SOLUTION MANUAL for Money, Banking, Financial
ii ii ii ii ii
Markets & Institutions 2nd Edition
ii ii ii ii ii ii
by Brandl Michael, All Chapters 1 - 24
ii ii ii ii ii ii ii
,TABLE OF CONTENTS
Part I: MONEY AND ITS PRICES.
ii ii ii ii ii
1. Introduction and Overview.
2. Money, Money Supply and Interest.
3. Bonds, Loanable Funds & Interest Rates.
4. Interest Rates in More Detail.
Part II: MONEY AND OVERALL ECONOMY.
ii ii ii ii ii
5. Financial Markets through Time.
6. Aggregate Supply & Aggregate Demand.
7. Banks and Money.
Part III: CENTRAL BANKS.
ii ii ii
8. Central Banks.
9. Monetary Policy Tools.
10. The Money Supply Process.
11. Monetary Policy & Debates.
Part IV: THE BANKING SYSTEM.
ii ii ii ii
12. Bank Management.
13. Bank Risk Management & Performance.
14. Banking Regulation.
Part V: FINANCIAL MARKETS.
ii ii ii
15. Money Markets.
16. Bond Markets.
17. Stock Market & Efficiency.
18. Mortgage Market.
Part VI: GLOBAL FINANCIAL MARKETS.
ii ii ii ii
19. FX.
20. Global Financial Architecture.
Part VII: FINANCIAL INSTITUTIONS.
ii ii ii
21. Thrifts and Finance Companies.
22. Insurance and Pensions.
23. Mutual Funds.
24. Investment Banks and Private Equity.
, CHAPTER 2: Money, Money Supply, and
Interest
24-1 Section
Review
1. What is the difference between money and currency? When are they the same? Why
might they be different?
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 accept them in exchange for
goods and services. If a group of people stop using currency to get goods and
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 400 goods? Explain why having a money in the second case is
beneficial.
ANS: 4 goods = 6 prices; 400 goods = 79,800 prices. Money allows us to specialize and
reduce our search cost. Money allows us to reduce the number of stated prices we
need.
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
b. Medium of exchange
c. Store of value
d. Double coincidence of
wantsANS: C
24-2 Section Review
1. Bobby is confused. He states: “Since prisoners are not allowed to smoke in prisons any
longer,
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 under control. 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
economy could suffer inflation.
3. Ricardo and Friedman agree that if the money supply increases “too quickly” the
following happens:
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.
ANS: C
24-3 Section Review
1. A critic of money economics once stated, “if you cannot measure the money supply
accurately, it is not 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, led to the decline in the usefulness of M2 as a monetary
aggregate.
2. Economistss 1 ares 1 searchings 1 fors 1 as 1 “good”s 1 measurements 1 ofs 1 thes 1 money
s 1 supply.s 1 Whats1constitutess 1 as 1 goods1measurements 1 ofs 1 thes 1 moneys 1 supply
?
ANS: Tos1 iieconomists,s1 iias1 ii“good”s1 iimeasurements1 iiofs1 iithes1 iimoneys 1 iisupplys1 iiiss1 iiones1 iith
ats1 iiconforms
iitos1iieconomi theoriess1 iiregardings1 iiinflations1 iiands1iithes1 iieconomy.s1 iiFors1iiexample,s1 iiifs1iith
csupplys1 ii(according
ii es1 moneys1 iito particulars1iimeasurement)s1iiincreasess1 iifasters1iithans1iithes1iigrowths1ii
a
iithes1 iieconomy,s1 iithens1 iieconomic
s1 rates1 of s1 iith suggestss1 iithats1 iiinflations1 iishoulds1 iioccur.s1 iiOns1 iithe
eory
ii hand,s1 iiifs1iithes1 iimoneys1 iisupplys1 ii(according other s1 iitos1 iias1 iip measurement)s1iiincreasess1iitoos1iislo
articular
ii relatives1iitos1 iithes1iigrowths1 iirates1iiofs1 iithes1 iieconomy,s1 iithen wlys1 iiecono suggestss1 iithats1 iith
mic
ii wills1s1theory
iiresults1iiins1iias1iirecession.s1iiWhens1iithes1iimeasurements1iiofs1iithes1iimoney is s1iisupplys1iicoin
cidess1iiwiths1iitheses1iieconomics1iipredictions,s1iithens1iithats1iiparticulars1iimeasurements1iihass1iit
hes1iipotential measurement
s1iitos1iibes1 iiofs1 iithes1 iimoneys1 iisupply.s1 iiDurings1 iicertains1iiperiodss1 iiofs1 iitime,s1 iibo
s1iia
th
iiM2s1iihaves1 iibe s1 M1 s1 and
en
considereds1 iitos1 iibes 1 ii“good”s1 iimeasurementss 1 iiofs1 iithes 1 iimoneys 1 iisupply.s 1 iiHowever,s 1 iithere
s1 iihaves 1 iialso
theory.
ii
3. Whichs 1 ofs 1 thes 1 followings 1 iss 1 thes 1 broadests 1 ors 1 mosts 1 inclusives 1 measuremen
ts 1 ofs 1 thes 1 moneys1supply?
