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Economics of Money, Banking and Financial Markets 9th Edition Frederic S. Mishkin - Solutions
If you suspect that a company will go bankrupt next year, which would you rather hold, bonds issued by the company or equities by the company? Why?
How can the adverse selection problem explain why you are more likely to make a loan to a family member than to a stranger?
Why do loan sharks worry less about moral hazard in connections with their borrowers than some other lenders do?
If you are an employer, what kinds of moral hazard problems might you worry about with your employees?
If there were no asymmetry in the information that a borrower and a lender had, could there still be a moral hazard problem?
In a world without information and transaction costs, financial intermediaries would not exist. Is this statement true, false, or uncertain? Explain your answer.
Why might you be willing to make a loan to your neighbor by putting funds in a saving account earning a 5% interests rate at the bank and having the bank lend her the funds at a 10% interest rate rather than lend her the funds yourself?
How does risk sharing benefit both financial intermediaries and private investors?
Discuss some of the manifestations of the globalization of world capital markets.
There are three goods produced in an economy by three individuals:Good ........ ProducerApples ........ Orchard ownerBananas......... Banana growerChocolate....... ChocolatierIf the orchard owner likes only bananas, the banana grower likes only chocolate, and the Chocolatier likes only apples,
Why were people in the United States in the nineteenth century sometimes willing to be paid by check rather than with gold, even though they knew that there was a possibility that the check might bounce?
In ancient Greece, why was gold a more likely candidate for use as money than wine was?
Was money a better store of value in the United States in the 1950s than it was in the 1970s? Why or why not? In which period would you have been more willing to hold money?
Would you be willing to give up your checkbook and instead use an electronic means of payment if it were made available? Why or why not?
Why have some economists described money during a hyperinflation as a “hot potato” that is quickly passed from one person to another?
In Brazil, a country that underwent a rapid inflation before 1994, many transactions were conducted in dollars rather than in real’s, the domestic currency. Why?
Suppose that a researcher discovers that a measure of the total amount of debt in the U.S economy over the past twenty years was a predictor of inflation and the business cycle than M1 or M2. Does this discovery mean that we should define money as equal to the total amount of debt in the economy?
Why are revisions of monetary aggregates less of a problem for measuring long-run movements of the money supply than they are for measuring short-run movements?
Would a dollar tomorrow be worth more to you today when the interest rate is 20% or when it is 10%?
What is the yield to maturity on a simple loan for $1 million that requires a repayment of $2 million in five years time?
To pay for college, you have just taken out a $1,000 government loan that makes you pay $126 per year for 25 years. However, you don’t have to start making these payments until you graduate from college two years from now. Why is the yield to maturity necessarily less than 12%, the yield to
Which $1,000 bond has the higher yield to maturity, a twenty-years bond selling for $800 with a current yield of 15% or a one-year bond selling for $800 with a current yield of 5%?
You are offered two bonds, a one-year U.S. Treasury bond with a yield to maturity of 9% and a one-year U.S Treasury bill with a yield on a discount basis of 8.9%. Which would you rather own?
If there is a decline in interest rate, which would you rather be holding long-term bonds or short-term bonds? Why? Which type of bond has the greater interest-rate risk?
Francine the Financial Advisor has just given you the following advice: Long-term bonds are a great investment because their interest rate is over 20%. Is Francine necessarily right?
If mortgage rates rise from 5% to 10% but the expected rate of increase in housing prices rises from 2% to 9%, are people more or less likely to but houses?
Interest rates were lower in the mid-1980s than they were in the late 1970s, yet many economisis have commented that real interest rates were actually much higher in the mid-1980s than in the late 1970s. Does this make sense? Do you think that these economists are right?
