SOLUTION MANUAL for Money, Banking, Financial
Markets & Institutions 2nd Edition
by Brandl Michael, All Chapters 1 - 24
,TABLE OF CONTENTS XK XK XK
Part I: MONEY AND ITS PRICES.
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1. Introduction and Overview.
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2. Money, Money Supply and Interest.
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3. Bonds, Loanable Funds & Interest Rates.
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4. Interest Rates in More Detail.
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Part II: MONEY AND OVERALL ECONOMY.
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5. Financial Markets through Time.
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6. Aggregate Supply & Aggregate Demand.
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7. Banks and Money.
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Part III: CENTRAL BANKS.
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8. Central Banks.
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9. Monetary Policy Tools.
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10. The Money Supply Process.
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11. Monetary Policy & Debates.
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Part IV: THE BANKING SYSTEM.
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12. Bank Management.
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13. Bank Risk Management & Performance.
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14. Banking Regulation.
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Part V: FINANCIAL MARKETS.
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15. Money Markets.
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16. Bond Markets.
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17. Stock Market & Efficiency.
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18. Mortgage Market.
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Part VI: GLOBAL FINANCIAL MARKETS.
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19. FX.
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20. Global Financial Architecture.
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Part VII: FINANCIAL INSTITUTIONS.
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21. Thrifts and Finance Companies.
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22. Insurance and Pensions.
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23. Mutual Funds.
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24. Investment Banks and Private Equity.
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, CHAPTER 2: Money, Money Supply, and Interest XK XK XK XK XK XK
2-1 Section Review XK
1. What is the difference between money and currency? When are they the same? Why might they bedifferent
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ANS: Money is anything generally accepted in exchange for goods & services. Currency is issued by a bank o
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r the government, but currency is not necessarily money. They are the same when they are accepted in exch
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ange for goods and services. Currencies can stop being money if people don’t acceptthem in exchange for go
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ods and services. If a group of people stop using currency to get goods and services but instead use bananas,
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then the bananas are the money.
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2. How many prices must a barter economy have if the economy has four goods? What if it has 400goods?
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Explain why having a money in the second case is beneficial.
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ANS: 4 goods = 6 prices; 400 goods = 79,800 prices. Money allows us to specialize and reduce our searchcost.
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Money allows us to reduce the number of stated prices we need.
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3. You read a news story about a country that is suffering from rapid, ongoing increases in the cost ofliving.
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Which characteristic of money is being directly negatively impacted in that economy?
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a. Unit of account XK XK
b. Medium of exchange XK XK
c. Store of value XK XK
d. Double coincidence of wantsA XK XK XK K
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NS: C XK
2-2 Section Review XK
1. Bobby is confused. He states: “Since prisoners are not allowed to smoke in prisons any longer,
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Radford’s examples of cigarettes in POW camps no longer applies.” How would you explain to Bobbyhow R
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adford’s story demonstrates the concepts of the criteria of money, as well as the importance ofchanges in the
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money supply?
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ANS: Any asset that is able to be standardized, divisible, durable and in demand could be currency, as long as
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it is a medium of exchange, is a unit of account and has store of value. Cigarettes were money.
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, 2. Proponents of the Gold Standard, or using gold as money, often argue that it will keep inflation undercontro
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l. How does the experience of Europe in the sixteenth century raise doubts about that claim?
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ANS: If people start to hoard gold or silver, there may not be enough money, and an economy couldslide in
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to recession. If gold or silver increases too rapidly the economy could suffer inflation.
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3. Ricardo and Friedman agree that if the money supply increases “too quickly” the following happens:
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a. The rate of inflation decreases.
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b. The rate of real economic growth increases.
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c. The rate of inflation increases.
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d. The level of employment decreases.
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ANS: C XK
2-3 Section Review XK
1. A critic of money economics once stated, “if you cannot measure the money supply accurately, it isnot wo
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rth discussing at all.” How would you refute this statement?
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ANS: Due to changes in financial markets, financial innovation and changes in the way banks operate,led to t
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he decline in the usefulness of M2 as a monetary aggregate.
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2. Economists are searching for a “good” measurement of the money supply. What constitutes a goodmeasure
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ment of the money supply?
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ANS: To economists, a “good” measurement of the money supply is one that conforms to economic theories re
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garding inflation and the economy. For example, if the money supply (according to a particular measurement) i
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ncreases faster than the growth rate of the economy, then economic theory suggests that inflation should occur.
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On the other hand, if the money supply (according to a particular measurement) increases too slowly relative
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to the growth rate of the economy, then economic theory suggests that this will result in a recession. When th
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e measurement of the money supply coincides withthese economic predictions, then that particular measuremen
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t has the potential to be a “good” measurement of the money supply. During certain periods of time, both M1
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and M2 have been
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considered to be “good” measurements of the money supply. However, there have also been periods oftime whe
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re the changes in M1 or M2 did not coincide with economic theory.
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3. Which of the following is the broadest or most inclusive measurement of the money supply?
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a. M1
b. M2
c. M3
d. M0
ANS: B X K
