ECONOMICS OF MONEY BANKING AND FINANCIAL
MARKETS
13TH GLOBAL EDITION MISHKIN (CHAPTER 1-19)
SOLỤTION MANỤAL
, Tables of Contents
PART I: Introduction
1. Why Study Money, Banking, and Financial Markets?
2. An Overview of the Financial System
3. What Is Money?
PART II: Financial Markets
4. The Meaning of Interest Rates
5. The Behavior of Interest Rates
6. The Risk and Term Structure of Interest Rates
7. The Stock Market, the Theory of Rational Expectations, and the Efficient Market Hypothesis
PART III: Financial Institutions
8. An Economic Analysis of Financial Structure
9. Banking and the Management of Financial Institutions
10. Economic Analysis of Financial Regulation
11. Banking Industry: Structure and Competition
12. Financial Crises in Advanced Economies
13. Financial Crises in Emerging Market Economies
PART IV: Central Banking And The Conduct Of Monetary Policy
14. Central Banks
15. The Money Supply Process
16. Tools of Monetary Policy
17. The Conduct of Monetary Policy: Strategy and Tactics
PART V: International Finance and Monetary Policy
18. The Foreign Exchange Market
19. The International Financial System
, Answers
to End-of-Chapter Questions and Problems
Chapter 1
ANSWERS TO QUESTIONS
1. What is the typical relationship among interest rates on three-month Treasury bills,
long-term Treasury bonds, and Baa corporate bonds?
The interest rate on three-month Treasury bills fluctuates more than the other interest
rates and is lower on average. The interest rate on Baa corporate bonds is higher on
average than the other interest rates.
2. What effect does high volatility of financial markets have on people's willingness to
spend?
The high volatility of financial markets decreases people's willingness to spend, primarily
because it directly affects their wealth, and also because high volatility indicates that
there are considerable fluctuations in the prices of securities over a short time span. It
increases insecurities about the future of an economy. Refer to Figure 2 to see the
extremely volatile nature of stock prices between 1950 and 2020.
3. Explain the main difference between a bond and a common stock.
A bond is a debt instrument, which entitles the owner to receive periodic amounts of
money (predetermined by the characteristics of the bond) until its maturity date. A
common stock, however, represents a share of ownership in the institution that has issued
the stock. In addition to its definition, it is not the same to hold bonds or stock of a given
corporation, since regulations state that stockholders are residual claimants (i.e., the
corporation has to pay all bondholders before paying stockholders).
4. What is the main role of a financial intermediary? Name two financial
intermediaries.
A financial intermediary is a firm or institution that channels savings into investments––
that is, it borrows funds from individuals who have saved and provides loans to those who
need funds. Banks and mutual funds are two examples of such intermediaries.
5. What was the main cause of the global recession in 2020?
The recession in 2020, sometimes referred to as the COVID-19 Recession, was mainly
caused by the global pandemic caused by the infectious coronavirus disease (Covid-
19). In March 2020, the stock market fell by 25% in a single month.
, According to the World Bank’s June 2020 Global Economic Prospects, the volatility induced
by the coronavirus pandemic, lockdowns, and other preventive measures taken by global
economies to contain it have led to a severe contraction in the global economy.
6. Can you think of a reason why people in general do not lend money to one another to buy
a house or a car? How would your answer explain the existence of banks?
In general, people do not lend large amounts of money to one another because of several
information problems. In particular, people do not know about the capacity of other people
of repaying their debts, or the effort they will provide to repay their debts.
Financial intermediaries, in particular commercial banks, tend to solve these problems by
acquiring information about potential borrowers and writing and enforcing contracts that
encourage lenders to repay their debt and/or maintain the value of the collateral.
7. Why are banks important to the financial system?
Banks are one of the major financial intermediaries. They channel savings from private
institutions or the general public to other institutions or people who need a loan. Well-
functioning banks are very important for the savings-to-loans cycle and for the housing
market.
8. Can you date the latest financial crisis in the United States or in Europe? Are there
reasons to think that these crises might have been related? Why?
The latest financial crisis in the United States and Europe occurred in 2007–2009. At the
beginning, it hit mostly the U.S. financial system, but it then quickly moved to Europe,
since financial markets are highly interconnected. One specific way in which these
markets were related is that some financial intermediaries in Europe held securities
backed by mortgages originated in the United States, and when these securities lost their
a considerable part of their value, the balance sheet of European financial intermediaries
was adversely affected.
9. Has the inflation rate in the United States increased or decreased in the past few
years? What about interest rates?
Since 2015, inflation has been around 2%, with some brief dips in 2015 and 2020. In
2015, the interest rate on three-month Treasury bills was near zero, and it then rose to
just over 2% in 2019, only to fall back near to zero in 2020.-
10. If history repeats itself and we see a decline in the rate of money growth, what might you
expect to happen to
a. real output?
b. the inflation rate?
c. interest rates?
The data in Figures 3, 5, and 6 suggest that real output, the inflation rate, and interest
rates would all fall.
11. When interest rates decrease, how might businesses and consumers change their
economic behavior?
