SOLUTION MANUAL
Money, Banking, Financial Markets & Institutions
2nd Edition for Brandl Michael, All Chapters 1 - 24
TABLE OF CONTENTS
Part I: MONEY AND ITS PRICES.
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.
5. Financial Markets through Time.
6. Aggregate Supply & Aggregate Demand. 7.
Banks and Money.
Part III: CENTRAL BANKS.
8. Central Banks.
9. Monetary Policy Tools.
10. The Money Supply Process.
11. Monetary Policy & Debates.
Part IV: THE BANKING SYSTEM.
12. Bank Management.
13. Bank Risk Management & Performance. 14.
Banking Regulation.
Part V: FINANCIAL MARKETS.
15. Money Markets. 16.
Bond Markets.
17. Stock Market & Efficiency. 18.
Mortgage Market.
Part VI: GLOBAL FINANCIAL MARKETS. 19.
FX.
20. Global Financial Architecture. Part
VII: FINANCIAL INSTITUTIONS.
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
2-1 Section Review
1.What is the difference between money and currency? When are they the
same? Why might they bedifferent?
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 acceptthem 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 400goods? 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 searchcost. Money allows us to reduce the number of
stated prices we need.
3. Youread 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
2-2 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 undercontrol. 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 could slide 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
2-3 Section Review
1. A critic of money economics once stated, “if you cannot measure the money
supply accurately, it isnot 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.Economists are searching for a “good” measurement of the money supply. What
constitutes a
goodmeasurement of the fmoney fsupply?
, ANS: To economists, a “good” measurement of the money supply is one that conforms to economic
theories regarding inflation and the economy. For example, if the money supply (according to a
particular measurement) increases faster than the growth rate of the economy, then economic theory
suggests that inflation should occur. On the other hand, if the money supply (according to a particular
measurement) increases too slowly relative to the growth rate of the economy, then economic theory
suggests that this will result in a recession. When the measurement of the money supply coincides
withthese economic predictions, then that particular measurement has the potential to be a “good”
measurement of the money supply. During certain periods of time, both M1 and M2 have been
considered to be “good” measurements of the money supply. However, there have also been periods
oftime where the changes in M1 or M2 did not coincide with economic theory.
3. Which fof fthe ffollowing fis fthe fbroadest for fmost finclusive fmeasurement fof fthe
money fsupply?
f
a. M1
b. M2
c. M3
d. M0
ANS: f fB
2-4 Section fReview
1.Each fperson fmight fhave fa fdifferent ftime fpreference. fExplain fwhy fan folder
fperson fmight fhave fa f higheror flower ftime fpreference fthan fa fyoung fperson.
ANS: fAn folder fperson fmight fhave fa fhigh ftime fpreference, fconsumer fnow fvs. fin fthe
ffuture. fThe folder f person fwill fplace fhigher fvalue fon fthe fability fto fconsume fnow
fmore fthan fmoney fin fthe ffuture.
2.What fis fthe ffuture fvalue fof f$500 fin ftwo fyears fif fthe finterest frate fis f4%? fHow
fwould fyou fexplain fthis fto f someone fwho fhas fno ftraining fin feconomics?
ANS: f500(1.04)2 f = f$540.80.
For someone without a background in economics, one could explain that
money invested today will grow over time. Thus, in order to have $500 in the future, today you would
only need to invest some amount that is less than $500. How much less depends on the return on your
investment (the interest rate).
3. If fthe fannual finterest frate fis f2%, fwhat fis fthe
quarterly finterest frate? f a. f0.0204
f
b. f0.0166
c. f0.005
d. f0.001
Money, Banking, Financial Markets & Institutions
2nd Edition for Brandl Michael, All Chapters 1 - 24
TABLE OF CONTENTS
Part I: MONEY AND ITS PRICES.
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.
5. Financial Markets through Time.
6. Aggregate Supply & Aggregate Demand. 7.
Banks and Money.
Part III: CENTRAL BANKS.
8. Central Banks.
9. Monetary Policy Tools.
10. The Money Supply Process.
11. Monetary Policy & Debates.
Part IV: THE BANKING SYSTEM.
12. Bank Management.
13. Bank Risk Management & Performance. 14.
Banking Regulation.
Part V: FINANCIAL MARKETS.
15. Money Markets. 16.
Bond Markets.
17. Stock Market & Efficiency. 18.
Mortgage Market.
Part VI: GLOBAL FINANCIAL MARKETS. 19.
FX.
20. Global Financial Architecture. Part
VII: FINANCIAL INSTITUTIONS.
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
2-1 Section Review
1.What is the difference between money and currency? When are they the
same? Why might they bedifferent?
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 acceptthem 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 400goods? 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 searchcost. Money allows us to reduce the number of
stated prices we need.
3. Youread 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
2-2 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 undercontrol. 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 could slide 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
2-3 Section Review
1. A critic of money economics once stated, “if you cannot measure the money
supply accurately, it isnot 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.Economists are searching for a “good” measurement of the money supply. What
constitutes a
goodmeasurement of the fmoney fsupply?
, ANS: To economists, a “good” measurement of the money supply is one that conforms to economic
theories regarding inflation and the economy. For example, if the money supply (according to a
particular measurement) increases faster than the growth rate of the economy, then economic theory
suggests that inflation should occur. On the other hand, if the money supply (according to a particular
measurement) increases too slowly relative to the growth rate of the economy, then economic theory
suggests that this will result in a recession. When the measurement of the money supply coincides
withthese economic predictions, then that particular measurement has the potential to be a “good”
measurement of the money supply. During certain periods of time, both M1 and M2 have been
considered to be “good” measurements of the money supply. However, there have also been periods
oftime where the changes in M1 or M2 did not coincide with economic theory.
3. Which fof fthe ffollowing fis fthe fbroadest for fmost finclusive fmeasurement fof fthe
money fsupply?
f
a. M1
b. M2
c. M3
d. M0
ANS: f fB
2-4 Section fReview
1.Each fperson fmight fhave fa fdifferent ftime fpreference. fExplain fwhy fan folder
fperson fmight fhave fa f higheror flower ftime fpreference fthan fa fyoung fperson.
ANS: fAn folder fperson fmight fhave fa fhigh ftime fpreference, fconsumer fnow fvs. fin fthe
ffuture. fThe folder f person fwill fplace fhigher fvalue fon fthe fability fto fconsume fnow
fmore fthan fmoney fin fthe ffuture.
2.What fis fthe ffuture fvalue fof f$500 fin ftwo fyears fif fthe finterest frate fis f4%? fHow
fwould fyou fexplain fthis fto f someone fwho fhas fno ftraining fin feconomics?
ANS: f500(1.04)2 f = f$540.80.
For someone without a background in economics, one could explain that
money invested today will grow over time. Thus, in order to have $500 in the future, today you would
only need to invest some amount that is less than $500. How much less depends on the return on your
investment (the interest rate).
3. If fthe fannual finterest frate fis f2%, fwhat fis fthe
quarterly finterest frate? f a. f0.0204
f
b. f0.0166
c. f0.005
d. f0.001
