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Solution Manual for The Economics of Money, Banking and Financial Markets, 12th Edition

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    The Economics of Money, Banking, and Financial Markets Twelfth Edition Frederic S. Mishkin Resource Manual for The Economics of Money, Banking, and Financial Markets Rick Mishkin

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    Mishkin • The Economics of Money, Banking, and Financial Markets , Twelfth Edition 4  Outline for General Money and Banking Course Core Chapters Chapter No. Chapter Title 1 Why Study Money, Banking, and Financial Markets? 2 An Overview of the Financial System 3 What Is Money? 4 Understanding Interest Rates 5 The Behavior of Interest Rates 9 Banking and the Management of Financial Institutions 10 Economic Analysis of Financial Regulation 11 Banking Industry: Structure and Competition 12 Financial Crises 13 Central Banks and the Federal Reserve System 15 Tools of Monetary Policy 16 The Conduct of Monetary Policy: Strategy and Tactics 22 Aggregate Demand and Supply Analysis 23 Monetary Policy Theory For a one-semester course, cover any five of the following optional chapters: Chapter No. Chapter Title 6 The Risk and Term Structure of Interest Rates 7 The Stock Market, the Theory of Rational Expectations, and the Efficient Market Hypothesis 8 An Economic Analysis of Financial Structure 14 The Money Supply Process 17 The Foreign Exchange Market 18 The International Financial System 19 Quantity Theory, Inflation, and the Demand for Money 20 The IS Curve 21 The Monetary Policy and Aggregate Demand Curves 24 The Role of Expectations in Monetary Policy 25 Transmission Mechanisms of Monetary Policy A one-quarter course would probably only include one or two of the optional chapters unless some of the chapters on central banking and the conduct of monetary policy (Chapters 13, 15, and 16) were deleted.

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    Mishkin • The Economics of Money, Banking, and Financial Markets , Twelfth Edition 5  Outline for General Money and Banking Course with an International Emphasis Core Chapters Chapter No. Chapter Title 1 Why Study Money, Banking, and Financial Markets? 2 An Overview of the Financial System 3 What Is Money? 4 Understanding Interest Rates 5 The Behavior of Interest Rates 9 Banking and the Management of Financial Institutions 10 Economic Analysis of Financial Regulation 11 Banking Industry: Structure and Competition 12 Financial Crises13. Central Banks and the Federal Reserve System 15 Tools of Monetary Policy 16 The Conduct of Monetary Policy: Strategy and Tactics 17 The Foreign Exchange Market 18 The International Financial System 22 Aggregate Demand and Supply Analysis 23 Monetary Policy Theory For a one-semester course, cover any three of the following optional chapters: Chapter No. Chapter Title 6 The Risk and Term Structure of Interest Rates 7 The Stock Market, the Theory of Rational Expectations, and the Efficient Market Hypothesis 8 An Economic Analysis of Financial Structure 14 The Money Supply Process 19 Quantity Theory, Inflation, and the Demand for Money 20 The IS Curve 21 The Monetary Policy and Aggregate Demand Curves 24 The Role of Expectations in Monetary Policy 25 Transmission Mechanisms of Monetary Policy A one-quarter course would probably not include any other chapters unless some of the chapters on central banking and the conduct of monetary policy (Chapters 13, 15, and 16) were deleted.

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    Mishkin • The Economics of Money, Banking, and Financial Markets , Twelfth Edition 6  Outline for Financial Markets and Institutions Course Core Chapters Chapter No. Chapter Title 1 Why Study Money, Banking, and Financial Markets? 2 An Overview of the Financial System 3 What Is Money? 4 Understanding 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 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 For a one-semester course, cover any seven of the following optional chapters: Chapter No. Chapter Title 13 Central Banks and the Federal Reserve System 14 The Money Supply Process 15 Tools of Monetary Policy 16 The Conduct of Monetary Policy: Strategy and Tactics 17 The Foreign Exchange Market 18 The International Financial System 19 Quantity Theory, Inflation, and the Demand for Money 20 The IS Curve 21 The Monetary Policy and Aggregate Demand Curves 22 Aggregate Demand and Supply Analysis 23 Monetary Policy Theory 24 The Role of Expectations in Monetary Policy 25 Transmission Mechanisms of Monetary Policy A one-quarter course would probably only include one or two of the optional chapters.

