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Mishkin • Instructor’s Manual for The Economics of Money, Banking, and Financial Markets, Twelfth Edition 51
Chapter 1
ANSWERS TO QUESTIONS
1. What is the typical relationship among interest rates on three-month Treasury bills, long-
term Treasury bonds, and Baa corporate bonds?
2. What effect might a fall in stock prices have on business investment?
3. Explain the main difference between a bond and a common stock.
A bond is a debt instrument, which entitles the owner to receive periodic amounts of money
4. Explain the link between well-performing financial markets and economic growth. Name one
channel through which financial markets might affect economic growth and poverty.
5. What was the main cause of the recession that began in 2007?
Mishkin • Instructor’s Manual for The Economics of Money, Banking, and Financial Markets, Twelfth Edition 52
6. Can you think of a reason why people in general do not lend money to one another to buy a
house or a car? How would your answer explain the existence of banks?
7. What are the other important financial intermediaries in the economy, besides banks?
8. Can you date the latest financial crisis in the United States or in Europe? Are there reasons
to think that these crises might have been related? Why?
9. Has the inflation rate in the United States increased or decreased in the past few years?
What about interest rates?
10. If history repeats itself and we see a decline in the rate of money growth, what might you
expect to happen to
a. real output?
b. the inflation rate?
c. interest rates?
11. When interest rates decrease, how might businesses and consumers change their economic
behavior?
Mishkin • Instructor’s Manual for The Economics of Money, Banking, and Financial Markets, Twelfth Edition 53
12. Is everybody worse off when interest rates rise?
13. Why do managers of financial institutions care so much about the activities of the Federal
Reserve System?
14. How does the current size of the U.S. budget deficit compare to the historical budget deficit
or surplus for the time period since 1950?
15. How would a fall in the value of the pound sterling affect British consumers?
16. How would an increase in the value of the pound sterling affect American businesses?
17. How can changes in foreign exchange rates affect the profitability of financial institutions?
18. According to Figure 8, in which years would you have chosen to visit the Grand Canyon in
Arizona rather than the Tower of London?
Mishkin • Instructor’s Manual for The Economics of Money, Banking, and Financial Markets, Twelfth Edition 54
The following table lists the foreign exchange rate between U.S. dollars and British pounds
(GBP) during May 2017. Which day would have been the best for converting $200 into British
pounds? Which day would have been the worst? What would be the difference in pounds?
Date
$/£
5-01
1.2917
5-02
1.2921
5-03
1.2916
5-04
1.2910
5-05
1.2950
05-08
1.2942
05-09
1.2939
05-10
1.2939
05-11
1.2885
05-12
1.2880
05-15
1.2917
05-16
1.2912
05-17
1.2944
05-18
1.3009
05-19
1.3018
05-22
1.3006
05-23
1.2984
05-24
1.2935
05-25
1.2954
05-26
1.2795
05-30
1.2858
05-31
1.2905
19. When the dollar is worth more in relation to currencies of other countries, are you more
likely to buy American-made or foreign-made jeans? Are U.S. companies that manufacture
jeans happier when the dollar is strong or when it is weak? What about an American
company that is in the business of importing jeans into the United States?
When the dollar increases in value, foreign goods become less expensive relative to
Mishkin • Instructor’s Manual for The Economics of Money, Banking, and Financial Markets, Twelfth Edition 56
ANSWERS TO DATA ANALYSIS PROBLEMS
1. Go to the St. Louis Federal Reserve FRED database and find data on the three-month
treasury bill rate (TB3MS), the three-month AA nonfinancial commercial paper rate
(CPN3M), the 30-year treasury bond rate (GS30), the 30-year fixed rate mortgage average
(MORTGAGE30US), and the NBER recession indicators (USREC). For the mortgage rate
indicator, set the frequency setting to ‘monthly’.
a. In general, how do these interest rates behave during expansionary periods?
b. In general, how do the three-month interest rates compare to the 30-year rates? How do
the Treasury rates compare to the respective commercial paper and mortgage rates?
c. For the most recent available month of data, take the average of each of the three-month
rates and compare it to the average of the three-month rates from January 2000. How do
the averages compare?
d. For the most recent available month of data, take the average of each of the 30-year
rates and compare it to the average of the 30-year rates from January 2000. How do the
averages compare?
May 2017
January 2000
Three-month rate avg.
0.92
5.53
30-year rate avg.
3.49
7.42
See table above. For both rate averages, they have decreased significantly since January
2000.
Mishkin • Instructor’s Manual for The Economics of Money, Banking, and Financial Markets, Twelfth Edition 57
2. Go to the St. Louis Federal Reserve FRED database and find data on the M1 money supply
(M1SL) and the 10-year treasury bond rate (GS10). Add the two series into a single graph by
using the “Add Data Series” feature. Transform the M1 money supply variable into the M1
growth rate by adjusting the units for the M1 money supply to “Percent Change from Year
Ago.”
a. In general, how have the growth rate of the M1 money supply and the 10-year treasury
bond rate behaved during recessions and during expansionary periods since the year
2000?
b. In general, is there an obvious, stable relationship between money growth and the
10-year interest rate since the year 2000?
c. Compare the money growth rate and the 10-year interest rate for the most recent month
available to the rates for January 2000. How do the rates compare?
May 2017
January 2000
M1 Money Growth
8.00
2.19
10-year Treasury rate
2.30
6.66
The money growth rate is significantly higher in May 2017 than it was in January 2000.
The 10-year treasury rate is significantly lower in May 2017 than it was in January 2000.
