Solution Manual For The Economics Of Money Banking And
Financial Markets 13th Global Edition By Frederic S. Mishkin
, Answers
To End-Of-Chapter
Questions And
Problems
Chapter 1
Answers To Questions
1. What Is The Typical Relationship Among Interest Rates On Three-Month Treasury
Bills, Long-Term Treasury Bonds, And Baa Corporate Bonds?
The Interest Rate On Three-Month Treasury Bills Fluctuates More Than The Other
Interest Rates And Is Lower On Average. The Interest Rate On Baa Corporate
Bonds Is Higher On Average Than The Other Interest Rates.
2. What Effect Does High Volatility Of Financial Markets Have On People's
Willingness To Spend?
The High Volatility Of Financial Markets Decreases People's Willingness To Spend,
Primarily Because It Directly Affects Their Wealth, And Also Because High
Volatility Indicates That There Are Considerable Fluctuations In The Prices Of
Securities Over A Short Time Span. It Increases Insecurities About The Future Of
An Economy. Refer To Figure 2 To See The Extremely Volatile Nature Of Stock
Prices Between 1950 And 2020.
3. Explain The Main Difference Between A Bond And A Common Stock.
A Bond Is A Debt Instrument, Which Entitles The Owner To Receive Periodic
Amounts Of Money (Predetermined By The Characteristics Of The Bond) Until Its
Maturity Date. A Common Stock, However, Represents A Share Of Ownership In
The Institution That Has Issued The Stock. In Addition To Its Definition, It Is Not
The Same To Hold Bonds Or Stock Of A Given Corporation, Since Regulations State
That Stockholders Are Residual Claimants (I.E., The Corporation Has To Pay All
Bondholders Before Paying Stockholders).
4. What Is The Main Role Of A Financial Intermediary? Name Two
Financial Intermediaries.
A Financial Intermediary Is A Firm Or Institution That Channels Savings Into
Investments––That Is, It Borrows Funds From Individuals Who Have Saved And
Provides Loans To Those Who Need Funds. Banks And Mutual Funds Are Two
Examples Of Such Intermediaries.
5. What Was The Main Cause Of The Global Recession In 2020?
, The Recession In 2020, Sometimes Referred To As The Covid-19 Recession, Was
Mainly Caused By The Global Pandemic Caused By The Infectious Coronavirus
Disease (Covid-19). In March 2020, The Stock Market Fell By 25% In A Single
Month.
According To The World Bank’s June 2020 Global Economic Prospects, The
Volatility Induced By The Coronavirus Pandemic, Lockdowns, And Other
Preventive Measures Taken By Global Economies To Contain It Have Led To A
Severe Contraction In The Global Economy.
6. Can You Think Of A Reason Why People In General Do Not Lend Money To One
Another To Buy A House Or A Car? How Would Your Answer Explain The Existence
Of Banks?
In General, People Do Not Lend Large Amounts Of Money To One Another Because Of
Several Information Problems. In Particular, People Do Not Know About The
Capacity Of Other People Of Repaying Their Debts, Or The Effort They Will Provide
To Repay Their Debts.
Financial Intermediaries, In Particular Commercial Banks, Tend To Solve These
Problems By Acquiring Information About Potential Borrowers And Writing And
Enforcing Contracts That Encourage Lenders To Repay Their Debt And/Or Maintain
The Value Of The Collateral.
7. Why Are Banks Important To The Financial System?
Banks Are One Of The Major Financial Intermediaries. They Channel Savings From
Private Institutions Or The General Public To Other Institutions Or People Who Need
A Loan. Well-Functioning Banks Are Very Important For The Savings-To-Loans
Cycle And For The Housing Market.
8. Can You Date The Latest Financial Crisis In The United States Or In Europe? Are
There Reasons To Think That These Crises Might Have Been Related? Why?
The Latest Financial Crisis In The United States And Europe Occurred In 2007–
2009. At The Beginning, It Hit Mostly The U.S. Financial System, But It Then
Quickly Moved To Europe, Since Financial Markets Are Highly Interconnected. One
Specific Way In Which These Markets Were Related Is That Some Financial
Intermediaries In Europe Held Securities Backed By Mortgages Originated In The
United States, And When These Securities Lost Their A Considerable Part Of Their
Value, The Balance Sheet Of European Financial Intermediaries Was Adversely
Affected.
9. Has The Inflation Rate In The United States Increased Or Decreased In The
Past Few Years? What About Interest Rates?
Since 2015, Inflation Has Been Around 2%, With Some Brief Dips In 2015 And
2020. In 2015, The Interest Rate On Three-Month Treasury Bills Was Near Zero,
And It Then Rose To Just Over 2% In 2019, Only To Fall Back Near To Zero In
2020.-
10. If History Repeats Itself And We See A Decline In The Rate Of Money Growth, What
Might You Expect To Happen To
a. Real Output?
b. The Inflation Rate?
, c. Interest Rates?
The Data In Figures 3, 5, And 6 Suggest That Real Output, The Inflation Rate, And
Interest Rates Would All Fall.
