Mishkin The Economics of Money Banking and Financial Markets Eighth Edition.docx
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Mishkin The Economics of Money Banking and Financial Markets Eighth Edition.docx
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MishkinTheEconomicsofMoneyBankingandFinancialMarketsEighthEdition
PartThree
Answers
toEnd-of-Chapter
Problems
NotAnswered
inTextbook
Chapter1
WhyStudyMoney,Banking,andFinancialMarkets?
7.Thebasicactivityofbanksistoacceptdepositsandmakeloans.
9.Theinterestrateonthree-monthTreasurybillsfluctuatesmorethantheotherinterestratesandisloweronaverage.TheinterestrateonBaacorporatebondsishigheronaveragethantheotherinterestrates.
11.Higherstockpricesmeansthatconsumers’wealthishigherandsotheywillbemorelikelytoincreasetheirspending.
13.ItmakesBritishgoodsmoreexpensiverelativetoAmericangoods.ThusAmericanbusinesseswillfinditeasiertoselltheirgoodsintheUnitedStatesandabroadandthedemandfortheirproductswillrise.
15.Whenthedollarincreasesinvalue,foreigngoodsbecomelessexpensiverelativetoAmericangoods;thusyouaremorelikelytobuyFrenchmadejeansthanAmericanmadejeans.TheresultingdropindemandforAmericanmadejeansbecauseofthestrongdollarhurtsAmericanjeansmanufacturers.Ontheotherhand,theAmericancompanythatimportsjeansintotheUnitedStatesnowfindsthatthedemandforitsproducthasrisen,soitisbetteroffwhenthedollarisstrong.
Chapter2
AnOverviewoftheFinancialSystem
2.Yes,Ishouldtakeouttheloan,becauseIwillbebetteroffasaresultofdoingso.Myinterestpaymentwillbe$4,500(90%of$5,000),butasaresult,Iwillearnanadditional$10,000,soIwillbeaheadofthegameby$5,500.SinceLarry’sloansharkingbusinesscanmakesomepeoplebetteroff,asinthisexample,loansharkingmayhavesocialbenefits.(Oneargumentagainstlegalizingloansharking,however,isthatitisfrequentlyaviolentactivity.)
4.TheprincipaldebtinstrumentsusedwereforeignbondswhichweresoldinBritainanddenominatedinpounds.TheBritishgainedbecausetheywereabletoearnhigherinterestratesasaresultoflendingtoAmericans,whiletheAmericansgainedbecausetheynowhadaccesstocapitaltostartupprofitablebusinessessuchasrailroads.
6.Youwouldratherholdbonds,becausebondholdersarepaidoffbeforeequityholders,whoaretheresidualclaimants.
10.Theymightnotworkhardenoughwhileyouarenotlookingormaystealorcommitfraud.
12.True.Iftherearenoinformationortransactionscosts,peoplecouldmakeloanstoeachotheratnocostandwouldthushavenoneedforfinancialintermediaries.
14.Arankingfrommostliquidtoleastliquidis(a),(b),(c),and(d).Therankingissimilarforthemostsafetotheleastsafe.
Chapter3
WhatisMoney?
1.(b)
3.Cavemendidnotneedmoney.Intheirprimitiveeconomy,theydidnotspecializeinproducingonetypeofgoodandtheyhadlittleneedtotradewithothercavemen.
5.Wineismoredifficulttotransportthangoldandisalsomoreperishable.Goldisthusabetterstoreofvaluethanwineandalsoleadstolowertransactionscost.Itisthereforeabettercandidateforuseasmoney.
7.Notnecessarily.Checkshavetheadvantageinthattheyprovideyouwithreceipts,areeasiertokeeptrackof,andmaymakeitharderforsomeonetostealmoneyoutofyouraccount.Theseadvantagesofchecksmayexplainwhythemovementtowardachecklesssocietyhasbeenverygradual.
8.Therankingfrommostliquidtoleastliquidis:
(a),(c),(e),(f),(b),and(d).
10.BecauseoftherapidinflationinBrazil,thedomesticcurrency,thereal,isapoorstoreofvalue.Thusmanypeoplewouldratherholddollars,whichareabetterstoreofvalue,andusethemintheirdailyshopping.
14.(a)M1andM2,(b)M2,(c)M2,(d)M1andM2.
Chapter4
UnderstandingInterestRates
2.No,becausethepresentdiscountedvalueofthesepaymentsisnecessarilylessthan$10millionaslongastheinterestrateisgreaterthanzero.
4.Theyieldtomaturityislessthan10percent.Onlyiftheinterestratewaslessthan10percentwouldthepresentvalueofthepaymentsaddupto$4,000,whichismorethanthe$3,000presentvalueinthepreviousproblem.
6.25%=($1,000–$800)/$800=$200/$800=0.25.
8.Iftheinterestratewere12percent,thepresentdiscountedvalueofthepaymentsonthegovernmentloanarenecessarilylessthanthe$1,000loanamountbecausetheydonotstartfortwoyears.Thustheyieldtomaturitymustbelowerthan12percentinorderforthepresentdiscountedvalueofthesepaymentstoaddupto$1,000.
10.Thecurrentyieldwillbeagoodapproximationtotheyieldtomaturitywheneverthebondpriceisveryclosetoparorwhenthematurityofthebondisovertenyears.
12.Youwouldratherbeholdinglongtermbondsbecausetheirpricewouldincreasemorethanthepriceoftheshorttermbonds,givingthemahigherreturn.
14.Peoplearemorelikelytobuyhousesbecausetherealinterestratewhenpur
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