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    Mishkin • The Economics of Money, Banking, and Financial Markets , Twelfth Edition 7  Outline for Monetary Theory and Policy Course Core Chapters Chapter No. Chapter Title 1 Why Study Money, Banking, and Financial Markets? 2 An Overview of the Financial System 3 What Is Money? 4 Understanding Interest Rates 5 The Behavior of Interest Rates 13 Central Banks and the Federal Reserve System 14 The Money Supply Process 15 Tools of Monetary Policy 16 The Conduct of Monetary Policy: Strategy and Tactics 19 Quantity Theory, Inflation, and the Demand for Money 20 The IS Curve 21 The Monetary Policy and Aggregate Demand Curves 22. Aggregate Demand and Supply Analysis 23 Monetary Policy Theory 24 The Role of Expectations in Monetary Policy For a one-semester course, cover any four of the following optional chapters: Chapter No. Chapter Title 6 The Risk and Term Structure of Interest Rates 7 The Stock Market, the Theory of Rational Expectations, and the Efficient Market Hypothesis 8 An Economic Analysis of Financial Structure 9 Financial Crises 10 Banking and the Management of Financial Institutions 11 Economic Analysis of Financial Regulation 12 Banking Industry: Structure and Competition 17 The Foreign Exchange Market 18 The International Financial System 25 Transmission Mechanisms of Monetary Policy A one-quarter course would probably only include one or two of the optional chapters.

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    Mishkin • The Economics of Money, Banking, and Financial Markets , Twelfth Edition 8 Overviews of the Textbook Chapters and Teaching Tips I have been teaching money and banking now for over thirty years. The overviews and teaching tips in Part Two of the Instructor’s Manual are intended to share with you some of my experiences in the classroom with teaching the material in the textbook. The overview and teaching tips for each chapter provide a brief description of the contents of the chapter, discuss the novel features of the chapter, indicate what central points need to be transmitted to the student, suggest teaching tips that I have found useful in class, and provide guidance as to what material can easily be skipped in each chapter.

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    Mishkin • The Economics of Money, Banking, and Financial Markets , Twelfth Edition 9 Answers to End-of-Chapter Problems Part Three of the Instructor’s Manual contains the answers to end-of-chapter problems. Some of these questions require students to look up current data, and in these cases no answers are given; however, for the rest of the questions, the answers are quite complete. Many instructors will use the end-of-chapter questions for homework assignments, as I do. I have found it useful to hand out answers to the questions provided in Part Three to the students as solutions sets after they have completed their assignments; they find them to be an invaluable study aid. Making up these solution sets for reproduction should be quite easy, either by cutting and pasting from Part Three or downloading the files from the Instructor’s Resource Center at www.pearsonhighered.com/irc.

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    Mishkin • The Economics of Money, Banking, and Financial Markets , Twelfth Edition 10 PowerPoint Presentation Also offered in the instructor’s supplement package is a PowerPoint Presentation that contains lecture notes and all the textbook’s figures and tables. These slides are comprehensive and outline all the major points covered in the text. The lecture notes have been class-tested successfully—they are the ones that I use in class—and they should help other instructors prepare their lectures as they have helped me. A special feature of these PowerPoints is that all the analytic figures are completely manipulable by the user so that instructors can custom-design their PowerPoint lectures. In addition, these PowerPoint have step-by-step animations that can be used to spice up lectures. Please note that unless you have access to PowerPoint version 4.0 or higher you will only be able to project the provided images using the viewer that is included; editing or adding material will not be possible unless you have the software program. To obtain the PowerPoint files, adopters of the text just need to get in touch with their Pearson sales representative, or visit the Instructor’s Resource Center at www.pearsonhighered.com/irc to download the available electronic files.

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    Mishkin • The Economics of Money, Banking, and Financial Markets , Twelfth Edition 11 Test Bank The Test Bank contains over 2,600 multiple-choice questions that are appropriate for use as quiz or test questions. It is provided as a set of Word files in Macintosh and Windows versions, as well as a set of .BOK Testgen files. It can be downloaded from the Instructor’s Resource Center at www.pearsonhighered.com/irc . These forms provide alternative methods for the instructor to make up exams. The Pearson TestGen program offered is a computerized test generator that lets you construct tests by choosing questions from the Test Bank that was prepared specifically for this textbook and your course. The test construction process involves the use of a simple TestGen screen that you fill in on the computer to choose questions for your test. If desired, test questions can be viewed on the screen, and test questions can be edited, saved, or printed. In addition, you can add questions, which may include graphics. Program features:  The Test Bank can include four types of questions: multiple choice, true/false, short answer, and essay.  A supplementary page attached to each Test Bank question can contain its topic, objective, skill, difficulty, and other user-added information.  Test questions can be chosen in a variety of ways including manual selection, random selection, choose while viewing, and choose by searching.  Questions chosen for a test can be viewed and edited without affecting the original versions of the questions in the item bank.  Test size is limited only by the memory size of the computer and the length of the questions you choose.  Test questions can be printed in the exact order you specify or grouped and sorted automatically by the program.  Printer files can be created or modified to take advantage of the capabilities of your printer.

