Archives

Chapter 1 Introducing Money and the Financial System Brief Chapter Summary and Learning Objectives  1.1 Key Components of the Financial System (pages 2–15) Identify the key components of the financial system. Financial assets, financial institutions, and government regulators are the […]

Solutions to the End-of-Chapter Questions, Problems, and Data   Exercises 1.1 Key Components of the Financial System Learning Objective: Identify the key components of the financial system. Review Questions 1.1 a. Money: Anything that people are willing to accept in […]

Chapter 10 The Economics of Banking Brief Chapter Summary and Learning Objectives  10.1 The Basics of Commercial Banking: The Bank Balance Sheet (pages 280–289) Understand bank balance sheets. A bank’s balance sheet provides a summary of a bank’s sources and […]

Solutions to the End-of-Chapter Questions, Problems, and Data Exercises 10.1 The Basics of Commercial Banking: The Bank Balance Sheet Learning objective: Understand bank balance sheets. Review Questions 1.1 Assets = Liabilities + Shareholders’ equity. The most important bank assets are […]

Chapter 11 Investment Banks, Mutual Funds, Hedge Funds, and the Shadow Banking System Brief Chapter Summary and Learning Objectives  11.1 Investment Banking (pages 314–327) Explain how investment banks operate. The central activities of investment banks include providing advice on new […]

Solutions to the End-of-Chapter Questions, Problems, and Data   Exercises 11.1 Investment Banking Learning objective: Explain how investment banks operate. Review Questions 1.1 Investment banking involves, among other activities, underwriting new security issues and providing 1.2 Repo financing is borrowing […]

Chapter 12 Financial Crises and Financial Regulation Brief Chapter Summary and Learning Objectives  12.1 The Origins of Financial Crises (pages 350–359) Explain what financial crises are and what causes them. Because banks borrow from depositors short term and lend long […]

Solutions to the End-of-Chapter Questions, Problems, and Data   Exercises 12.1 The Origins of Financial Crises Learning objective: Explain what financial crises are and what causes them. Review Questions 1.2 A bank run is the process by which depositors who […]

Chapter 13 The Federal Reserve and Central Banking Brief Chapter Summary and Learning Objectives  13.1 The Structure of the Federal Reserve System (pages 388–399) Explain why the Federal Reserve is structured the way it is. The Federal Reserve Act established […]

Solutions to the End-of-Chapter Questions, Problems, and Data   Exercises 13.1 The Structure of the Federal Reserve System Learning Objective: Explain why the Federal Reserve System is structured the way it is. Review Questions 1.1 Congress established the first Bank […]

Chapter 14 The Federal Reserve’s Balance Sheet and the Money Supply Process Brief Chapter Summary and Learning Objectives  14.1 The Federal Reserve’s Balance Sheet and the Monetary Base (pages 416–424) Explain the relationship between the Fed’s balance sheet and the […]

Solutions to the End-of-Chapter Questions, Problems, and Data   Exercises 14.1 The Federal Reserve’s Balance Sheet and the Monetary Base Learning Objective: Explain the relationship between the Fed’s balance sheet and the monetary base. Review Questions 1.1 The monetary base […]

Chapter 15 Monetary Policy Brief Chapter Summary and Chapter Objectives  15.1 The Goals of Monetary Policy (pages 448–451) Describe the Goals of Monetary Policy. The Fed has several goals for monetary policy, including price stability, high employment, economic growth, stability […]

Solutions to the End-of-Chapter Questions and Problems 15.1 The Goals of Monetary Policy Learning objective: Describe the goals of monetary policy. Review Questions 1.1 Monetary policy aims to advance the economic well-being of the country’s citizens. Economic well-being is typically […]

Chapter 15 Monetary Policy Brief Chapter Summary and Chapter Objectives  15.1 The Goals of Monetary Policy (pages 448–451) Describe the Goals of Monetary Policy. 15.2 Monetary Policy Tools and the Federal Funds Rate (pages 451–459) Understand how the Fed uses […]

