Instructor’s Resource Manual for
g g g
The Economics of Money, Banki
g g g g
ng, and Financial Markets
g g g
The Economics of
g g g
Money, Banking, and
g g g
Financial Markets g
Thirteenth Edition, Global Edition
g g g
Frederic S. Mishkin
g g
NewgYork,gNY
, Answers
to End-of- g
Chapter Questions and P g g g
roblems
Chapterg1
ANSWERSgTOgQUESTIONS
1. Whatgisgthegtypicalgrelationshipgamongginterestgratesgongthree-
monthgTreasurygbills,glong-termgTreasurygbonds,gandgBaagcorporategbonds?
Theginterestgrategongthree-
monthgTreasurygbillsgfluctuatesgmoregthangthegotherginterestgratesgandgisglowergongaver
age.gTheginterestgrategongBaagcorporategbondsgisghighergongaveragegthangthegotherginte
restgrates.
2. Whatgeffectgdoesghighgvolatilitygofgfinancialgmarketsghavegongpeople'sgwillingnessgtogs
pend?
Theghighgvolatilitygofgfinancialgmarketsgdecreasesgpeople'sgwillingnessgtogspend,gprima
rilygbecausegitgdirectlygaffectsgtheirgwealth,gandgalsogbecauseghighgvolatilitygindicatesgt
hatgtheregaregconsiderablegfluctuationsgingthegpricesgofgsecuritiesgovergagshortgtimegspan
.gItgincreasesginsecuritiesgaboutgthegfuturegofgangeconomy.gRefergtogFigureg2gtogseegthege
xtremelygvolatilegnaturegofgstockgpricesgbetweeng1950gandg2020.
3. Explaingthegmaingdifferencegbetweengagbondgandgagcommongstock.
Agbondgisgagdebtginstrument,gwhichgentitlesgthegownergtogreceivegperiodicgamountsgofgm
oneyg(predeterminedgbygthegcharacteristicsgofgthegbond)guntilgitsgmaturitygdate.gAgcomm
ongstock,ghowever,grepresentsgagsharegofgownershipgingtheginstitutiongthatghasgissuedgtheg
stock.gIngadditiongtogitsgdefinition,gitgisgnotgthegsamegtogholdgbondsgorgstockgofgaggivengco
rporation,gsincegregulationsgstategthatgstockholdersgaregresidualgclaimantsg(i.e.,gthegcorpo
rationghasgtogpaygallgbondholdersgbeforegpayinggstockholders).
4. Whatgisgthegmaingrolegofgagfinancialgintermediary?gNamegtwogfinancialgi
ntermediaries.
Agfinancialgintermediarygisgagfirmgorginstitutiongthatgchannelsgsavingsgintoginvestments
––
thatgis,gitgborrowsgfundsgfromgindividualsgwhoghavegsavedgandgprovidesgloansgtogthoseg
whogneedgfunds.gBanksgandgmutualgfundsgaregtwogexamplesgofgsuchgintermediaries.
5. Whatgwasgthegmaingcausegofgthegglobalgrecessionging2020?
Thegrecessionging2020,gsometimesgreferredgtogasgthegCOVID-
,19gRecession,gwasgmainlygcausedgbygthegglobalgpandemicgcausedgbygtheginfectiousgco
ronavirusgdiseaseg(Covid-
19).gIngMarchg2020,gthegstockgmarketgfellgbyg25%gingagsinglegmonth.
, AccordinggtogthegWorldgBank’sgJuneg2020gGlobalgEconomicgProspects,gthegvolatilitygi
nducedgbygthegcoronavirusgpandemic,glockdowns,gandgothergpreventivegmeasuresgtake
ngbygglobalgeconomiesgtogcontaingitghavegledgtogagseveregcontractiongingthegglobalgecono
my.
6. Cangyougthinkgofgagreasongwhygpeopleginggeneralgdognotglendgmoneygtogoneganothergtogb
uygaghousegorgagcar?gHowgwouldgyourganswergexplaingthegexistencegofgbanks?
Inggeneral,gpeoplegdognotglendglargegamountsgofgmoneygtogoneganothergbecausegofgseveralgi
nformationgproblems.gIngparticular,gpeoplegdognotgknowgaboutgthegcapacitygofgothergpeop
legofgrepayinggtheirgdebts,gorgthegeffortgtheygwillgprovidegtogrepaygtheirgdebts.
Financialgintermediaries,gingparticulargcommercialgbanks,gtendgtogsolvegthesegproblemsg
bygacquiringginformationgaboutgpotentialgborrowersgandgwritinggandgenforcinggcontractsgt
hatgencourageglendersgtogrepaygtheirgdebtgand/orgmaintaingthegvaluegofgthegcollateral.
