TEST BANK FOR The Economics of Money, Banking and Financial Markets, Global Edition 13th Edition by Frederic Mishkin ISBN: 978-1292409481 COMPLETE GUIDE ALL CHAPTERS COVERED 100% VERIFIED A+ GRADE ASSURED!!!!!NEW LATEST UPDATE!!!!!

,Chapter 1 br




ANSWERS TO QUESTIONS br br




1. What is the typical relationship among interest rates on three-
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month Treasury bills, long-term Treasury bonds, and Baa corporate bonds?
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The interest rate on three-
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month Treasury bills fluctuates more than the other interest rates and is lower on avera
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ge. The interest rate on Baa corporate bonds is higher on average than the other inter
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est rates. br




2. What effect does high volatility of financial markets have on people's willingness to s
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pend?
The high volatility of financial markets decreases people's willingness to spend, prima
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rily because it directly affects their wealth, and also because high volatility indicates t
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hat there are considerable fluctuations in the prices of securities over a short time span
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. It increases insecurities about the future of an economy. Refer to Figure 2 to see the e
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xtremely volatile nature of stock prices between 1950 and 2020.
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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 amounts of m
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oney (predetermined by the characteristics of the bond) until its maturity date. A comm
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on stock, however, represents a share of ownership in the institution that has issued the
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stock. In addition to its definition, it is not the same to hold bonds or stock of a given co
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rporation, since regulations state that stockholders are residual claimants (i.e., the corpo
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ration has to pay all bondholders before paying stockholders).
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4. What is the main role of a financial intermediary? Name two financial i
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ntermediaries.
A financial intermediary is a firm or institution that channels savings into investments
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––
that is, it borrows funds from individuals who have saved and provides loans to those w
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ho need funds. Banks and mutual funds are two 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-
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19 Recession, was mainly caused by the global pandemic caused by the infectious co
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ronavirus disease (Covid- br br



19). In March 2020, the stock market fell by 25% in a single month.
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, According to the World Bank’s June 2020 Global Economic Prospects, the volatility in
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duced by the coronavirus pandemic, lockdowns, and other preventive measures taken
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by global economies to contain it have led to a severe contraction in the global econom
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y.
6. Can you think of a reason why people in general do not lend money to one another to b
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uy a house or a car? How would your answer explain the existence of banks?
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In general, people do not lend large amounts of money to one another because of several inf
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ormation problems. In particular, people do not know about the capacity of other people o
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f repaying their debts, or the effort they will provide to repay their debts.
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Financial intermediaries, in particular commercial banks, tend to solve these problems b
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y acquiring information about potential borrowers and writing and enforcing contracts tha
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t encourage lenders to repay their debt and/or maintain the 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 private
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institutions or the general public to other institutions or people who need a loan. Well-
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functioning banks are very important for the savings-to- br br br br br br br



loans 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 there r
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easons 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 mov
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ed to Europe, since financial markets are highly interconnected. One specific way in w
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hich these markets were related is that some financial intermediaries in Europe held se
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curities backed by mortgages originated in the United States, and when these securitie
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s lost their a considerable part of their value, the balance sheet of European financial i
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ntermediaries was adversely affected. br br br




9. Has the inflation rate in the United States increased or decreased in the past few y
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ears? What about interest rates? br br br br




Since 2015, inflation has been around 2%, with some brief dips in 2015 and 2020. In 201
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5, the interest rate on three-
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month Treasury bills was near zero, and it then rose to just over 2% in 2019, only to fall
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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 might y
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ou expect to happen to
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a. real output? br




b. the inflation rate? br br




c. interest rates? br




The data in Figures 3, 5, and 6 suggest that real output, the inflation rate, and interest ra
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tes would all fall. br br br




11. When interest rates decrease, how might businesses and consumers change their e
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conomic behavior? br

, Businesses would increase investment spending because the cost of financing this spe
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nding is now lower, and consumers would be more likely to purchase a house or a car b
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ecause the cost of financing their purchase is lower.
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12. Is everybody worse off when interest rates rise?
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No. It is true that people who borrow to purchase a house or a car are worse off because
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it costs them more to finance their purchase; however, savers benefit because they can e
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arn higher interest rates on their savings.
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13. What is the main role of a central bank? Why are central banks, like the European
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Central Bank (ECB), important to financial analysts?br br br br br br




Central banks oversee the monetary policy for a specific country or a group of nations (a
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s in the case of the ECB). This is done by setting a base interest rate or by forward guid
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ance, which impacts the financial and real economy. Since money affects many econo
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mic variables that are important to the health of an economy, financial analysts (includi
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ng politicians and policymakers) take an interest in the conduct of monetary policy, as
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well as in the management of money and interest rates.
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14. Germany is one of the few countries that has maintained a budget surplus in the last fi
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ve years, and according to Reuters, the federal government made a record surplus of
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br€13.5 billion in 2019. How does a budget surplus arise?
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A budget surplus results from tax revenues exceeding government expenditure, which l
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eads to lower government debt burdens.
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15. How would a fall in the value of the pound sterling affect British consumers?
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It makes foreign goods more expensive, so British consumers will buy fewer foreign go
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ods and more domestic goods.
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16. How would an increase in the value of the pound sterling affect American b
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usinesses?
It makes British goods more expensive relative to American goods. Thus, American b
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usinesses will find it easier to sell their goods in the United States and abroad, and th
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e demand for their products will rise.
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17. How can changes in foreign exchange rates affect the profitability of financial i
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nstitutions?
Changes in foreign exchange rates change the value of assets held by financial instituti
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ons and thus lead to gains and losses on these assets. Also changes in foreign exchange rat
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es affect the profits made by traders in foreign exchange who work for financial institut
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ions.

18. According to Figure 8, in which years would you have chosen to visit the Grand C
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anyon in Arizona rather than the Tower of London?
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In the mid-to- br br



late 1970s, the late 1980s to early 1990s, and 2008 to 2015, the value of the dollar was lo
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w, making travel abroad relatively more expensive; thus, it was a good time to vacation in t
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he United States and see the Grand Canyon. With the rise in the dollar’s value in the earl
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y 1980s, late 1990s, and after 2015, travel abroad became
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