15.3 More on the Fed’s Monetary Policy Tools Learning objective: Trace how the importance of different monetary policy tools has changed over time. Review Questions 3.1 An open market sale of Treasury securities decreases the price of Treasury securities, thereby […]

Chapter 16 The International Financial System and Monetary Policy Brief Chapter Summary and Chapter Objectives  16.1 Foreign Exchange Intervention and the Monetary Base (pages 488–490) Analyze how the Fed’s interventions in foreign exchange markets affect the U.S. monetary base. International […]

Solutions to the End-of-Chapter Questions, Problems, and Data   Exercises 16.1 Foreign Exchange Intervention and the Monetary Base Learning objective: Analyze how the Fed’s interventions in foreign exchange markets affect the U.S. monetary base. Review Questions 1.1 The difference is […]

Chapter 17 Monetary Theory I: The Aggregate Demand and Aggregate Supply Model Brief Chapter Summary and Chapter Objectives   17.1 The Aggregate Demand Curve (pages 521–525) Explain how the aggregate demand curve is derived. Economists analyze the demand for goods […]

Solutions to the End-of-Chapter Questions, Problems, and Data Exercises 17.1 The Aggregate Demand Curve Learning objective: Explain how the aggregate demand curve is derived. Review Questions 1.1 Aggregate expenditure consists of: 1) Spending by households on goods and services, C; […]

17.4 The Effects of Monetary Policy Learning objective: Use the aggregate demand and aggregate supply model to show the effects of monetary policy. Review Questions 4.1 Business cycles vary both in length and in severity. For example, the recession of […]

Chapter 18 Monetary Theory II: The IS–MP Model Brief Chapter Summary and Chapter Objectives  18.1 The IS Curve (pages 551–562) Understand what the IS curve is and how it is derived. Aggregate expenditure is the sum of consumption, investment, government […]

Solutions to the End-of-Chapter Questions and Problems 18.1 The IS Curve Learning objective: Understand what the IS curve is and how it is derived. Review Questions 1.1 The three parts of the IS-MP model are: 1. The IS curve, which […]

18.3 Equilibrium in the IS-MP Model Learning objective: Use the IS-MP model to illustrate macroeconomic equilibrium. Review Questions 3.1 The first graph that follows shows that in long-run equilibrium, the IS and MP curves intersect 3.2 When the Fed lowers […]

Chapter 2 Money and the Payments System Brief Chapter Summary and Learning Objectives  2.1 Do We Need Money? (pages 24–26) Analyze the inefficiencies of a barter system. Money reduces the transactions costs of exchange as well as other inefficiencies of […]

Solutions to the End-of-Chapter Questions, Problems, and Data   Exercises 2.1 Do We Need Money? Learning objectives: Analyze the inefficiencies of a barter system. Review Questions 1.1 Barter is a system of exchange in which individuals trade goods and services […]

Chapter 3 Interest Rates and Rates of Return Brief Chapter Summary and Learning Objectives  3.1 The Interest Rate, Present Value, and Future Value (pages 50–58) Explain how the interest rate links present value with future value. People value funds in […]

Solutions to the End-of-Chapter Questions, Problems, and Data   Exercises 3.1 The Interest Rate, Present Value, and Future Value Learning objective: Explain how the interest rate links present value with future value. Review Questions 1.1 Interest provides lenders with an […]

Chapter 4 Determining Interest Rates Brief Chapter Summary and Learning Objectives  4.1 How to Build an Investment Portfolio (pages 88–95) Discuss the most important factors in building an investment portfolio. The determinants of portfolio choice include wealth, an asset’s expected […]

Solutions to the End-of-Chapter Questions, Problems, and Data   Exercises 4.1 How to Build an Investment Portfolio Learning objective: Discuss the most important factors in building an investment portfolio. Review Questions 1.1 There are five determinants of asset demand: 1) […]

Chapter 5 The Risk Structure and Term Structure of Interest Rates Brief Chapter Summary and Learning Objectives  5.1 The Risk Structure of Interest Rates (pages 125–137) Explain why bonds with the same maturity can have different interest rates. Bonds that […]

