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!!!!!

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roblems
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ANSWERS TO QUESTIONS ma ma




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 av
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erage. The interest rate on Baa corporate bonds is higher on average than the othe
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r interest rates.
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2. What effect does high volatility of financial markets have on people's willingness t
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o spend?
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The high volatility of financial markets decreases people's willingness to spend, pri
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marily because it directly affects their wealth, and also because high volatility indic
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ates that there are considerable fluctuations in the prices of securities over a short ti
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me span. It increases insecurities about the future of an economy. Refer to Figure 2
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to see the extremely 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 o
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f money (predetermined by the characteristics of the bond) until its maturity date. A
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common stock, however, represents a share of ownership in the institution that has i
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ssued the stock. In addition to its definition, it is not the same to hold bonds or stoc
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k of a given corporation, since regulations state that stockholders are residual claima
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nts (i.e., the corporation has to pay all bondholders before paying stockholders).
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4. What is the main role of a financial intermediary? Name two financia
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l intermediaries.
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A financial intermediary is a firm or institution that channels savings into investme
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nts––
that is, it borrows funds from individuals who have saved and provides loans to thos
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e who need funds. Banks and mutual funds are two examples of such intermediarie
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s.

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
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coronavirus disease (Covid-
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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 volatilit
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y induced by the coronavirus pandemic, lockdowns, and other preventive measures
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taken by global economies to contain it have led to a severe contraction in the globa
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l economy.
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6. Can you think of a reason why people in general do not lend money to one another
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to buy 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
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mainformation problems. In particular, people do not know about the capacity of other p
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eople of 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
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maby acquiring information about potential borrowers and writing and enforcing contract
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s that 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 priv
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ate institutions or the general public to other institutions or people who need a loan.
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Well-functioning banks are very important for the savings-to- ma ma ma ma ma ma ma



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 ther
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e reasons 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
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moved to Europe, since financial markets are highly interconnected. One specific w
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ay in which these markets were related is that some financial intermediaries in Euro
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pe held securities backed by mortgages originated in the United States, and when t
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hese securities lost their a considerable part of their value, the balance sheet of Eur
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opean financial intermediaries was adversely affected.
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9. Has the inflation rate in the United States increased or decreased in the past fe
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w years? What about interest rates?
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Since 2015, inflation has been around 2%, with some brief dips in 2015 and 2020. In
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2015, 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
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fall 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 mig
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ht you expect to happen to
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a. real output? ma




b. the inflation rate? ma ma




c. interest rates? ma




The data in Figures 3, 5, and 6 suggest that real output, the inflation rate, and intere
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st rates would all fall.
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11. When interest rates decrease, how might businesses and consumers change thei
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r economic behavior?
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