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Mishkin • Instructor’s Manual for The Economics of Money, Banking, and Financial Markets, Twelfth Edition 136
Chapter 11
ANSWERS TO QUESTIONS
1. Do you think that before the National Bank Act of 1863 the prevailing conditions in the
banking industry fostered or hindered trade across states in the United States?
2. Why does the United States operate under a dual banking system?
3. In light of the recent financial crisis of 2007–2009, do you think that the firewall created by
the Glass-Steagall Act of 1933 between commercial banking and the securities industry
proved to be a good thing or not?
4. Which regulatory agency has the primary responsibility for supervising the following
categories of commercial banks?
a. National banks
b. Bank holding companies
c. Nonfederal Reserve member state banks
d. Federal Reserve member state banks
Mishkin • Instructor’s Manual for The Economics of Money, Banking, and Financial Markets, Twelfth Edition 137
e. Federally chartered savings and loan associations
f. Federally chartered credit unions
5. How does the emergence of interest-rate risk help explain financial innovation?
6. Why did new technology make it harder to enforce limitations on bank branching?
7. “The invention of the computer is the major factor behind the decline of the banking
industry.” Is this statement true, false, or uncertain? Explain your answer.
Uncertain. The invention of the computer did help lower transaction costs and the costs of
collecting information, both of which have made other financial institutions more
8. “If inflation had not risen in the 1960s and 1970s, the banking industry might be healthier
today.” Is this statement true, false, or uncertain? Explain your answer.
Mishkin • Instructor’s Manual for The Economics of Money, Banking, and Financial Markets, Twelfth Edition 138
Copyright © 2019 by Pearson Education, Inc. All rights reserved.
However, improved information technology would still have eroded the banks’ income
advantages on the assets side of their balance sheet, so the decline in the banking industry
would still have occurred.
9. How do sweep accounts and money market mutual funds allow banks to avoid reserve
requirements?
With a sweep account, any account funds left at the end of the business day are technically
transferred to another account, which is invested in overnight securities. Since they are no
10. If reserve requirements were eliminated in the future, as some economists advocate, what
effects would this have on the size of money market mutual funds?
11. Why is loophole mining so prevalent in the banking industry in the United States?
12. Why have banks been losing cost advantages in acquiring funds in recent years?
The rise in inflation and the resulting higher interest rates on alternatives to checkable
deposits meant that banks had a big shrinkage in this low-cost way of raising funds. The
Mishkin • Instructor’s Manual for The Economics of Money, Banking, and Financial Markets, Twelfth Edition 142
c. Calculate the growth rate from the most recent quarter of data available to the same
quarter a year prior. How does this growth rate compare to the highest average yearly
growth rate for the decades from part (b)?
