SOLUTION MANUAL FOR
. .
Money,.Banking,.Financial.Markets.&.Institutions.2nd.Edition.for.Brandl.Michael
Chapter.2-24
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.be.diffe
rent?
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.accept.them.in.
exchange.for.goods.and.services..If.a.group.of.people.stop.using.currency.to.get.goods.and.services.but.instea
d.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.400.good
s?.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.search.cost..
Money.allows.us.to.reduce.the.number.of.stated.prices.we.need.
3. You.read.a.news.story.about.a.country.that.is.suffering.from.rapid,.ongoing.increases.in.the.cost.of.livin
g..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.wants.
ANS:. 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.of.changes.in.the.m
oney.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.under.cont
rol..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.int
o.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.is.not.
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.t
he.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.good.me
asurement.of.the.money.supply?
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.measurem
ent).increases.faster.than.the.growth.rate.of.the.economy,.then.economic.theory.suggests.that.inflation.sho
uld.occur..On.the.other.hand,.if.the.money.supply.(according.to.a.particular.measurement).increases.too.slo
wly.relative.to.the.growth.rate.of.the.economy,.then.economic.theory.suggests.that.this.will.result.in.a.recess
ion..When.the.measurement.of.the.money.supply.coincides.with.these.economic.predictions,.then.that.parti
cular.measurement.has.the.potential.to.be.a.“good”.measurement.of.the.money.supply..During.certain.perio
ds.of.time,.both.M1.and.M2.have.been.considered.to.be.“good”.measurements.of.the.money.supply..Howev
er,.there.have.also.been.periods.of.time.where.the.changes.in.M1.or.M2.did.not.coincide.with.economic.theo
ry.
3. Which.of.the.following.is.the.broadest.or.most.inclusive.measurement.of.the.money.supply?
a. M1
b. M2
c. M3
d. M0
ANS:. B
,2-4 .Section.Review
1. Each.person.might.have.a.different.time.preference..Explain.why.an.older.person.might.have.a.higher.or.lo
wer.time.preference.than.a.young.person.
ANS:.An.older.person.might.have.a.high.time.preference,.consumer.now.vs..in.the.future.. The.older.person.w
ill.place.higher.value.on.the.ability.to.consume.now.more.than.money.in.the.future.
2. What.is.the.future.value.of.$500.in.two.years.if.the.interest.rate.is.4%?.How.would.you.explain.this.to.some
one.who.has.no.training.in.economics?
ANS:.500(1.04)2.=.$540.80..For.someone.without.a.background.in.economics,.one.could.explain.that.money.i
nvested.today.will.grow.over.time..Thus,.in.order.to.have.$500.in.the.future,.today.you.would.only.need.to.inv
est.some.amount.that.is.less.than.$500..How.much.less.depends.on.the.return.on.your.investment.(the.intere
st.rate).
3. If.the.annual.interest.rate.is.2%,.what.is.the.quarterly.interest.rate?
a. 0.0204
b. 0.0166
c. 0.005
d. 0.001
ANS:. C
CHAPTER.3:.Bonds.and.Loanable.Funds
3-1 .Section.Review
1. Today,.shoppers.“clip.coupons”.before.they.go.shopping..Explain.how.these.modern.coupons.are.sim
ilar.and.dissimilar.to.the.“coupons”.referred.to.in.the.bond.market.
ANS:.Today,.though,.most.bonds.are.not.physical.printed.pieces.of.paper.with.coupons.that.must.be.clipped.o
ff.and.mailed.to.the.issuer.
2. The.fact.that.the.face.value.of.a.bond.does.not.change.over.the.life.of.the.bond.is.generally.consi
dered.a.benefit.to.the.borrower..Can.you.explain.why?
ANS:.If.the.market.conditions.change,.say.rates.drop,.the.face.value.will.not.change.
3. The.rate.of.interest.a.bond.pays.is.called.the.bond’s:
a. face.value.
b. coupon.rate.
c. bond.rating.
d. rating.rate.
, ANS:. B
3-2 .Section.Review
1. If.you.have.a.bond.with.a.face.value.of.$1,000.and.a.coupon.rate.of.2.25%,.but.the.market.interest.rate.f
or.such.bonds.is.2.5%,.will.your.bond.sell.at.par,.at.a.premium,.or.at.a.discount?.Explain.why.
ANS:.When.market.interest.rates.rise.relative.to.coupon.rates.on.existing.bonds,.the.price.of.these.existing.b
onds.decrease.below.face.value..This.means.that.this.bond.will.be.sold.at.a.discount,.since.the.market.price.is.
below.the.face.value.of.the.bond.
2. If.you.have.a.bond.with.a.face.value.of.$1,000.and.a.coupon.rate.of.2.5%,.but.the.market.interest.rate.f
or.such.bonds.is.2.25%,.will.your.bond.sell.at.par,.at.a.premium,.or.at.a.discount?.Explain.why.
