SOLUTION MANUAL
MONEY BANKING FINANCIAL MARKETS
INSTITUTIONS 2ND EDITION STUDY NOTES
,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.
MONEY BANKING FINANCIAL MARKETS
INSTITUTIONS 2ND EDITION STUDY NOTES
,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.