Solutions to the End-of-Chapter Questions, Problems, and Data   Exercises 5.1 The Risk Structure of Interest Rates Learning objective: Explain why bonds with the same maturity can have different interest rates. Review Questions 1.1 The risk structure of interest rates […]

Chapter 6 The Stock Market, Information, and Financial Market Efficiency Brief Chapter Summary and Learning Objectives  6.1 Stocks and the Stock Market (pages 158–164) Understand the basic operations of the stock market. Publicly traded companies sell stocks on the stock […]

Solutions to the End-of-Chapter Questions, Problems, and Data   Exercises 6.1 Stocks and the Stock Market Learning objective: Understand the basic operations of the stock market. Review Questions 1.1 Stocks are called equities because equity is the difference between the […]

Chapter 7 Derivatives and Derivate Markets Brief Chapter Summary and Learning Objectives  7.1 Derivatives, Hedging, and Speculating (pages 191–192) Explain what derivatives are and distinguish between using them to hedge and using them to speculate. Derivatives are financial securities that […]

Solutions to the End-of-Chapter Questions, Problems, and Data   Exercises 7.1 Derivatives, Hedging, and Speculating Learning objective: Explain what derivatives are and distinguish between using them to hedge and using them to speculate. Review Questions 1.1 Derivatives allow investors to […]

Chapter 8 The Market for Foreign Exchange Brief Chapter Summary and Learning Objectives 8.1 Exchange Rates and Trade (pages 225–229) Explain the difference between nominal and real exchange rates. Foreign exchange rates can be expressed as either U.S. dollars per […]

Solutions to the End-of-Chapter Questions, Problems, and Data Exercises 8.1 Exchange Rates and Trade Learning objective: Explain the difference between nominal and real exchange rates. Review Questions 1.1 The nominal exchange rate is the price of one country’s currency in […]

Chapter 9 Transactions Costs, Asymmetric Information, and the Structure of the Financial System Brief Chapter Summary and Learning Objectives  9.1 Obstacles to Matching Savers and Borrowers (pages 255–257) Analyze the obstacles to matching savers and borrowers. Because of transactions costs […]

Solutions to the End-of-Chapter Questions, Problems, and Data Exercises 9.1 Obstacles to Matching Savers and Borrowers Learning objective: Analyze the obstacles to matching savers and borrowers. Review Questions 1.1 Transactions costs are the costs of a trade or an exchange. […]

Which of the following does NOT describe the relationship between banks and small business during the 2000s (prior to the financial crisis)? A) Banks typically applied fixed guidelines for granting loans, leaving little room for personal judgment. B) Fewer small […]

Which of the following is included in M1, but not in M2? A) currency B) checking account deposits C) travelers checks D) Everything in M1 is in M2. Answer: Which of the following statements about ACH transactions is false? A) […]

The Fed’s current position towards the existing monetary aggregates is A) it is convinced that M1 is the best measure of the money supply. B) it is convinced that M2 is the best measure of the money supply. C) it […]

Alt-A borrowers were those who A) used mortgages to purchase apartments. B) chose adjustable-rate mortgages instead of fixed-rate mortgages. C) borrowed using “interest-only” mortgages. D) did not provide documentation of their income when applying for a mortgage. Answer: Economies of […]

According to the efficient markets hypothesis, who should earn the highest risk-adjusted return on stocks? A) a financial expert who can devote considerable time to research B) the average investor who doesn’t do too much research C) someone throwing darts […]

Bank capital is equal to A) the value of the capital originally invested in the bank by its owners. B) the value of everything the bank owns. C) the difference between the value of the bank’s assets and the value […]

An expansionary monetary policy that successfully counteracts a recession has the side effect of A) lower investment spending than if no action had been taken. B) a larger government deficit than if no action had been taken. C) a higher […]

