SOLUTION MANUAL For Money, Banking, Financial Markets and Institutions, 2nd Edition by Brandl Michael, Verified Chapters 1 - 24, Complete Newest Version

,TABLE OF CONTENTS RV RV RV




Part I: MONEY AND ITS PRICES.
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1. Introduction and Overview.
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2. Money, Money Supply and Interest.
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3. Bonds, Loanable Funds & Interest Rates.
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4. Interest Rates in More Detail.
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Part II: MONEY AND OVERALL ECONOMY.
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5. Financial Markets through Time.
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6. Aggregate Supply & Aggregate Demand.
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7. Banks and Money.
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Part III: CENTRAL BANKS.
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8. Central Banks.
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9. Monetary Policy Tools.
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10. The Money Supply Process.
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11. Monetary Policy & Debates.
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Part IV: THE BANKING SYSTEM.
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12. Bank Management.
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13. Bank Risk Management & Performance.
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14. Banking Regulation.
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Part V: FINANCIAL MARKETS.
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15. Money Markets.
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16. Bond Markets.
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17. Stock Market & Efficiency.
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18. Mortgage Market.
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Part VI: GLOBAL FINANCIAL MARKETS.
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19. FX.
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20. Global Financial Architecture.
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Part VII: FINANCIAL INSTITUTIONS.
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21. Thrifts and Finance Companies.
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22. Insurance and Pensions.
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23. Mutual Funds.
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24. Investment Banks and Private Equity.
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, CHAPTER 2: Money, Money Supply, and Interest RV RV RV RV RV RV




2-1 Section Review RV




1. What is the difference between money and currency? When are they the same? Why might they bedifferent?
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ANS: Money is anything generally accepted in exchange for goods & services. Currency is issued by a bank or the govern
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ment, but currency is not necessarily money. They are the same when they are accepted in exchange for goods and servi
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ces. Currencies can stop being money if people don’t acceptthem in exchange for goods and services. If a group of peopl
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e stop using currency to get goods and services but instead use bananas, then the bananas are the money.
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2. How many prices must a barter economy have if the economy has four goods? What if it has 400goods? Explain why
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having a money in the second case is beneficial.
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ANS: 4 goods = 6 prices; 400 goods = 79,800 prices. Money allows us to specialize and reduce our searchcost. Money all
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ows 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 char
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acteristic of money is being directly negatively impacted in that economy?
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a. Unit of account RV RV




b. Medium of exchange RV RV




c. Store of value RV RV




d. Double coincidence of wantsAN RV RV RV R
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S: C RV




2-2 Section Review RV




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 Bobbyhow Radford’s st
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ory demonstrates the concepts of the criteria of money, as well as the importance ofchanges in the money supply?
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ANS: Any asset that is able to be standardized, divisible, durable and in demand could be currency, as long as it is a mediu
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m of exchange, is a unit of account and has store of value. Cigarettes were money.
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, 2. Proponents of the Gold Standard, or using gold as money, often argue that it will keep inflation undercontrol. How doe
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s the experience of Europe in the sixteenth century raise doubts about that claim?
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ANS: If people start to hoard gold or silver, there may not be enough money, and an economy couldslide into recession.
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RIf gold or silver increases too rapidly the economy could suffer inflation.
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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. RV RV RV RV




b. The rate of real economic growth increases. RV RV RV RV RV RV




c. The rate of inflation increases. RV RV RV RV




d. The level of employment decreases. RV RV RV RV




ANS: C RV




2-3 Section Review RV




1. A critic of money economics once stated, “if you cannot measure the money supply accurately, it isnot worth discussi
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ng at all.” How would you refute this statement?
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ANS: Due to changes in financial markets, financial innovation and changes in the way banks operate,led to the decline i
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n the usefulness of M2 as a monetary aggregate.
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2. Economists are searching for a “good” measurement of the money supply. What constitutes a goodmeasurement of th RV RV RV RV RV RV RV RV RV RV RV RV RV RV R
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e money supply?
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ANS: To economists, a “good” measurement of the money supply is one that conforms to economic theories regarding infl
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ation and the economy. For example, if the money supply (according to a particular measurement) increases faster than th
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e growth rate of the economy, then economic theory suggests that inflation should occur. On the other hand, if the money
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supply (according to a particular measurement) increases too slowly relative to the growth rate of the economy, then econ
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omic theory suggests that this will result in a recession. When the measurement of the money supply coincides withthese e
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conomic predictions, then that particular measurement has the potential to be a “good” measurement of the money supply
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. During certain periods of time, both M1 and M2 have been
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considered to be “good” measurements of the money supply. However, there have also been periods oftime where the cha
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nges in M1 or M2 did not coincide with economic theory.
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3. Which of the following is the broadest or most inclusive measurement of the money supply?
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a. M1

b. M2

c. M3

d. M0
ANS: B R V