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 beiidifferent?
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 acceptiithem 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 400iigoods? 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 searchiicost. 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 underiicontrol. 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 isiinot 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,iiled to the decline in the usefulness of M2 as a monetary
aggregate.
2. Economists are searching for a “good” measurement of the money supply. What
constitutes a goodiimeasurement of the money supply?
ANS: ii To iieconomists, iia ii“good” iimeasurement iiof iithe iimoney iisupply iiis iione iithat iiconforms
iito iieconomic iitheories iiregarding iiinflation iiand iithe iieconomy. iiFor iiexample, iiif iithe iimoney
iisupply ii(according iito iia particular iimeasurement) iiincreases iifaster iithan iithe iigrowth iirate iiof
iithe iieconomy, iithen iieconomic iitheory suggests iithat iiinflation iishould iioccur. iiOn iithe iiother
iihand, iiif iithe iimoney iisupply ii(according iito iia iiparticular measurement) iiincreases iitoo iislowly
iirelative iito iithe iigrowth iirate iiof iithe iieconomy, iithen iieconomic iitheory suggests iithat iithis
iiwill iiresult iiin iia iirecession. iiWhen iithe iimeasurement iiof iithe iimoney iisupply iicoincides iiwith
iithese iieconomic iipredictions, iithen iithat iiparticular iimeasurement iihas iithe iipotential iito iibe iia
ii“good” measurement iiof iithe iimoney iisupply. iiDuring iicertain iiperiods iiof iitime, iiboth iiM1 iiand
iiM2 iihave iibeen
considered iito iibe ii“good” iimeasurements iiof iithe iimoney iisupply. iiHowever, iithere iihave iialso
iibeen iiperiods iiofiitime iiwhere iithe iichanges iiin iiM1 iior iiM2 iidid iinot iicoincide iiwith iieconomic
iitheory.
3. Which of the following is the broadest or most inclusive measurement of the money
supply?
a. M1
b. M2
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 beiidifferent?
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 acceptiithem 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 400iigoods? 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 searchiicost. 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 underiicontrol. 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 isiinot 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,iiled to the decline in the usefulness of M2 as a monetary
aggregate.
2. Economists are searching for a “good” measurement of the money supply. What
constitutes a goodiimeasurement of the money supply?
ANS: ii To iieconomists, iia ii“good” iimeasurement iiof iithe iimoney iisupply iiis iione iithat iiconforms
iito iieconomic iitheories iiregarding iiinflation iiand iithe iieconomy. iiFor iiexample, iiif iithe iimoney
iisupply ii(according iito iia particular iimeasurement) iiincreases iifaster iithan iithe iigrowth iirate iiof
iithe iieconomy, iithen iieconomic iitheory suggests iithat iiinflation iishould iioccur. iiOn iithe iiother
iihand, iiif iithe iimoney iisupply ii(according iito iia iiparticular measurement) iiincreases iitoo iislowly
iirelative iito iithe iigrowth iirate iiof iithe iieconomy, iithen iieconomic iitheory suggests iithat iithis
iiwill iiresult iiin iia iirecession. iiWhen iithe iimeasurement iiof iithe iimoney iisupply iicoincides iiwith
iithese iieconomic iipredictions, iithen iithat iiparticular iimeasurement iihas iithe iipotential iito iibe iia
ii“good” measurement iiof iithe iimoney iisupply. iiDuring iicertain iiperiods iiof iitime, iiboth iiM1 iiand
iiM2 iihave iibeen
considered iito iibe ii“good” iimeasurements iiof iithe iimoney iisupply. iiHowever, iithere iihave iialso
iibeen iiperiods iiofiitime iiwhere iithe iichanges iiin iiM1 iior iiM2 iidid iinot iicoincide iiwith iieconomic
iitheory.
3. Which of the following is the broadest or most inclusive measurement of the money
supply?
a. M1
b. M2