MARKETS
13TH GLOBAL EDITION MISHKIN (CHAPTER 1-19)
SOLỤTION MANỤAL
, Tables of Contents
PART I: Introduction
1. Why Study Money, Banking, and Financial Markets?
2. An Overview of the Financial System
3. What Is Money?
PART II: Financial Markets
4. The Meaning of Interest Rates
5. The Behavior of Interest Rates
6. The Risk and Term Structure of Interest Rates
7. The Stock Market, the Theory of Rational Expectations, and the Efficient Market Hypothesis
PART III: Financial Institutions
8. An Economic Analysis of Financial Structure
9. Banking and the Management of Financial Institutions
10. Economic Analysis of Financial Regulation
11. Banking Industry: Structure and Competition
12. Financial Crises in Advanced Economies
13. Financial Crises in Emerging Market Economies
PART IV: Central Banking And The Conduct Of Monetary Policy
14. Central Banks
15. The Money Supply Process
16. Tools of Monetary Policy
17. The Conduct of Monetary Policy: Strategy and Tactics
PART V: International Finance and Monetary Policy
18. The Foreign Exchange Market
19. The International Financial System
, Answers
to End-of-Chapter Questions and Problems
Chapter 1
ANSWERS TO QUESTIONS
1. What is the typical relationship among interest rates on three-month Treasury bills,
long-term Treasury bonds, and Baa corporate bonds?
The interest rate on three-month Treasury bills fluctuates more than the other interest
rates and is lower on average. The interest rate on Baa corporate bonds is higher on
average than the other interest rates.
2. What effect does high volatility of financial markets have on people's willingness to
spend?
The high volatility of financial markets decreases people's willingness to spend, primarily
because it directly affects their wealth, and also because high volatility indicates that
there are considerable fluctuations in the prices of securities over a short time span. It
increases insecurities about the future of an economy. Refer to Figure 2 to see the
extremely volatile nature of stock prices between 1950 and 2020.
3. Explain the main difference between a bond and a common stock.
A bond is a debt instrument, which entitles the owner to receive periodic amounts of
money (predetermined by the characteristics of the bond) until its maturity date. A
common stock, however, represents a share of ownership in the institution that has issued
the stock. In addition to its definition, it is not the same to hold bonds or stock of a given
corporation, since regulations state that stockholders are residual claimants (i.e., the
corporation has to pay all bondholders before paying stockholders).
4. What is the main role of a financial intermediary? Name two financial
intermediaries.
A financial intermediary is a firm or institution that channels savings into investments––
that is, it borrows funds from individuals who have saved and provides loans to those who
need funds. Banks and mutual funds are two examples of such intermediaries.
5. What was the main cause of the global recession in 2020?
The recession in 2020, sometimes referred to as the COVID-19 Recession, was mainly
caused by the global pandemic caused by the infectious coronavirus disease (Covid-
19). In March 2020, the stock market fell by 25% in a single month.
, According to the World Bank’s June 2020 Global Economic Prospects, the volatility induced
by the coronavirus pandemic, lockdowns, and other preventive measures taken by global
economies to contain it have led to a severe contraction in the global economy.
6. Can you think of a reason why people in general do not lend money to one another to buy
a house or a car? How would your answer explain the existence of banks?
In general, people do not lend large amounts of money to one another because of several
information problems. In particular, people do not know about the capacity of other people
of repaying their debts, or the effort they will provide to repay their debts.
Financial intermediaries, in particular commercial banks, tend to solve these problems by
acquiring information about potential borrowers and writing and enforcing contracts that
encourage lenders to repay their debt and/or maintain the value of the collateral.
7. Why are banks important to the financial system?
Banks are one of the major financial intermediaries. They channel savings from private
institutions or the general public to other institutions or people who need a loan. Well-
functioning banks are very important for the savings-to-loans cycle and for the housing
market.
8. Can you date the latest financial crisis in the United States or in Europe? Are there
reasons to think that these crises might have been related? Why?
The latest financial crisis in the United States and Europe occurred in 2007–2009. At the
beginning, it hit mostly the U.S. financial system, but it then quickly moved to Europe,
since financial markets are highly interconnected. One specific way in which these
markets were related is that some financial intermediaries in Europe held securities
backed by mortgages originated in the United States, and when these securities lost their
a considerable part of their value, the balance sheet of European financial intermediaries
was adversely affected.
9. Has the inflation rate in the United States increased or decreased in the past few
years? What about interest rates?
Since 2015, inflation has been around 2%, with some brief dips in 2015 and 2020. In
2015, the interest rate on three-month Treasury bills was near zero, and it then rose to
just over 2% in 2019, only to fall back near to zero in 2020.-
10. If history repeats itself and we see a decline in the rate of money growth, what might you
expect to happen to
a. real output?
b. the inflation rate?
c. interest rates?
The data in Figures 3, 5, and 6 suggest that real output, the inflation rate, and interest
rates would all fall.
11. When interest rates decrease, how might businesses and consumers change their
economic behavior?
