Instructor’s Resource Manual for
v v v
The Economics of Money, Banki
v v v v
ng, and Financial Markets
v v v
The Economics of
v v v
Money, Banking, and
v v v
Financial Markets v
Thirteenth Edition, Global Edition
v v v
Frederic S. Mishkin
v v
NewvYork,vNY
, Answers
to End-of- v
Chapter Questions and P v v v
roblems
Chapterv1
ANSWERSvTOvQUESTIONS
1. vWhatvisvthevtypicalvrelationshipvamongvinterestvratesvonvthree-
monthvTreasuryvbills,vlong-termvTreasuryvbonds,vandvBaavcorporatevbonds?
Thevinterestvratevonvthree-
monthvTreasuryvbillsvfluctuatesvmorevthanvthevothervinterestvratesvandvisvlowervonvaver
age.vThevinterestvratevonvBaavcorporatevbondsvisvhighervonvaveragevthanvthevothervinte
restvrates.
2. Whatveffectvdoesvhighvvolatilityvofvfinancialvmarketsvhavevonvpeople'svwillingnessvtovs
pend?
Thevhighvvolatilityvofvfinancialvmarketsvdecreasesvpeople'svwillingnessvtovspend,vprima
rilyvbecausevitvdirectlyvaffectsvtheirvwealth,vandvalsovbecausevhighvvolatilityvindicatesvt
hatvtherevarevconsiderablevfluctuationsvinvthevpricesvofvsecuritiesvovervavshortvtimevspan
.vItvincreasesvinsecuritiesvaboutvthevfuturevofvanveconomy.vRefervtovFigurev2vtovseevtheve
xtremelyvvolatilevnaturevofvstockvpricesvbetweenv1950vandv2020.
3. Explainvthevmainvdifferencevbetweenvavbondvandvavcommonvstock.
Avbondvisvavdebtvinstrument,vwhichventitlesvthevownervtovreceivevperiodicvamountsvofvm
oneyv(predeterminedvbyvthevcharacteristicsvofvthevbond)vuntilvitsvmaturityvdate.vAvcomm
onvstock,vhowever,vrepresentsvavsharevofvownershipvinvthevinstitutionvthatvhasvissuedvthev
stock.vInvadditionvtovitsvdefinition,vitvisvnotvthevsamevtovholdvbondsvorvstockvofvavgivenvco
rporation,vsincevregulationsvstatevthatvstockholdersvarevresidualvclaimantsv(i.e.,vthevcorpo
rationvhasvtovpayvallvbondholdersvbeforevpayingvstockholders).
4. Whatvisvthevmainvrolevofvavfinancialvintermediary?vNamevtwovfinancialvi
ntermediaries.
Avfinancialvintermediaryvisvavfirmvorvinstitutionvthatvchannelsvsavingsvintovinvestments
––
thatvis,vitvborrowsvfundsvfromvindividualsvwhovhavevsavedvandvprovidesvloansvtovthosev
whovneedvfunds.vBanksvandvmutualvfundsvarevtwovexamplesvofvsuchvintermediaries.
5. Whatvwasvthevmainvcausevofvthevglobalvrecessionvinv2020?
Thevrecessionvinv2020,vsometimesvreferredvtovasvthevCOVID-
,19vRecession,vwasvmainlyvcausedvbyvthevglobalvpandemicvcausedvbyvthevinfectiousvco
ronavirusvdiseasev(Covid-
19).vInvMarchv2020,vthevstockvmarketvfellvbyv25%vinvavsinglevmonth.
, AccordingvtovthevWorldvBank’svJunev2020vGlobalvEconomicvProspects,vthevvolatilityvi
nducedvbyvthevcoronavirusvpandemic,vlockdowns,vandvothervpreventivevmeasuresvtake
nvbyvglobalveconomiesvtovcontainvitvhavevledvtovavseverevcontractionvinvthevglobalvecono
my.
6. Canvyouvthinkvofvavreasonvwhyvpeoplevinvgeneralvdovnotvlendvmoneyvtovonevanothervtovbu
yvavhousevorvavcar?vHowvwouldvyourvanswervexplainvthevexistencevofvbanks?
Invgeneral,vpeoplevdovnotvlendvlargevamountsvofvmoneyvtovonevanothervbecausevofvseveralvi
nformationvproblems.vInvparticular,vpeoplevdovnotvknowvaboutvthevcapacityvofvothervpeop
levofvrepayingvtheirvdebts,vorvtheveffortvtheyvwillvprovidevtovrepayvtheirvdebts.
Financialvintermediaries,vinvparticularvcommercialvbanks,vtendvtovsolvevthesevproblemsv
byvacquiringvinformationvaboutvpotentialvborrowersvandvwritingvandvenforcingvcontractsvt
hatvencouragevlendersvtovrepayvtheirvdebtvand/orvmaintainvthevvaluevofvthevcollateral.