The “lemons problem” in the used car market arises from A) the difficulty U.S. producers have in making reliable cars. B) the difficulty buyers have in distinguishing good cars from lemons. C) the tendency of buyers of used cars to […]

If oil prices fall at the same time that the federal government increases its purchases, in the short run A) aggregate output and the price level will both increase. B) aggregate output will increase, but the price level will fall. […]

All of the following took place during the economic crisis that began in 2007 EXCEPT: A) the financial system was disrupted B) large portions of the U.S. economy were cut off from the funds they needed to thrive C) there […]

The problem of a double coincidence of wants refers to A) the insatiability of wants in a free market economy. B) poorly-managed companies producing what consumers want only by coincidence. C) the necessity in a barter system of each trading […]

If i is the yield to maturity of a fixed-payment loan, A) the value of the loan today equals i times the sum of the values of all the loan payments. B) i equals the present value of the loan […]

When the Fed lends to depository institutions, the loans are called A) federal funds. B) discount loans. C) repurchase agreements. D) reverse repurchase agreements. Answer: Discount loans available to health banks which can be used for any purpose are called […]

Reserves equal A) deposits with the Fed plus holdings of U.S. government securities. B) currency in circulation plus vault cash. C) deposits with the Fed plus vault cash. D) currency outstanding plus currency in circulation. Answer: The buyer of a […]

The automatic mechanism can best be described as: A) the process of the economy adjusting back to potential GDP without any action taken by the government B) the result of monetary policy implemented by the Fed restoring full employment C) […]

As wealth increases in the economy, savers are willing to A) hold more cash relative to their holdings of bonds. B) buy fewer bonds at any given price. C) lend more at any given interest rate. D) lend less at […]

Special Drawing Rights A) are granted by the Fed to banks which want to trade in the foreign exchange markets. B) were eliminated when the Bretton Woods system broke down. C) are created by the IMF in its role as […]

The purchasing power of money A) rises when prices fall. B) rises when prices rise. C) is set by the Fed in January of each year. D) is constant. Answer: Which of the following statements concerning seasonal credit is true? […]

In a put options contract, the A) seller has the obligation to receive the instrument at a specified time. B) buyer has the obligation to deliver the instrument at a specified time. C) buyer has the obligation to receive the […]

Derivative instruments are A) assets such as bonds or common stock that derive their value from the value of the companies which issue them. B) assets whose rates of returns must be derived from information published in financial tables. C) […]

Businesses hold substantial balances in demand deposits for all of the following reasons EXCEPT: A) they cannot hold NOW accounts B) the existence of low transaction costs C) to maintain liquidity D) relatively high interest rates Answer: The demand curve […]

Which of the following is a fixed payment loan? A) a home mortgage B) a U.S. Treasury bill C) a U.S. Treasury note D) a zero-coupon bond Answer: The “greater fool” theory assumes that A) markets are efficient. B) bubbles […]

Collateral is A) the interest rate that banks charge high-quality borrowers. B) assets pledged to the bank in the event the borrower defaults. C) the difference between the value of a bank’s assets and the value of a bank’s liabilities. […]

The speculative attack on the German mark in 1971 resulted in A) a large increase in the German monetary base. B) a decline in the value of the mark relative to the dollar. C) a decision to end the floating […]

The efficient markets hypothesis A) assumes that market participants form their expectations adaptively. B) applies rational expectations to the pricing of assets. C) applies to the stock market, but not to the bond market. D) indicates that the stock market […]

Which of the following is an example of fiat money? A) a cowry shell used as money on a South Pacific island B) a gold coin used as money in nineteenth century England C) a Federal Reserve Note used as […]

Interest-rate risk can best be characterized as the risk that A) you could have earned a higher interest rate if you waited to purchase a bond. B) fluctuations in the price of a financial asset in response to changes in […]

The wealth of most people declined as a result of the financial crisis of 2007-2009. As a result, which asset was most likely became a larger portion of their portfolio? A) bonds B) stocks C) house D) checking account Answer: […]

