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

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The Economics ofMoney, Banking, andFinancial MarketsTwelfth EditionFrederic S. MishkinResource Manual forThe Economics of Money,Banking, and Financial MarketsRick Mishkin

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Mishkin •The Economics of Money, Banking, and Financial Markets, Twelfth Edition4Outline for General Money and Banking CourseCore ChaptersChapter No.Chapter Title1Why Study Money, Banking, and Financial Markets?2An Overview of the Financial System3What Is Money?4Understanding Interest Rates5The Behavior of Interest Rates9Banking and the Management of Financial Institutions10Economic Analysis of Financial Regulation11Banking Industry: Structure and Competition12Financial Crises13Central Banks and the Federal Reserve System15Tools of Monetary Policy16The Conduct of Monetary Policy: Strategy and Tactics22Aggregate Demand and Supply Analysis23Monetary Policy TheoryFor a one-semester course, cover any five of the following optional chapters:Chapter No.Chapter Title6The Risk and Term Structure of Interest Rates7The Stock Market, the Theory of Rational Expectations, and the Efficient MarketHypothesis8An Economic Analysis of Financial Structure14The Money Supply Process17The Foreign Exchange Market18The International Financial System19Quantity Theory, Inflation, and the Demand for Money20TheISCurve21The Monetary Policy and Aggregate Demand Curves24The Role of Expectations in Monetary Policy25Transmission Mechanisms of Monetary PolicyA one-quarter course would probably only include one or two of the optional chapters unlesssome 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 Edition5Outline for General Money and Banking Coursewith an InternationalEmphasisCore ChaptersChapter No.Chapter Title1Why Study Money, Banking, and Financial Markets?2An Overview of the Financial System3What Is Money?4Understanding Interest Rates5The Behavior of Interest Rates9Banking and the Management of Financial Institutions10Economic Analysis of Financial Regulation11Banking Industry: Structure and Competition12Financial Crises13.Central Banks and the Federal Reserve System15Tools of Monetary Policy16The Conduct of Monetary Policy: Strategy and Tactics17The Foreign Exchange Market18The International Financial System22Aggregate Demand and Supply Analysis23Monetary Policy TheoryFor a one-semester course, cover any three of the following optional chapters:Chapter No.Chapter Title6The Risk and Term Structure of Interest Rates7The Stock Market, the Theory of Rational Expectations, and the Efficient MarketHypothesis8An Economic Analysis of Financial Structure14The Money Supply Process19Quantity Theory, Inflation, and the Demand for Money20TheISCurve21The Monetary Policy and Aggregate Demand Curves24The Role of Expectations in Monetary Policy25Transmission Mechanisms of Monetary PolicyA one-quarter course would probably not include any other chapters unless some of the chapterson 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 Edition6Outline for Financial Markets and Institutions CourseCore ChaptersChapter No.Chapter Title1Why Study Money, Banking, and Financial Markets?2An Overview of the Financial System3What Is Money?4Understanding Interest Rates5The Behavior of Interest Rates6The Risk and Term Structure of Interest Rates7The Stock Market, the Theory of Rational Expectations, and the Efficient MarketHypothesis8An Economic Analysis of Financial Structure9Banking and the Management of Financial Institutions10Economic Analysis of Financial Regulation11Banking Industry: Structure and Competition12Financial CrisesFor a one-semester course, cover any seven of the following optional chapters:Chapter No.Chapter Title13Central Banks and the Federal Reserve System14The Money Supply Process15Tools of Monetary Policy16The Conduct of Monetary Policy: Strategy and Tactics17The Foreign Exchange Market18The International Financial System19Quantity Theory, Inflation, and the Demand for Money20TheISCurve21The Monetary Policy and Aggregate Demand Curves22Aggregate Demand and Supply Analysis23Monetary Policy Theory24The Role of Expectations in Monetary Policy25Transmission Mechanisms of Monetary PolicyA 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 Edition7Outline for Monetary Theory and Policy CourseCore ChaptersChapter No.Chapter Title1Why Study Money, Banking, and Financial Markets?2An Overview of the Financial System3What Is Money?4Understanding Interest Rates5The Behavior of Interest Rates13Central Banks and the Federal Reserve System14The Money Supply Process15Tools of Monetary Policy16The Conduct of Monetary Policy: Strategy and Tactics19Quantity Theory, Inflation, and the Demand for Money20TheISCurve21The Monetary Policy and Aggregate Demand Curves22.Aggregate Demand and Supply Analysis23Monetary Policy Theory24The Role of Expectations in Monetary PolicyFor a one-semester course, cover any four of the following optional chapters:Chapter No.Chapter Title6The Risk and Term Structure of Interest Rates7The Stock Market, the Theory of Rational Expectations, and the Efficient MarketHypothesis8An Economic Analysis of Financial Structure9Financial Crises10Banking and the Management of Financial Institutions11Economic Analysis of Financial Regulation12Banking Industry: Structure and Competition17The Foreign Exchange Market18The International Financial System25Transmission Mechanisms of Monetary PolicyA 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 Edition8Overviews of the Textbook Chaptersand Teaching TipsI have been teaching money and banking now for over thirty years. The overviews and teachingtips in Part Two of the Instructor’s Manual are intended to share with you some of myexperiences in the classroom with teaching the material in the textbook. The overview andteaching tips for each chapter provide a brief description of the contents of the chapter, discussthe novel features of the chapter, indicate what central points need to be transmitted to thestudent, suggest teaching tips that I have found useful in class, and provide guidance as to whatmaterial can easily be skipped in each chapter.