7. Whygaregbanksgimportantgtogthegfinancialgsystem?
Banksgaregonegofgthegmajorgfinancialgintermediaries.gTheygchannelgsavingsgfromgprivate
ginstitutionsgorgtheggeneralgpublicgtogotherginstitutionsgorgpeoplegwhogneedgagloan.gWell-
functioninggbanksgaregverygimportantgforgthegsavings-to-
loansgcyclegandgforgtheghousinggmarket.
8. CangyougdategtheglatestgfinancialgcrisisgingthegUnitedgStatesgorgingEurope?gAregtheregr
easonsgtogthinkgthatgthesegcrisesgmightghavegbeengrelated?gWhy?
TheglatestgfinancialgcrisisgingthegUnitedgStatesgandgEuropegoccurredging2007–
2009.gAtgthegbeginning,gitghitgmostlygthegU.S.gfinancialgsystem,gbutgitgthengquicklygmov
edgtogEurope,gsincegfinancialgmarketsgareghighlyginterconnected.gOnegspecificgwaygingw
hichgthesegmarketsgweregrelatedgisgthatgsomegfinancialgintermediariesgingEuropegheldgse
curitiesgbackedgbygmortgagesgoriginatedgingthegUnitedgStates,gandgwhengthesegsecuritie
sglostgtheirgagconsiderablegpartgofgtheirgvalue,gthegbalancegsheetgofgEuropeangfinancialgi
ntermediariesgwasgadverselygaffected.
9. HasgtheginflationgrategingthegUnitedgStatesgincreasedgorgdecreasedgingthegpastgfewgy
ears?gWhatgaboutginterestgrates?
Sinceg2015,ginflationghasgbeengaroundg2%,gwithgsomegbriefgdipsging2015gandg2020.gIng2
015,gtheginterestgrategongthree-
monthgTreasurygbillsgwasgneargzero,gandgitgthengrosegtogjustgoverg2%ging2019,gonlygtogfa
llgbackgneargtogzeroging2020.-
10. Ifghistorygrepeatsgitselfgandgwegseegagdeclinegingthegrategofgmoneyggrowth,gwhatgmightgy
ougexpectgtoghappengto
a. realgoutput?
b. theginflationgrate?
c. interestgrates?
ThegdatagingFiguresg3,g5,gandg6gsuggestgthatgrealgoutput,gtheginflationgrate,gandginterestgra
tesgwouldgallgfall.
11. Whenginterestgratesgdecrease,ghowgmightgbusinessesgandgconsumersgchangegtheirg
economicgbehavior?
g g g
The Economics of Money, Banki
g g g g
ng, and Financial Markets
g g g
The Economics of
g g g
Money, Banking, and
g g g
Financial Markets g
Thirteenth Edition, Global Edition
g g g
Frederic S. Mishkin
g g
NewgYork,gNY
, Answers
to End-of- g
Chapter Questions and P g g g
roblems
Chapterg1
ANSWERSgTOgQUESTIONS
1. Whatgisgthegtypicalgrelationshipgamongginterestgratesgongthree-
monthgTreasurygbills,glong-termgTreasurygbonds,gandgBaagcorporategbonds?
Theginterestgrategongthree-
monthgTreasurygbillsgfluctuatesgmoregthangthegotherginterestgratesgandgisglowergongaver
age.gTheginterestgrategongBaagcorporategbondsgisghighergongaveragegthangthegotherginte
restgrates.
2. Whatgeffectgdoesghighgvolatilitygofgfinancialgmarketsghavegongpeople'sgwillingnessgtogs
pend?
Theghighgvolatilitygofgfinancialgmarketsgdecreasesgpeople'sgwillingnessgtogspend,gprima
rilygbecausegitgdirectlygaffectsgtheirgwealth,gandgalsogbecauseghighgvolatilitygindicatesgt
hatgtheregaregconsiderablegfluctuationsgingthegpricesgofgsecuritiesgovergagshortgtimegspan
.gItgincreasesginsecuritiesgaboutgthegfuturegofgangeconomy.gRefergtogFigureg2gtogseegthege
xtremelygvolatilegnaturegofgstockgpricesgbetweeng1950gandg2020.
3. Explaingthegmaingdifferencegbetweengagbondgandgagcommongstock.
Agbondgisgagdebtginstrument,gwhichgentitlesgthegownergtogreceivegperiodicgamountsgofgm
oneyg(predeterminedgbygthegcharacteristicsgofgthegbond)guntilgitsgmaturitygdate.gAgcomm
ongstock,ghowever,grepresentsgagsharegofgownershipgingtheginstitutiongthatghasgissuedgtheg
stock.gIngadditiongtogitsgdefinition,gitgisgnotgthegsamegtogholdgbondsgorgstockgofgaggivengco
rporation,gsincegregulationsgstategthatgstockholdersgaregresidualgclaimantsg(i.e.,gthegcorpo
rationghasgtogpaygallgbondholdersgbeforegpayinggstockholders).
