Test Bank for Economics of Money, Banking, and Financial Markets, 13th Edition by Frederic S Mishkin All 25 chapters covered and verified ISBN:9781292409566

, Answers
to End-of-Chapter m




m Questions and Problems m m




Chapter 1 m




ANSWERS TO QUESTIONS m m




1. What is the typical relationship among interest rates on three-month Treasury
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bills, 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
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interest rates and is lower on average. The interest rate on Baa corporate
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mbonds is higher on average than the other interest rates.
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2. What effect does high volatility of financial markets have on people's
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willingness to spend?
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The high volatility of financial markets decreases people's willingness to spend,
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mprimarily because it directly affects their wealth, and also because high volatility
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mindicates that there are considerable fluctuations in the prices of securities over
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ma short time span. It increases insecurities about the future of an economy.
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mRefer to Figure 2 to see the extremely volatile nature of stock prices between
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m1950 and 2020. m m




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
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amounts of money (predetermined by the characteristics of the bond) until its
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maturity date. A common stock, however, represents a share of ownership in
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the institution that has issued the stock. In addition to its definition, it is not
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the same to hold bonds or stock of a given corporation, since regulations state
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that stockholders are residual claimants (i.e., the corporation has to pay all
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bondholders before paying stockholders).
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4. What is the main role of a financial intermediary? Name two
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financial intermediaries.
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A financial intermediary is a firm or institution that channels savings into
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investments––that is, it borrows funds from individuals who have saved and
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provides loans to those who need funds. Banks and mutual funds are two
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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
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disease (Covid-19). In March 2020, the stock market fell by 25% in a single
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month.
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, According to the World Bank’s June 2020 Global Economic Prospects, the
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volatility induced by the coronavirus pandemic, lockdowns, and other preventive
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measures taken by global economies to contain it have led to a severe
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contraction in the global economy.
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6. Can you think of a reason why people in general do not lend money to one
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another to buy a house or a car? How would your answer explain the existence
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of banks?
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In general, people do not lend large amounts of money to one another because of
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mseveral information problems. In particular, people do not know about the
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mcapacity of other people of repaying their debts, or the effort they will provide to
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mrepay their debts. m m


Financial intermediaries, in particular commercial banks, tend to solve these
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mproblems by acquiring information about potential borrowers and writing and
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menforcing contracts that encourage lenders to repay their debt and/or maintain
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mthe value of the collateral.
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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
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private institutions or the general public to other institutions or people who
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need a loan. Well-functioning banks are very important for the savings-to-loans
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cycle and for the housing market.
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8. Can you date the latest financial crisis in the United States or in Europe? Are
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there 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–
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2009. At the beginning, it hit mostly the U.S. financial system, but it then quickly
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mmoved to Europe, since financial markets are highly interconnected. One specific
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way in which these markets were related is that some financial intermediaries
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min Europe held securities backed by mortgages originated in the United States,
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mand when these securities lost their a considerable part of their value, the
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mbalance sheet of European financial intermediaries was adversely affected.
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9. Has the inflation rate in the United States increased or decreased in the past
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few years? What about interest rates?
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Since 2015, inflation has been around 2%, with some brief dips in 2015 and 2020.
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In 2015, the interest rate on three-month Treasury bills was near zero, and it
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then rose to just over 2% in 2019, only to fall back near to zero in 2020.-
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10. If history repeats itself and we see a decline in the rate of money growth, what
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m might you expect to happen to
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a. real output? m




b. the inflation rate? m m




c. interest rates? m




The data in Figures 3, 5, and 6 suggest that real output, the inflation rate, and
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minterest rates would all fall. m m m m