Which of the following is NOT a benefit of derivatives? A) risk sharing B) guaranteed minimum profit C) liquidity D) information services Answer: At any point along the LM curve, A) the quantity of money demanded equals the quantity of […]

The fundamental value of a stock equals A) the future value of all future dividends. B) the present value of all future dividends. C) the present value of current and future dividends. D) the present value of all future capital […]

As of 2012, the bank portion of TARP: A) earned a profit of $21 billion B) earned a profit of $245 billion C) cost $266 billion D) cost $700 billion Answer: The situation in which investors choose to put their […]

Under the Bretton Woods system, exchange rates were supposed to be adjusted A) only when a country experienced fundamental disequilibrium. B) daily. C) weekly. D) following each annual meeting of the board of governors of the International Monetary Fund. Answer: […]

In regard to crowd funding, it was expected that the SEC would limit the amount that small investors can invest in any one company to no more than: A) $1000 B) $10,000 C) $100,000 D) $1,000,000 Answer: How did the […]

An increase in oil prices will A) shift the short-run aggregate supply curve up and to the left. B) shift the short-run aggregate supply curve down and to the right. C) cause a movement along the short-run aggregate supply curve. […]

Unless otherwise indicated, when economists or investors refer to the interest rate on a financial asset, they referring to the: A) current yield B) coupon rate C) yield to maturity D) prime rate Answer: Which of the following assets is […]

Moody’s Investors Service is able to make a profit because A) most investors are irrational. B) of the existence of adverse selection problems. C) fluctuations in interest rates make default risk on corporate bonds difficult to gauge. D) small investors […]

Which interest rates is most relevant in determining aggregate expenditures? A) federal funds rate B) short-term real interest rate C) long-term nominal interest rate D) long-term real interest rate Answer: The second stage in the regulatory process is A) a […]

Stocks of small firms have a higher annual average return than stocks in general. Some economists attribute this to: A) compensation for the higher risk of small firms B) lower liquidity of stocks of small firms C) higher information costs […]

By the summer of 2008, about what percent of subprime mortgages were overdue by at least 30 days? A) 10% B) 25% C) 34% D) 50% Answer: Who organized the Bank of the United States? A) Alexander Hamilton B) George […]

If the price level in the United States increases more slowly than the price level in Canada, we would expect A) interest rates in the United States to be higher than interest rates in Canada. B) the U.S. dollar to […]

Which of the following is NOT a fixed payment loan? A) a home mortgage B) a car loan C) a U.S. Treasury note D) a student loan Answer: Who had served as a de facto lender of last resort during […]

In a competition of financial analysts vs. throwing a dart to choose stocks, according Burton Malkiel, financial analysts came out ahead due to all of the following reasons EXCEPT: A) it considered only stock prices, not dividends B) investors that […]

Most macroeconomic policy consists of: A) monetary policy B) fiscal policy C) exchange-rate policy D) regulatory policy Answer: Why do higher interest rates increase adverse selection problems in the loan market? A) Higher interest rates reduce the gains from economies […]

An autonomous expenditure is one that does not depend on: A) government policy B) the automobile sector C) interest rates D) GDP Answer: A $10 million open market purchase will increase the monetary base by A) $10 million. B) $10 […]

What is the yield to maturity of a consol with a coupon of $85 and a price of $944.44? A) 5.56% B) 8.50% C) 9.00% D) Not enough information has been provided to determine the answer. Answer: A falling dollar […]

Federal Reserve district banks perform all of the following roles EXCEPT A) managing checking clearing in the payments system. B) performing regulatory functions. C) setting the federal funds rate. D) managing currency in circulation by issuing new Federal Reserve Notes. […]

The default risk premium is A) relevant only for securities issued by very small companies. B) the additional yield a saver requires for holding a bond with some default risk. C) zero for corporate bonds, but quite substantial for corporate […]

In what way can the stock market affect the overall economy? A) It’s an important source of funds for corporations. B) It can affect consumer and business sentiment. C) It is an important factor affecting consumer wealth and thus consumer […]