4. Whatgisgthegmaingrolegofgagfinancialgintermediary?gNamegtwogfinancialgi
ntermediaries.
Agfinancialgintermediarygisgagfirmgorginstitutiongthatgchannelsgsavingsgintoginvestments
––
thatgis,gitgborrowsgfundsgfromgindividualsgwhoghavegsavedgandgprovidesgloansgtogthoseg
whogneedgfunds.gBanksgandgmutualgfundsgaregtwogexamplesgofgsuchgintermediaries.
5. Whatgwasgthegmaingcausegofgthegglobalgrecessionging2020?
Thegrecessionging2020,gsometimesgreferredgtogasgthegCOVID-
,19gRecession,gwasgmainlygcausedgbygthegglobalgpandemicgcausedgbygtheginfectiousgco
ronavirusgdiseaseg(Covid-
19).gIngMarchg2020,gthegstockgmarketgfellgbyg25%gingagsinglegmonth.
, AccordinggtogthegWorldgBank’sgJuneg2020gGlobalgEconomicgProspects,gthegvolatilitygi
nducedgbygthegcoronavirusgpandemic,glockdowns,gandgothergpreventivegmeasuresgtake
ngbygglobalgeconomiesgtogcontaingitghavegledgtogagseveregcontractiongingthegglobalgecono
my.
6. Cangyougthinkgofgagreasongwhygpeopleginggeneralgdognotglendgmoneygtogoneganothergtogb
uygaghousegorgagcar?gHowgwouldgyourganswergexplaingthegexistencegofgbanks?
Inggeneral,gpeoplegdognotglendglargegamountsgofgmoneygtogoneganothergbecausegofgseveralgi
nformationgproblems.gIngparticular,gpeoplegdognotgknowgaboutgthegcapacitygofgothergpeop
legofgrepayinggtheirgdebts,gorgthegeffortgtheygwillgprovidegtogrepaygtheirgdebts.
Financialgintermediaries,gingparticulargcommercialgbanks,gtendgtogsolvegthesegproblemsg
bygacquiringginformationgaboutgpotentialgborrowersgandgwritinggandgenforcinggcontractsgt
hatgencourageglendersgtogrepaygtheirgdebtgand/orgmaintaingthegvaluegofgthegcollateral.
7. Whygaregbanksgimportantgtogthegfinancialgsystem?
Banksgaregonegofgthegmajorgfinancialgintermediaries.gTheygchannelgsavingsgfromgprivate
ginstitutionsgorgtheggeneralgpublicgtogotherginstitutionsgorgpeoplegwhogneedgagloan.gWell-
functioninggbanksgaregverygimportantgforgthegsavings-to-
loansgcyclegandgforgtheghousinggmarket.
8. CangyougdategtheglatestgfinancialgcrisisgingthegUnitedgStatesgorgingEurope?gAregtheregr
easonsgtogthinkgthatgthesegcrisesgmightghavegbeengrelated?gWhy?
TheglatestgfinancialgcrisisgingthegUnitedgStatesgandgEuropegoccurredging2007–
2009.gAtgthegbeginning,gitghitgmostlygthegU.S.gfinancialgsystem,gbutgitgthengquicklygmov
edgtogEurope,gsincegfinancialgmarketsgareghighlyginterconnected.gOnegspecificgwaygingw
hichgthesegmarketsgweregrelatedgisgthatgsomegfinancialgintermediariesgingEuropegheldgse
curitiesgbackedgbygmortgagesgoriginatedgingthegUnitedgStates,gandgwhengthesegsecuritie
sglostgtheirgagconsiderablegpartgofgtheirgvalue,gthegbalancegsheetgofgEuropeangfinancialgi
ntermediariesgwasgadverselygaffected.
9. HasgtheginflationgrategingthegUnitedgStatesgincreasedgorgdecreasedgingthegpastgfewgy
ears?gWhatgaboutginterestgrates?
Sinceg2015,ginflationghasgbeengaroundg2%,gwithgsomegbriefgdipsging2015gandg2020.gIng2
015,gtheginterestgrategongthree-
monthgTreasurygbillsgwasgneargzero,gandgitgthengrosegtogjustgoverg2%ging2019,gonlygtogfa
llgbackgneargtogzeroging2020.-
10. Ifghistorygrepeatsgitselfgandgwegseegagdeclinegingthegrategofgmoneyggrowth,gwhatgmightgy
ougexpectgtoghappengto
a. realgoutput?
b. theginflationgrate?
c. interestgrates?
ThegdatagingFiguresg3,g5,gandg6gsuggestgthatgrealgoutput,gtheginflationgrate,gandginterestgra
tesgwouldgallgfall.
11. Whenginterestgratesgdecrease,ghowgmightgbusinessesgandgconsumersgchangegtheirg
economicgbehavior?