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Mishkin •The Economics of Money, Banking, and Financial Markets, Twelfth Edition9Answers to End-of-Chapter ProblemsPart Three of the Instructor’s Manual contains the answers to end-of-chapter problems. Some ofthese 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. Ihave found it useful to hand out answers to the questions provided in Part Three to the students assolutions sets after they have completed their assignments; they find them to be an invaluablestudy aid. Making up these solution sets for reproduction should be quite easy, either by cuttingand pasting from Part Three or downloading the files from the Instructor’s Resource Center atwww.pearsonhighered.com/irc.

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Mishkin •The Economics of Money, Banking, and Financial Markets, Twelfth Edition10PowerPoint PresentationAlso offered in the instructor’s supplement package is a PowerPoint Presentation that containslecture notes and all the textbook’s figures and tables. These slides are comprehensive and outlineall the major points covered in the text. The lecture notes have been class-tested successfully—theyare the ones that I use in class—and they should help other instructors prepare their lectures as theyhave helped me.A special feature of these PowerPoints is that all the analytic figures are completely manipulableby the user so that instructors can custom-design their PowerPoint lectures. In addition, thesePowerPoint 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 ableto project the provided images using the viewer that is included; editing or adding material will notbe possible unless you have the software program.To obtain the PowerPoint files, adopters of the text just need to get in touch with their Pearsonsales representative, or visit the Instructor’s Resource Center at www.pearsonhighered.com/irctodownload the available electronic files.

