Solution Manual for The Economics Of Money Banking And Financial Markets 13th Global Edition Frederic Mishkin

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Solution Manual for The Economics Of Money Banking And Financial Markets 13th Global Edition Frederic Mishkin-1. What is the typical relationship among interest rates on three-month Treasury bills, l... ong-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. [Show More]

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