Mishkin Solutions Ch 1-6

Mishkin Solutions Ch 1-6 - Mishkin Solutions Chapter 1 Why...

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Mishkin Solutions Chapter 1 Why Study Money, Banking, and Financial Markets? 7. The basic activity of banks is to accept deposits and make loans. 9. 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. 11. Higher stock prices means that consumers’ wealth is higher and so they will be more likely to increase their spending. 13. It makes British goods more expensive relative to American goods. Thus American businesses will find it easier to sell their goods in the United States and abroad and the demand for their products will rise. 15. When the dollar increases in value, foreign goods become less expensive relative to American goods; thus you are more likely to buy French-made jeans than American-made jeans. The resulting drop in demand for American-made jeans because of the strong dollar hurts American jeans manufacturers. On the other hand, the American company that imports jeans into the United States now finds that the demand for its product has risen, so it is better off when the dollar is strong. Chapter 2 An Overview of the Financial System 2. Yes, I should take out the loan, because I will be better off as a result of doing so. My interest payment will be $4,500 (90% of $5,000), but as a result, I will earn an additional $10,000, so I will be ahead of the game by $5,500. Since Larry’s loan-sharking business can make some people better off, as in this example, loan sharking may have social benefits. (One argument against legalizing loan sharking, however, is that it is frequently a violent activity.) 4. The principal debt instruments used were foreign bonds which were sold in Britain and denominated in pounds. The British gained because they were able to earn higher interest rates as a result of lending to Americans, while the Americans gained because they now had access to capital to start up profitable businesses such as railroads. 6. You would rather hold bonds, because bondholders are paid off before equity holders, who are the residual claimants. 10. They might not work hard enough while you are not looking or may steal or commit fraud. 12. True. If there are no information or transactions costs, people could make loans to each other at no cost and would thus have no need for financial intermediaries. 14. A ranking from most liquid to least liquid is (a), (b), (c), and (d). The ranking is similar for the most safe to the least safe.
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Chapter 3 What is Money? 1. (b) 3. Cavemen did not need money. In their primitive economy, they did not specialize in producing one type of good and they had little need to trade with other cavemen. 5.
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Mishkin Solutions Ch 1-6 - Mishkin Solutions Chapter 1 Why...

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