ANS:.Premium.because.the.coupon.rate.is.less.than.the.market.rate.
3. If.a.three-
year.bond.with.a.$1,000.face.value.has.a.coupon.rate.of.3.5%,.and.the.current.market.interest.rate.is.2
%,.what.is.the.market.price.of.the.bond?
a. $956.75
b. $1,035.00
c. $1,043.30
d. $1,148.34
.ANS:. c
3-3 .Section.Review
1. You.read.in.the.financial.press.that.market.participants.expect.stock.prices.to.increase.dramatically.in.the.
near.future,.while.at.the.same.time.business.confidence.is.increasing..Explain.in.words.and.show.graphically.
what.will.happen.in.the.bond.market.if.the.first.change.is.larger.in.magnitude.than.the.second.
ANS:.Stocks.and.bonds.are.considered.substitutes,.the.return.on.holding.stocks.are.going.to.increase,.you.do
.not.want.to.hold.bonds.. Demand.for.bonds.will.fall,.relative.return.to.bonds.is.declining.
Business.confidence.is.increasing.so.firms.are.going.to.fund.more.projects.. They.will.need.to.borrow.more.m
oney,.or.sell.more.bonds.to.raise.those.funds.. The.supply.of.bonds.is.increasing.. Due.to.the.decrease.in.dema
nd.for.bonds.is.bigger.than.the.second,.we.can.conclude.equilibrium.price.will.fall.and.equilibrium.quantity.wi
ll.increase.
2. Stories.appear.in.the.financial.press.reporting.two.economic.developments:.Wealth.levels.in.the.Unite
d.States.are.increasing,.while.at.the.same.time.the.relative.riskiness.of.bonds.issued.by.American.corporati
ons.is.decreasing..Explain.in.words.what.will.happen.in.the.US.bond.market.because.of.these.two.events.
ANS:.Increasing.wealth.levels.cause.an.increase.in.the.demand.for.bonds.because.households.can.use.this.
wealth.not.only.to.increase.consumption.but.also.save..Some.portion.of.these.new.savings.will.find
its.way.into.the.bond.market.as.households.will.purchase.more.bonds.at.every.price..At.the.same.time,
if.default.risk.decreases,.savers.will.buy.more.bonds.as.they.are.considered.a.relatively.safer.asset..So,
. .
Money,.Banking,.Financial.Markets.&.Institutions.2nd.Edition.for.Brandl.Michael
Chapter.2-24
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.be.diffe
rent?
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.accept.them.in.
exchange.for.goods.and.services..If.a.group.of.people.stop.using.currency.to.get.goods.and.services.but.instea
d.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.400.good
s?.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.search.cost..
Money.allows.us.to.reduce.the.number.of.stated.prices.we.need.
3. You.read.a.news.story.about.a.country.that.is.suffering.from.rapid,.ongoing.increases.in.the.cost.of.livin
g..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.wants.
ANS:. 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.of.changes.in.the.m
oney.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.under.cont
rol..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.int
o.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.is.not.
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.t
he.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.good.me
asurement.of.the.money.supply?
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.measurem
ent).increases.faster.than.the.growth.rate.of.the.economy,.then.economic.theory.suggests.that.inflation.sho
uld.occur..On.the.other.hand,.if.the.money.supply.(according.to.a.particular.measurement).increases.too.slo
wly.relative.to.the.growth.rate.of.the.economy,.then.economic.theory.suggests.that.this.will.result.in.a.recess
ion..When.the.measurement.of.the.money.supply.coincides.with.these.economic.predictions,.then.that.parti
cular.measurement.has.the.potential.to.be.a.“good”.measurement.of.the.money.supply..During.certain.perio
ds.of.time,.both.M1.and.M2.have.been.considered.to.be.“good”.measurements.of.the.money.supply..Howev
er,.there.have.also.been.periods.of.time.where.the.changes.in.M1.or.M2.did.not.coincide.with.economic.theo
ry.
3. Which.of.the.following.is.the.broadest.or.most.inclusive.measurement.of.the.money.supply?
a. M1
b. M2
c. M3
d. M0
ANS:. B
,2-4 .Section.Review
1. Each.person.might.have.a.different.time.preference..Explain.why.an.older.person.might.have.a.higher.or.lo
wer.time.preference.than.a.young.person.
ANS:.An.older.person.might.have.a.high.time.preference,.consumer.now.vs..in.the.future.. The.older.person.w
ill.place.higher.value.on.the.ability.to.consume.now.more.than.money.in.the.future.
2. What.is.the.future.value.of.$500.in.two.years.if.the.interest.rate.is.4%?.How.would.you.explain.this.to.some
one.who.has.no.training.in.economics?