ii ii ii ii ii
Markets & Institutions 2nd Edition
ii ii ii ii ii ii
by Brandl Michael, All Chapters 1 - 24
ii ii ii ii ii ii ii
,TABLE OF CONTENTS
Part I: MONEY AND ITS PRICES.
ii ii ii ii ii
1. Introduction and Overview.
2. Money, Money Supply and Interest.
3. Bonds, Loanable Funds & Interest Rates.
4. Interest Rates in More Detail.
Part II: MONEY AND OVERALL ECONOMY.
ii ii ii ii ii
5. Financial Markets through Time.
6. Aggregate Supply & Aggregate Demand.
7. Banks and Money.
Part III: CENTRAL BANKS.
ii ii ii
8. Central Banks.
9. Monetary Policy Tools.
10. The Money Supply Process.
11. Monetary Policy & Debates.
Part IV: THE BANKING SYSTEM.
ii ii ii ii
12. Bank Management.
13. Bank Risk Management & Performance.
14. Banking Regulation.
Part V: FINANCIAL MARKETS.
ii ii ii
15. Money Markets.
16. Bond Markets.
17. Stock Market & Efficiency.
18. Mortgage Market.
Part VI: GLOBAL FINANCIAL MARKETS.
ii ii ii ii
19. FX.
20. Global Financial Architecture.
Part VII: FINANCIAL INSTITUTIONS.
ii ii ii
21. Thrifts and Finance Companies.
22. Insurance and Pensions.
23. Mutual Funds.
24. Investment Banks and Private Equity.
, CHAPTER 2: Money, Money Supply, and
Interest
24-1 Section
Review
1. What is the difference between money and currency? When are they the same? Why
might they be different?
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 accept them in exchange for
goods and services. If a group of people stop using currency to get goods and
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 400 goods? Explain why having a money in the second case is
beneficial.
ANS: 4 goods = 6 prices; 400 goods = 79,800 prices. Money allows us to specialize and
reduce our search cost. Money allows us to reduce the number of stated prices we
need.
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
b. Medium of exchange
c. Store of value
d. Double coincidence of
wantsANS: C
24-2 Section Review
1. Bobby is confused. He states: “Since prisoners are not allowed to smoke in prisons any
longer,
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 under control. 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
economy could suffer inflation.
3. Ricardo and Friedman agree that if the money supply increases “too quickly” the
following happens:
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.
ANS: C
24-3 Section Review
1. A critic of money economics once stated, “if you cannot measure the money supply
accurately, it is not 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, led to the decline in the usefulness of M2 as a monetary
aggregate.
2. Economistss 1 ares 1 searchings 1 fors 1 as 1 “good”s 1 measurements 1 ofs 1 thes 1 money
s 1 supply.s 1 Whats1constitutess 1 as 1 goods1measurements 1 ofs 1 thes 1 moneys 1 supply
?
ANS: Tos1 iieconomists,s1 iias1 ii“good”s1 iimeasurements1 iiofs1 iithes1 iimoneys 1 iisupplys1 iiiss1 iiones1 iith
ats1 iiconforms
iitos1iieconomi theoriess1 iiregardings1 iiinflations1 iiands1iithes1 iieconomy.s1 iiFors1iiexample,s1 iiifs1iith
csupplys1 ii(according
ii es1 moneys1 iito particulars1iimeasurement)s1iiincreasess1 iifasters1iithans1iithes1iigrowths1ii
a
iithes1 iieconomy,s1 iithens1 iieconomic
s1 rates1 of s1 iith suggestss1 iithats1 iiinflations1 iishoulds1 iioccur.s1 iiOns1 iithe
eory
ii hand,s1 iiifs1iithes1 iimoneys1 iisupplys1 ii(according other s1 iitos1 iias1 iip measurement)s1iiincreasess1iitoos1iislo
articular
ii relatives1iitos1 iithes1iigrowths1 iirates1iiofs1 iithes1 iieconomy,s1 iithen wlys1 iiecono suggestss1 iithats1 iith
mic
ii wills1s1theory
iiresults1iiins1iias1iirecession.s1iiWhens1iithes1iimeasurements1iiofs1iithes1iimoney is s1iisupplys1iicoin
cidess1iiwiths1iitheses1iieconomics1iipredictions,s1iithens1iithats1iiparticulars1iimeasurements1iihass1iit
hes1iipotential measurement
s1iitos1iibes1 iiofs1 iithes1 iimoneys1 iisupply.s1 iiDurings1 iicertains1iiperiodss1 iiofs1 iitime,s1 iibo
s1iia
th
iiM2s1iihaves1 iibe s1 M1 s1 and
en
considereds1 iitos1 iibes 1 ii“good”s1 iimeasurementss 1 iiofs1 iithes 1 iimoneys 1 iisupply.s 1 iiHowever,s 1 iithere
s1 iihaves 1 iialso
theory.
ii
3. Whichs 1 ofs 1 thes 1 followings 1 iss 1 thes 1 broadests 1 ors 1 mosts 1 inclusives 1 measuremen
ts 1 ofs 1 thes 1 moneys1supply?