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Mishkin •The Economics of Money, Banking, and Financial Markets, Twelfth Edition11Test BankThe Test Bank contains over 2,600 multiple-choice questions that are appropriate for useas quiz or test questions. It is provided as a set of Word files in Macintosh and Windowsversions, as well as a set of .BOK Testgen files. It can be downloaded from the Instructor’sResource Center at www.pearsonhighered.com/irc.These forms provide alternative methods forthe instructor to make up exams.The Pearson TestGen program offered is a computerized test generator that lets you constructtests by choosing questions from the Test Bank that was prepared specifically for this textbookand your course.The test construction process involves the use of a simple TestGen screen that you fill in on thecomputer 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 mayinclude 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, randomselection, choose while viewing, and choose by searching.Questions chosen for a test can be viewed and edited without affecting the original versionsof the questions in the item bank.Test size is limited only by the memory size of the computer and the length of the questionsyou choose.Test questions can be printed in the exact order you specify or grouped and sortedautomatically 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 Edition12Course Management with MyEconLabMyEconLab 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 MyEconLabMyEconLab delivers the content and tools your students need to succeed online. Students whoseinstructors use MyEconLab gain access to a variety of study and practice tools that put them incontrol of their own learning:All end-of-chapter questions and applied problems from the text are available inMyEconLab.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 figuresincluded in the text. The videos can be used in class or viewed by students on their owntime.A Personal Study Plan is created for each individual student based on his or herperformance 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), aredesigned to help the student exactly when he or she needs support.News articles are available for classroom and assignment use. Up-to-date news articlesand complimentary discussion questions are posted weekly to bring today’s news into theclassroom 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 fromFRED, a comprehensive and up-to-date data set maintained by the Federal Reserve Bankof St. Louis. Exercises are graded based on the particular data used, and feedback isprovided.An Enhanced Pearson eText is available within the online course materials and offlinevia iPad and Android apps. The enhanced Pearson eText enables instructors and studentsto 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 Edition13Instructors and MyEconLabWith MyEconLab instructors can customize existing content and add their own. They canmanage, create, and assign tests to students, choosing from the exercises in the Study Plan aswell as from our Test Banks. MyEconLab also includes advanced tracking features that recordstudents’ usage and performance and a Gradebook feature to see students’ test results. Pleasecontact your Pearson sales representative to see how MyEconLab can work for your course.

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PARTTWOOverviewsof the TextbookChapters andTeaching Tips

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Mishkin •The Economics of Money, Banking, and Financial Markets, Twelfth Edition14Chapter 1Why Study Money, Banking, and Financial Markets?Before embarking on a study of money, banking, and financial markets, the student must beconvinced that this subject is worth studying. Chapter 1 pursues this goal in two ways. First, itshows the student that money and banking is an exciting field because it focuses on economicphenomena that affect everyday life. Second, using eight figures, this chapter encourages thestudent to look at data that bear on the central issues in this field. An additional purpose ofChapter 1 is to provide an overview for the entire book, previewing the topics that will becovered 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 thematerial. 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-worldimplications 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 readthis appendix outside of class to jog their memories.

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Mishkin •The Economics of Money, Banking, and Financial Markets, Twelfth Edition15Chapter 2An Overview of the Financial SystemChapter 2 is an introductory chapter that contains the background information on the structureand operation of financial markets that is needed in later chapters of the book. This chapterallows the instructor to branch out to various choices of later chapters, thus allowing differentdegrees of coverage of financial markets and institutions.The most important point to transmit to the student is that financial markets and financialintermediaries are crucial to a well-functioning economy because they channel funds from thosewho do not have a productive use for them to those who do. Professors who emphasize financialmarkets and institutions in their course will want to teach this chapter in detail, and those whofocus on international issues will want to spend some time on the section “Internationalization ofFinancial Markets.” However, those who slant their course to monetary theory and policy maywant to give this chapter a more cursory treatment. No matter how much class time is devoted tothis chapter, I have found that it is a good reference chapter for students. You might want to tellthem that if in later chapters they do not recall what some financial instrument is or whoregulates whom, they can refer back to this chapter, especially to summary tables, such as Tables3 and 5.The chapter introduces Global boxes, which are sprinkled throughout the text, to get students torecognize the growing importance of the global economy. The Global box in this chapter getsstudents to think about how the financial system in the United States is both similar to anddifferent from financial systems in other countries.

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Mishkin •The Economics of Money, Banking, and Financial Markets, Twelfth Edition16Chapter 3What Is Money?Before becoming immersed in the study of money and banking, the student must understand howmoney 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, anda historical view of how what serves as money has changed over time. The second half of thechapter describes the tricky issues involved in applying the definition of money in order tomeasure it.Once the student understands what money is, the most important point to get across to him or heris that economists are not exactly sure how to measure money. This presents to policymakers aserious 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 (suchas 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, interestingideas, and intriguing facts to keep students excited about the material.

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