11. When Interest Rates Decrease, How Might Businesses And Consumers Change Their
Economic Behavior?Businesses Would Increase Investment Spending Because The Cost
Of Financing This Spending Is Now Lower, And Consumers Would Be More Likely To
Purchase A House Or A Car Because The Cost Of Financing Their Purchase Is Lower.
12. Is Everybody Worse Off When Interest Rates Rise?
No. It Is True That People Who Borrow To Purchase A House Or A Car Are Worse
Off Because It Costs Them More To Finance Their Purchase; However, Savers
Benefit Because They Can Earn Higher Interest Rates On Their Savings.
13. What Is The Main Role Of A Central Bank? Why Are Central Banks, Like The
European Central Bank (Ecb), Important To Financial Analysts?
Central Banks Oversee The Monetary Policy For A Specific Country Or A Group Of
Nations (As In The Case Of The Ecb). This Is Done By Setting A Base Interest Rate
Or By Forward Guidance, Which Impacts The Financial And Real Economy. Since
Money Affects Many Economic Variables That Are Important To The Health Of An
Economy, Financial Analysts (Including Politicians And Policymakers) Take An
Interest In The Conduct Of Monetary Policy, As Well As In The Management Of
Money And Interest Rates.
14. Germany Is One Of The Few Countries That Has Maintained A Budget Surplus In
The Last Five Years, And According To Reuters, The Federal Government Made A
Record Surplus Of €13.5 Billion In 2019. How Does A Budget Surplus Arise?
A Budget Surplus Results From Tax Revenues Exceeding Government Expenditure,
Which Leads To Lower Government Debt Burdens.
15. How Would A Fall In The Value Of The Pound Sterling Affect British Consumers?
It Makes Foreign Goods More Expensive, So British Consumers Will Buy Fewer
Foreign Goods And More Domestic Goods.
16. How Would An Increase In The Value Of The Pound Sterling Affect
American Businesses?
It Makes British Goods More Expensive Relative To American Goods. Thus,
American Businesses Will Find It Easier To Sell Their Goods In The United States
And Abroad, And The Demand For Their Products Will Rise.
17. How Can Changes In Foreign Exchange Rates Affect The Profitability Of
Financial Institutions?
Changes In Foreign Exchange Rates Change The Value Of Assets Held By Financial
Institutions And Thus Lead To Gains And Losses On These Assets. Also Changes In
Foreign Exchange Rates Affect The Profits Made By Traders In Foreign Exchange
Who Work For Financial Institutions.
18. According To Figure 8, In Which Years Would You Have Chosen To Visit The
Grand Canyon In Arizona Rather Than The Tower Of London?
Financial Markets 13th Global Edition By Frederic S. Mishkin
, Answers
To End-Of-Chapter
Questions And
Problems
Chapter 1
Answers To Questions
1. What Is The Typical Relationship Among Interest Rates On Three-Month Treasury
Bills, Long-Term Treasury Bonds, And Baa Corporate Bonds?
The Interest Rate On Three-Month Treasury Bills Fluctuates More Than The Other
Interest Rates And Is Lower On Average. The Interest Rate On Baa Corporate
Bonds Is Higher On Average Than The Other Interest Rates.
2. What Effect Does High Volatility Of Financial Markets Have On People's
Willingness To Spend?
The High Volatility Of Financial Markets Decreases People's Willingness To Spend,
Primarily Because It Directly Affects Their Wealth, And Also Because High
Volatility Indicates That There Are Considerable Fluctuations In The Prices Of
Securities Over A Short Time Span. It Increases Insecurities About The Future Of
An Economy. Refer To Figure 2 To See The Extremely Volatile Nature Of Stock
Prices Between 1950 And 2020.
3. Explain The Main Difference Between A Bond And A Common Stock.
A Bond Is A Debt Instrument, Which Entitles The Owner To Receive Periodic
Amounts Of Money (Predetermined By The Characteristics Of The Bond) Until Its
Maturity Date. A Common Stock, However, Represents A Share Of Ownership In
The Institution That Has Issued The Stock. In Addition To Its Definition, It Is Not
The Same To Hold Bonds Or Stock Of A Given Corporation, Since Regulations State
That Stockholders Are Residual Claimants (I.E., The Corporation Has To Pay All
Bondholders Before Paying Stockholders).
4. What Is The Main Role Of A Financial Intermediary? Name Two
Financial Intermediaries.
A Financial Intermediary Is A Firm Or Institution That Channels Savings Into
Investments––That Is, It Borrows Funds From Individuals Who Have Saved And
Provides Loans To Those Who Need Funds. Banks And Mutual Funds Are Two
Examples Of Such Intermediaries.
5. What Was The Main Cause Of The Global Recession In 2020?
, The Recession In 2020, Sometimes Referred To As The Covid-19 Recession, Was
Mainly Caused By The Global Pandemic Caused By The Infectious Coronavirus
Disease (Covid-19). In March 2020, The Stock Market Fell By 25% In A Single
Month.
According To The World Bank’s June 2020 Global Economic Prospects, The
Volatility Induced By The Coronavirus Pandemic, Lockdowns, And Other
Preventive Measures Taken By Global Economies To Contain It Have Led To A
Severe Contraction In The Global Economy.