7. Whyvarevbanksvimportantvtovthevfinancialvsystem?
Banksvarevonevofvthevmajorvfinancialvintermediaries.vTheyvchannelvsavingsvfromvprivate
vinstitutionsvorvthevgeneralvpublicvtovothervinstitutionsvorvpeoplevwhovneed vavloan.vWell-
functioningvbanksvarevveryvimportantvforvthevsavings-to-
loansvcyclevandvforvthevhousingvmarket.
8. CanvyouvdatevthevlatestvfinancialvcrisisvinvthevUnitedvStatesvorvinvEurope?vArevtherevre
asonsvtovthinkvthatvthesevcrisesvmightvhavevbeenvrelated?vWhy?
ThevlatestvfinancialvcrisisvinvthevUnitedvStatesvandvEuropevoccurredvinv2007–
2009.vAtvthevbeginning,vitvhitvmostlyvthevU.S.vfinancialvsystem,vbutvitvthenvquicklyvmov
edvtovEurope,vsincevfinancialvmarketsvarevhighlyvinterconnected.vOnevspecificvwayvinvw
hichvthesevmarketsvwerevrelatedvisvthatvsomevfinancialvintermediariesvinvEuropevheldvse
curitiesvbackedvbyvmortgagesvoriginatedvinvthevUnitedvStates,vandvwhenvthesevsecuritie
svlostvtheirvavconsiderablevpartvofvtheirvvalue,vthevbalancevsheetvofvEuropeanvfinancialvi
ntermediariesvwasvadverselyvaffected.
9. HasvthevinflationvratevinvthevUnitedvStatesvincreasedvorvdecreasedvinvthevpastvfewvye
ars?vWhatvaboutvinterestvrates?
Sincev2015,vinflationvhasvbeenvaroundv2%,vwithvsomevbriefvdipsvinv2015vandv2020.vInv2
015,vthevinterestvratevonvthree-
monthvTreasuryvbillsvwasvnearvzero,vandvitvthenvrosevtovjustvoverv2%vinv2019,vonlyvtovfa
llvbackvnearvtovzerovinv2020.-
10. Ifvhistoryvrepeatsvitselfvandvwevseevavdeclinevinvthevratevofvmoneyvgrowth,vwhatvmightvyo
uvexpectvtovhappenvto
a. realvoutput?
b. thevinflationvrate?
c. interestvrates?
ThevdatavinvFiguresv3,v5,vandv6vsuggestvthatvrealvoutput,vthevinflationvrate,vandvinterestvra
tesvwouldvallvfall.
11. Whenvinterestvratesvdecrease,vhowvmightvbusinessesvandvconsumersvchangevtheirve
conomicvbehavior?
v v v
The Economics of Money, Banki
v v v v
ng, and Financial Markets
v v v
The Economics of
v v v
Money, Banking, and
v v v
Financial Markets v
Thirteenth Edition, Global Edition
v v v
Frederic S. Mishkin
v v
NewvYork,vNY
, Answers
to End-of- v
Chapter Questions and P v v v
roblems
Chapterv1
ANSWERSvTOvQUESTIONS
1. vWhatvisvthevtypicalvrelationshipvamongvinterestvratesvonvthree-
monthvTreasuryvbills,vlong-termvTreasuryvbonds,vandvBaavcorporatevbonds?
Thevinterestvratevonvthree-
monthvTreasuryvbillsvfluctuatesvmorevthanvthevothervinterestvratesvandvisvlowervonvaver
age.vThevinterestvratevonvBaavcorporatevbondsvisvhighervonvaveragevthanvthevothervinte
restvrates.
2. Whatveffectvdoesvhighvvolatilityvofvfinancialvmarketsvhavevonvpeople'svwillingnessvtovs
pend?
Thevhighvvolatilityvofvfinancialvmarketsvdecreasesvpeople'svwillingnessvtovspend,vprima
rilyvbecausevitvdirectlyvaffectsvtheirvwealth,vandvalsovbecausevhighvvolatilityvindicatesvt
hatvtherevarevconsiderablevfluctuationsvinvthevpricesvofvsecuritiesvovervavshortvtimevspan
.vItvincreasesvinsecuritiesvaboutvthevfuturevofvanveconomy.vRefervtovFigurev2vtovseevtheve
xtremelyvvolatilevnaturevofvstockvpricesvbetweenv1950vandv2020.
3. Explainvthevmainvdifferencevbetweenvavbondvandvavcommonvstock.
Avbondvisvavdebtvinstrument,vwhichventitlesvthevownervtovreceivevperiodicvamountsvofvm
oneyv(predeterminedvbyvthevcharacteristicsvofvthevbond)vuntilvitsvmaturityvdate.vAvcomm
onvstock,vhowever,vrepresentsvavsharevofvownershipvinvthevinstitutionvthatvhasvissuedvthev
stock.vInvadditionvtovitsvdefinition,vitvisvnotvthevsamevtovholdvbondsvorvstockvofvavgivenvco
rporation,vsincevregulationsvstatevthatvstockholdersvarevresidualvclaimantsv(i.e.,vthevcorpo
rationvhasvtovpayvallvbondholdersvbeforevpayingvstockholders).