ANS:.500(1.04)2.=.$540.80..For.someone.without.a.background.in.economics,.one.could.explain.that.money.i
nvested.today.will.grow.over.time..Thus,.in.order.to.have.$500.in.the.future,.today.you.would.only.need.to.inv
est.some.amount.that.is.less.than.$500..How.much.less.depends.on.the.return.on.your.investment.(the.intere
st.rate).
3. If.the.annual.interest.rate.is.2%,.what.is.the.quarterly.interest.rate?
a. 0.0204
b. 0.0166
c. 0.005
d. 0.001
ANS:. C
CHAPTER.3:.Bonds.and.Loanable.Funds
3-1 .Section.Review
1. Today,.shoppers.“clip.coupons”.before.they.go.shopping..Explain.how.these.modern.coupons.are.sim
ilar.and.dissimilar.to.the.“coupons”.referred.to.in.the.bond.market.
ANS:.Today,.though,.most.bonds.are.not.physical.printed.pieces.of.paper.with.coupons.that.must.be.clipped.o
ff.and.mailed.to.the.issuer.
2. The.fact.that.the.face.value.of.a.bond.does.not.change.over.the.life.of.the.bond.is.generally.consi
dered.a.benefit.to.the.borrower..Can.you.explain.why?
ANS:.If.the.market.conditions.change,.say.rates.drop,.the.face.value.will.not.change.
3. The.rate.of.interest.a.bond.pays.is.called.the.bond’s:
a. face.value.
b. coupon.rate.
c. bond.rating.
d. rating.rate.
, ANS:. B
3-2 .Section.Review
1. If.you.have.a.bond.with.a.face.value.of.$1,000.and.a.coupon.rate.of.2.25%,.but.the.market.interest.rate.f
or.such.bonds.is.2.5%,.will.your.bond.sell.at.par,.at.a.premium,.or.at.a.discount?.Explain.why.
ANS:.When.market.interest.rates.rise.relative.to.coupon.rates.on.existing.bonds,.the.price.of.these.existing.b
onds.decrease.below.face.value..This.means.that.this.bond.will.be.sold.at.a.discount,.since.the.market.price.is.
below.the.face.value.of.the.bond.
2. If.you.have.a.bond.with.a.face.value.of.$1,000.and.a.coupon.rate.of.2.5%,.but.the.market.interest.rate.f
or.such.bonds.is.2.25%,.will.your.bond.sell.at.par,.at.a.premium,.or.at.a.discount?.Explain.why.
ANS:.Premium.because.the.coupon.rate.is.less.than.the.market.rate.
3. If.a.three-
year.bond.with.a.$1,000.face.value.has.a.coupon.rate.of.3.5%,.and.the.current.market.interest.rate.is.2
%,.what.is.the.market.price.of.the.bond?
a. $956.75
b. $1,035.00
c. $1,043.30
d. $1,148.34
.ANS:. c
3-3 .Section.Review
1. You.read.in.the.financial.press.that.market.participants.expect.stock.prices.to.increase.dramatically.in.the.
near.future,.while.at.the.same.time.business.confidence.is.increasing..Explain.in.words.and.show.graphically.
what.will.happen.in.the.bond.market.if.the.first.change.is.larger.in.magnitude.than.the.second.
ANS:.Stocks.and.bonds.are.considered.substitutes,.the.return.on.holding.stocks.are.going.to.increase,.you.do
.not.want.to.hold.bonds.. Demand.for.bonds.will.fall,.relative.return.to.bonds.is.declining.
Business.confidence.is.increasing.so.firms.are.going.to.fund.more.projects.. They.will.need.to.borrow.more.m
oney,.or.sell.more.bonds.to.raise.those.funds.. The.supply.of.bonds.is.increasing.. Due.to.the.decrease.in.dema
nd.for.bonds.is.bigger.than.the.second,.we.can.conclude.equilibrium.price.will.fall.and.equilibrium.quantity.wi
ll.increase.
2. Stories.appear.in.the.financial.press.reporting.two.economic.developments:.Wealth.levels.in.the.Unite
d.States.are.increasing,.while.at.the.same.time.the.relative.riskiness.of.bonds.issued.by.American.corporati
ons.is.decreasing..Explain.in.words.what.will.happen.in.the.US.bond.market.because.of.these.two.events.
ANS:.Increasing.wealth.levels.cause.an.increase.in.the.demand.for.bonds.because.households.can.use.this.
wealth.not.only.to.increase.consumption.but.also.save..Some.portion.of.these.new.savings.will.find
its.way.into.the.bond.market.as.households.will.purchase.more.bonds.at.every.price..At.the.same.time,
if.default.risk.decreases,.savers.will.buy.more.bonds.as.they.are.considered.a.relatively.safer.asset..So,