6. Can You Think Of A Reason Why People In General Do Not Lend Money To One
Another To Buy A House Or A Car? How Would Your Answer Explain The Existence
Of Banks?
In General, People Do Not Lend Large Amounts Of Money To One Another Because Of
Several Information Problems. In Particular, People Do Not Know About The
Capacity Of Other People Of Repaying Their Debts, Or The Effort They Will Provide
To Repay Their Debts.
Financial Intermediaries, In Particular Commercial Banks, Tend To Solve These
Problems By Acquiring Information About Potential Borrowers And Writing And
Enforcing Contracts That Encourage Lenders To Repay Their Debt And/Or Maintain
The Value Of The Collateral.
7. Why Are Banks Important To The Financial System?
Banks Are One Of The Major Financial Intermediaries. They Channel Savings From
Private Institutions Or The General Public To Other Institutions Or People Who Need
A Loan. Well-Functioning Banks Are Very Important For The Savings-To-Loans
Cycle And For The Housing Market.
8. Can You Date The Latest Financial Crisis In The United States Or In Europe? Are
There Reasons To Think That These Crises Might Have Been Related? Why?
The Latest Financial Crisis In The United States And Europe Occurred In 2007–
2009. At The Beginning, It Hit Mostly The U.S. Financial System, But It Then
Quickly Moved To Europe, Since Financial Markets Are Highly Interconnected. One
Specific Way In Which These Markets Were Related Is That Some Financial
Intermediaries In Europe Held Securities Backed By Mortgages Originated In The
United States, And When These Securities Lost Their A Considerable Part Of Their
Value, The Balance Sheet Of European Financial Intermediaries Was Adversely
Affected.
9. Has The Inflation Rate In The United States Increased Or Decreased In The
Past Few Years? What About Interest Rates?
Since 2015, Inflation Has Been Around 2%, With Some Brief Dips In 2015 And
2020. In 2015, The Interest Rate On Three-Month Treasury Bills Was Near Zero,
And It Then Rose To Just Over 2% In 2019, Only To Fall Back Near To Zero In
2020.-
10. If History Repeats Itself And We See A Decline In The Rate Of Money Growth, What
Might You Expect To Happen To
a. Real Output?
b. The Inflation Rate?
, c. Interest Rates?
The Data In Figures 3, 5, And 6 Suggest That Real Output, The Inflation Rate, And
Interest Rates Would All Fall.
11. When Interest Rates Decrease, How Might Businesses And Consumers Change Their
Economic Behavior?Businesses Would Increase Investment Spending Because The Cost
Of Financing This Spending Is Now Lower, And Consumers Would Be More Likely To
Purchase A House Or A Car Because The Cost Of Financing Their Purchase Is Lower.
12. Is Everybody Worse Off When Interest Rates Rise?
No. It Is True That People Who Borrow To Purchase A House Or A Car Are Worse
Off Because It Costs Them More To Finance Their Purchase; However, Savers
Benefit Because They Can Earn Higher Interest Rates On Their Savings.
13. What Is The Main Role Of A Central Bank? Why Are Central Banks, Like The
European Central Bank (Ecb), Important To Financial Analysts?
Central Banks Oversee The Monetary Policy For A Specific Country Or A Group Of
Nations (As In The Case Of The Ecb). This Is Done By Setting A Base Interest Rate
Or By Forward Guidance, Which Impacts The Financial And Real Economy. Since
Money Affects Many Economic Variables That Are Important To The Health Of An
Economy, Financial Analysts (Including Politicians And Policymakers) Take An
Interest In The Conduct Of Monetary Policy, As Well As In The Management Of
Money And Interest Rates.
14. Germany Is One Of The Few Countries That Has Maintained A Budget Surplus In
The Last Five Years, And According To Reuters, The Federal Government Made A
Record Surplus Of €13.5 Billion In 2019. How Does A Budget Surplus Arise?
A Budget Surplus Results From Tax Revenues Exceeding Government Expenditure,
Which Leads To Lower Government Debt Burdens.
15. How Would A Fall In The Value Of The Pound Sterling Affect British Consumers?
It Makes Foreign Goods More Expensive, So British Consumers Will Buy Fewer
Foreign Goods And More Domestic Goods.
16. How Would An Increase In The Value Of The Pound Sterling Affect
American Businesses?
It Makes British Goods More Expensive Relative To American Goods. Thus,
American Businesses Will Find It Easier To Sell Their Goods In The United States
And Abroad, And The Demand For Their Products Will Rise.
17. How Can Changes In Foreign Exchange Rates Affect The Profitability Of
Financial Institutions?
Changes In Foreign Exchange Rates Change The Value Of Assets Held By Financial
Institutions And Thus Lead To Gains And Losses On These Assets. Also Changes In
Foreign Exchange Rates Affect The Profits Made By Traders In Foreign Exchange
Who Work For Financial Institutions.
18. According To Figure 8, In Which Years Would You Have Chosen To Visit The
Grand Canyon In Arizona Rather Than The Tower Of London?