Explain why you would be more or less willing to buy a share of Microsoft stock in the following situations:a. Your wealth falls.b. You expect the stock to appreciate in value.c. The bond market becomes more liquid.d. You expect gold to appreciate in value.e. Prices in the bond market become more
Explain why you would be more or less willing to buy a house under the following circumstances:a. You just inherited $100,000.b. Real estate commissions fall from 6% of the sales price to 5% of the sales price.c. You expect Microsoft stock to double in value next year.d. Prices in the stock market
Explain why you would be more or less willing to buy gold under the following circumstances:a. Gold again becomes acceptable as a medium of exchange.b. Prices in the gold market become more volatile.c. You expect inflation to rise, and gold prices tend to move with the aggregate price level.d. You
Explain why you would be more or less willing to buy long-term AT&T bonds under the following circumstances:a. Trading in these bonds increases, making them easier to sell.b. You expect a bear market in stock (stock prices are expected to decline).c. Brokerage commissions on stock fall.d. You
An important why in which the Federal Reserve decreases the money supply is by selling bonds to the public. Using a supply and demand analysis for bonds, show what effect this action has on interest rates. Is your answer consistent with what you would expect to find with the liquidity preference
Using both the liquidity preference framework and the supply and demand for bonds framework, show why interest rates are procyclical (rising when the economy is expanding and falling during recessions).
Why should a rise in the price level (but not in expected inflation) cause interest rates to rise when the nominal money supply is fixed?
What effect will a sudden increase in the volatility of gold prices have on interest rates?
How might a sudden increase in people’s expectations of future real estate prices affect interest rates?
Explain what effect a large federal deficit might have on interest rates.
Using both the supply and demand for bonds and liquidity preference frameworks, shown what the effect is on interest rates when the riskiness of bonds rises. Are the results the same in the two frameworks?
If the price level falls next year, remaining fixed there-after, and the money supply is fixed, what is likely to happen to interest rates over the next two year?
Will there be an effect on interest rates if brokerage commissions on stocks fall? Explain your answer.
The president of the United States announces in a press conference that he will fight the higher inflation rate with a new anti-inflation program. Predict what will happen to interest rates if the public believes him.
The chairman of the Fed announces that interest rates will rise sharply next year, and the market believes him. What will happen to today’s interest rate on AT&T bonds, such as the 8 1/8s of 2022?
If the next chair of the Federal Reserve Board has a reputation for advocating an even slower rate of money growth than the current chair, what will happen to interest rates? Discuss the possible resulting situations.
Why do U.S. Treasury bills have lower interest rates than large-denomination negotiable bank CDs?
Risk premiums on corporate bonds are usually anticyclical; that is, they decrease during business cycle expansions and increase during recessions. Why is this so?
Assuming that the expectations theory is the correct theory of the term structure, calculate the interest rates in the term structure for maturities of one to five years, and plot the resulting yield curves for the following series of one-year interest rates over the next five years:a. 5%, 7%, 7%,
Assuming that the expectations theory is the correct theory of the term structure, calculate the interest rates in the term structure for maturities of one to five years, and plot the resulting yield curves for the following paths of one-year interest rates over the next five years:a. 5%, 6%, 7%,
If a yield curve looks like the one shown in figure (a) below, what is the market predicting about the movement of future short-term interest rates? What might the yield curve indicate about the markets predictions for the inflation rate in thefuture?
If a yield curve looks like the one shown in figure (b) below, what is the market predicting about the movement of future short-term interest rates? What might the yield curve indicate about the market€™s predictions for the inflation rate in thefuture?
What effect would reducing income tax rates have on the interest rates of municipal bonds? Would interest rates of Treasury securities be affected, and if so how?
Predict what will happen to interest rates on a corporations bond if the federal government guarantees today that it will pay creditors if the corporation goes bankrupt in the future. What will happen to the interest rates on Treasury securities?
If the income tax exemption on municipal bonds were abolished, what would happen to the interest rates on these bonds? What effect would the change have on interest rates on U.S. Treasury securities?
Forecasters’ predictions of inflation are notoriously inaccurate, so their expectations of inflation cannot be rational. Is this statement true, false, or uncertain? Explain your answer.