4. Whatvisvthevmainvrolevofvavfinancialvintermediary?vNamevtwovfinancialvi
ntermediaries.
Avfinancialvintermediaryvisvavfirmvorvinstitutionvthatvchannelsvsavingsvintovinvestments
––
thatvis,vitvborrowsvfundsvfromvindividualsvwhovhavevsavedvandvprovidesvloansvtovthosev
whovneedvfunds.vBanksvandvmutualvfundsvarevtwovexamplesvofvsuchvintermediaries.
5. Whatvwasvthevmainvcausevofvthevglobalvrecessionvinv2020?
Thevrecessionvinv2020,vsometimesvreferredvtovasvthevCOVID-
,19vRecession,vwasvmainlyvcausedvbyvthevglobalvpandemicvcausedvbyvthevinfectiousvco
ronavirusvdiseasev(Covid-
19).vInvMarchv2020,vthevstockvmarketvfellvbyv25%vinvavsinglevmonth.
, AccordingvtovthevWorldvBank’svJunev2020vGlobalvEconomicvProspects,vthevvolatilityvi
nducedvbyvthevcoronavirusvpandemic,vlockdowns,vandvothervpreventivevmeasuresvtake
nvbyvglobalveconomiesvtovcontainvitvhavevledvtovavseverevcontractionvinvthevglobalvecono
my.
6. Canvyouvthinkvofvavreasonvwhyvpeoplevinvgeneralvdovnotvlendvmoneyvtovonevanothervtovbu
yvavhousevorvavcar?vHowvwouldvyourvanswervexplainvthevexistencevofvbanks?
Invgeneral,vpeoplevdovnotvlendvlargevamountsvofvmoneyvtovonevanothervbecausevofvseveralvi
nformationvproblems.vInvparticular,vpeoplevdovnotvknowvaboutvthevcapacityvofvothervpeop
levofvrepayingvtheirvdebts,vorvtheveffortvtheyvwillvprovidevtovrepayvtheirvdebts.
Financialvintermediaries,vinvparticularvcommercialvbanks,vtendvtovsolvevthesevproblemsv
byvacquiringvinformationvaboutvpotentialvborrowersvandvwritingvandvenforcingvcontractsvt
hatvencouragevlendersvtovrepayvtheirvdebtvand/orvmaintainvthevvaluevofvthevcollateral.
7. Whyvarevbanksvimportantvtovthevfinancialvsystem?
Banksvarevonevofvthevmajorvfinancialvintermediaries.vTheyvchannelvsavingsvfromvprivate
vinstitutionsvorvthevgeneralvpublicvtovothervinstitutionsvorvpeoplevwhovneed vavloan.vWell-
functioningvbanksvarevveryvimportantvforvthevsavings-to-
loansvcyclevandvforvthevhousingvmarket.
8. CanvyouvdatevthevlatestvfinancialvcrisisvinvthevUnitedvStatesvorvinvEurope?vArevtherevre
asonsvtovthinkvthatvthesevcrisesvmightvhavevbeenvrelated?vWhy?
ThevlatestvfinancialvcrisisvinvthevUnitedvStatesvandvEuropevoccurredvinv2007–
2009.vAtvthevbeginning,vitvhitvmostlyvthevU.S.vfinancialvsystem,vbutvitvthenvquicklyvmov
edvtovEurope,vsincevfinancialvmarketsvarevhighlyvinterconnected.vOnevspecificvwayvinvw
hichvthesevmarketsvwerevrelatedvisvthatvsomevfinancialvintermediariesvinvEuropevheldvse
curitiesvbackedvbyvmortgagesvoriginatedvinvthevUnitedvStates,vandvwhenvthesevsecuritie
svlostvtheirvavconsiderablevpartvofvtheirvvalue,vthevbalancevsheetvofvEuropeanvfinancialvi
ntermediariesvwasvadverselyvaffected.
9. HasvthevinflationvratevinvthevUnitedvStatesvincreasedvorvdecreasedvinvthevpastvfewvye
ars?vWhatvaboutvinterestvrates?
Sincev2015,vinflationvhasvbeenvaroundv2%,vwithvsomevbriefvdipsvinv2015vandv2020.vInv2
015,vthevinterestvratevonvthree-
monthvTreasuryvbillsvwasvnearvzero,vandvitvthenvrosevtovjustvoverv2%vinv2019,vonlyvtovfa
llvbackvnearvtovzerovinv2020.-
10. Ifvhistoryvrepeatsvitselfvandvwevseevavdeclinevinvthevratevofvmoneyvgrowth,vwhatvmightvyo
uvexpectvtovhappenvto
a. realvoutput?
b. thevinflationvrate?
c. interestvrates?
ThevdatavinvFiguresv3,v5,vandv6vsuggestvthatvrealvoutput,vthevinflationvrate,vandvinterestvra
tesvwouldvallvfall.
11. Whenvinterestvratesvdecrease,vhowvmightvbusinessesvandvconsumersvchangevtheirve
conomicvbehavior?
