMamountsMofMmoneyMtoMoneManotherMbecauseMofMsev
eralMinformationMproblems.MInMparticular,MpeopleMdoMnotMknowMaboutMtheMcapacityMofM
otherMpeopleMofMrepayingMtheirMdebts,MorMtheMeffortMtheyMwillMprovideMtoMrepayMtheirMde
bts.
FinancialMintermediaries,MinMparticularMcommercialMbanks,MtendMtoMsolveMtheseMproble
msMbyMacquiringMinformationMaboutMpotentialMborrowersMandMwritingMandMenforcingMco
ntractsMthatMencourageMlendersMtoMrepayMtheirMdebtMand/orMmaintainMtheMvalueMofMtheMc
ollateral.

7. WhyMareMbanksMimportantMtoMtheMfinancialMsystem?
BanksMareMoneMofMtheMmajorMfinancialMintermediaries.MTheyMchannelMsavingsMfromMpr
ivateMinstitutionsMorMtheMgeneralMpublicMtoMotherMinstitutionsMorMpeopleMwhoMneedMaMl
oan.MWell-functioningMbanksMareMveryMimportantMforMtheMsavings-to-
loansMcycleMandMforMtheMhousingMmarket.

8. CanMyouMdateMtheMlatestMfinancialMcrisisMinMtheMUnitedMStatesMorMinMEurope?MAreMt
hereMreasonsMtoMthinkMthatMtheseMcrisesMmightMhaveMbeenMrelated?MWhy?
TheMlatestMfinancialMcrisisMinMtheMUnitedMStatesMandMEuropeMoccurredMinM2007–
2009.MAtMtheMbeginning,MitMhitMmostlyMtheMU.S.MfinancialMsystem,MbutMitMthenMquickly
MmovedMtoMEurope,MsinceMfinancialMmarketsMareMhighlyMinterconnected.MOneMspecific

MwayMinMwhichM theseMmarketsMwereMrelatedMisMthatMsomeMfinancialMintermediariesMinM
EuropeMheldMsecuritiesMbackedMbyMmortgagesMoriginatedMinMtheMUnitedMStates,MandM
whenMtheseMsecuritiesMlostMtheirMaMconsiderableMpartMofMtheirMvalue,MtheMbalanceMshe
etMofMEuropeanMfinancialMintermediariesMwasMadverselyMaffected.

9. HasMtheMinflationMrateMinMtheMUnitedMStatesMincreasedMorMdecreasedMinMtheMpastM
fewMyears?MWhatMaboutMinterestMrates?
SinceM2015,MinflationMhasMbeenMaroundM2%,MwithMsomeMbriefMdipsMinM2015MandM202
0.MInM2015,MtheMinterestMrateMonMthree-
monthMTreasuryMbillsMwasMnearMzero,MandMitMthenMroseMtoMjustMoverM2%MinM2019,Monl
yMtoMfallMbackMnearMtoMzeroMinM2020.-

10. IfMhistoryMrepeatsMitselfMandMweMseeMaMdeclineMinMtheMrateMofMmoneyMgrowth,MwhatMm
ightMyouMexpectMtoMhappenMto
a. realMoutput?
b. theMinflationMrate?
c. interestMrates?
TheMdataMinMFiguresM3,M5,MandM6MsuggestMthatMrealMoutput,MtheMinflationMrate,MandMint
erestMratesMwouldMallMfall.