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    Mishkin • The Economics of Money, Banking, and Financial Markets , Twelfth Edition 12 Course Management with MyEconLab MyEconLab delivers rich online content and innovative learning tools to your classroom. Instructors who use MyEconLab gain access to powerful communication and assessment tools, and their students receive access to the additional learning resources described below. Students and MyEconLab MyEconLab delivers the content and tools your students need to succeed online. Students whose instructors use MyEconLab gain access to a variety of study and practice tools that put them in control of their own learning:  All end-of-chapter questions and applied problems from the text are available in MyEconLab.  Applications from the text are provided, along with assignable questions.  Mini-Lecture Videos provide a step-by-step analysis of all the data and analytic figures included in the text. The videos can be used in class or viewed by students on their own time.  A Personal Study Plan is created for each individual student based on his or her performance on assigned and sample exercises.  Instant tutorial feedback is provided for problems and graphing responses to questions.  Interactive learning aids, such as Help Me Solve This (a step-by-step tutorial), are designed to help the student exactly when he or she needs support.  News articles are available for classroom and assignment use. Up-to-date news articles and complimentary discussion questions are posted weekly to bring today’s news into the classroom and course.  Real-Time Data Analysis Problems allow instructors to assign problems that use up-to- the-minute data. Each RTDA exercise loads the appropriate and most current data from FRED, a comprehensive and up-to-date data set maintained by the Federal Reserve Bank of St. Louis. Exercises are graded based on the particular data used, and feedback is provided.  An Enhanced Pearson eText is available within the online course materials and offline via iPad and Android apps. The enhanced Pearson eText enables instructors and students to highlight, bookmark, and take notes.  Auto-graded problems and graphs are available for assignments.

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    Mishkin • The Economics of Money, Banking, and Financial Markets , Twelfth Edition 13 Instructors and MyEconLab With MyEconLab instructors can customize existing content and add their own. They can manage, create, and assign tests to students, choosing from the exercises in the Study Plan as well as from our Test Banks. MyEconLab also includes advanced tracking features that record students’ usage and performance and a Gradebook feature to see students’ test results. Please contact your Pearson sales representative to see how MyEconLab can work for your course.

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    P ART T WO Overviews of the Textbook Chapters and Teaching Tips

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    Mishkin • The Economics of Money, Banking, and Financial Markets , Twelfth Edition 14 Chapter 1 Why Study Money, Banking, and Financial Markets? Before embarking on a study of money, banking, and financial markets, the student must be convinced that this subject is worth studying. Chapter 1 pursues this goal in two ways. First, it shows the student that money and banking is an exciting field because it focuses on economic phenomena that affect everyday life. Second, using eight figures, this chapter encourages the student to look at data that bear on the central issues in this field. An additional purpose of Chapter 1 is to provide an overview for the entire book, previewing the topics that will be covered in later chapters, and to indicate how the book will be taught. In teaching this chapter, the most important goal should be to get the student excited about the material. I have found that talking about the data presented in the figures helps achieve this goal. Furthermore, it shows the student that the subject matter of money and banking has real-world implications that the student should care about. The appendix to this chapter reviews concepts regarding the definitions of aggregate output, income, and the price level that the student already has seen in an economic principles course. Since these concepts are extremely important, it might be worthwhile to have your students read this appendix outside of class to jog their memories.

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    Mishkin • The Economics of Money, Banking, and Financial Markets , Twelfth Edition 15 Chapter 2 An Overview of the Financial System Chapter 2 is an introductory chapter that contains the background information on the structure and operation of financial markets that is needed in later chapters of the book. This chapter allows the instructor to branch out to various choices of later chapters, thus allowing different degrees of coverage of financial markets and institutions. The most important point to transmit to the student is that financial markets and financial intermediaries are crucial to a well-functioning economy because they channel funds from those who do not have a productive use for them to those who do. Professors who emphasize financial markets and institutions in their course will want to teach this chapter in detail, and those who focus on international issues will want to spend some time on the section “Internationalization of Financial Markets.” However, those who slant their course to monetary theory and policy may want to give this chapter a more cursory treatment. No matter how much class time is devoted to this chapter, I have found that it is a good reference chapter for students. You might want to tell them that if in later chapters they do not recall what some financial instrument is or who regulates whom, they can refer back to this chapter, especially to summary tables, such as Tables 3 and 5. The chapter introduces Global boxes, which are sprinkled throughout the text, to get students to recognize the growing importance of the global economy. The Global box in this chapter gets students to think about how the financial system in the United States is both similar to and different from financial systems in other countries.

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    Mishkin • The Economics of Money, Banking, and Financial Markets , Twelfth Edition 16 Chapter 3 What Is Money? Before becoming immersed in the study of money and banking, the student must understand how money is defined and measured. The first half of Chapter 3 discusses the definition of money: how the economist’s definition differs from that of common speech, the functions of money, and a historical view of how what serves as money has changed over time. The second half of the chapter describes the tricky issues involved in applying the definition of money in order to measure it. Once the student understands what money is, the most important point to get across to him or her is that economists are not exactly sure how to measure money. This presents to policymakers a serious problem: Although they might want to control the money supply to affect the economy, they are not sure which measure of money is the right one to control. In many situations, knowing which measure of money is the right one is not crucial because different measures (such as Ml and M2) move together. But, as Figure 1 illustrates, this is sometimes not the case, presenting the policymaker with a dilemma. This chapter introduces FYI boxes, which highlight dramatic historical episodes, interesting ideas, and intriguing facts to keep students excited about the material.

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