Whenever it is snowing when Joe Commuter gets up in the morning, he misjudges how long it will take him to drive to work. Otherwise, his expectations of the driving time are perfectly accurate. Considering that it snows only once every ten years where Joe lives, Joe’s expectations are almost
Suppose that increases in the money supply lead to a rise in stock prices. Does this mean that when you see that the money supple has had a sharp increase in the past week, you should go out and buy stocks? Why or why not?
If the public expects a corporation to lose $5 per share this quarter and it actually loses $5, which is still the largest loss in the history of the company, what does the efficient market hypothesis say will happen to the price of the stock when the $4 loss is announced?
If you read in the Wall Street Journal that the smart money on Wall Street expects stock prices to fall, should you follow that lead and sell all your stocks?
If your broker has been right in her five previous buy and sell recommendations, should you continue listening to her advice?
If most participants in the stock market do not follow what is happening to the monetary aggregates, prices of common stock will not fully reflect information about them. Is this statement true, false, or uncertain? Explain your answer.
An efficient market is one in which no one ever profits from having better information than the rest. Is this statement true, false, or uncertain? Explain your answer.
If higher money growth is associated with higher future inflation, and if announced money growth turns out to be extremely high but is still less than the market expected, what do you think would happen to long-term bond prices?
Can we expect the value of the dollar to rise by 2% next week if our expectations are rational?
Human fear is the source of stock market crashes, so these crashes indicate that expectations in the stock market cannot be rational. Is this statement true, false, or uncertain? Explain your answer.
Identify the cash flows available to an investor in stock. How reliably can these cash flows be estimated? Compare the problem of estimating stock cash flows to estimating bond cash flows. Which security would you predict to be more volatile?
Some economists think that the central banks should try to prick bubbles in the stock market before they get out of hand and cause later damage when they burst. How can monetary policy be used to prick a bubble? Explain how it can do this using the Gordon growth model.
If stock prices did not follow a random walk, there would be unexploited profit opportunities in the market. Is this statement true, false, or uncertain? Explain your answer.
Can a person with rational expectations expect the price of a share of Google to rise by 10% in the next month?
Foreign exchange rates, like stock prices, should follow a random walk. Is this statement true, false, or uncertain? Explain your answer.
Would you be more will to lend to a friend if she put all of her life savings into her business than you would if she had not done so? Why?
Wealthy people often worry that others will seek to marry them only for their money. Is this a problem of adverse selection?
The more collateral there is backing a loan, the less the lender has to worry about adverse selection. Is this statement true, false, or uncertain? Explain your answer.
How can conflicts of interest make financial service firms less efficient?
How does spinning lead to a less efficient financial system?
How can economies of scale help explain the existence of financial intermediaries?
Describe two ways in which financial intermediaries help lower transaction costs in the economy.
Would moral hazard and adverse selection still arise in financial markets if information were not asymmetric? Explain.
How do standard accounting principles help financial markets work more efficiently?
Do you think the lemons problem would be more severe for stocks traded on the New York Stock Exchange or those traded over-the-counter? Explain.
Which firms are most likely to use bank financing rather than to issue bonds or stocks to finance their activities? Why?
How can the existence of asymmetric information provide a rationale for government regulation of financial markets?
How does the free-rider problem aggravate adverse selection and moral hazard problems in financial markets?
Explain how the separation of ownership and control in American corporations might lead to poor management.
Describe two conflicts of interest that occur when underwriting and research are provided by a single investment firm.
Describe two conflicts of interest that occur in accounting firms.
Which provisions of Sarbanes-Oxley do you think are beneficial, and which are not?
Which provisions of the Global Legal Settlement do you think are beneficial, and which are not?
How can a currency crisis lead to higher interest rates?
How can a bursting of an asset-price bubble in the stock market help trigger a financial crisis?
How does an unanticipated decline in the price level cause a drop in lending?
When can a decline in the value of a country’s currency exacerbate adverse selection and moral hazard problems? Why?
How can a decline in real estate prices cause deleveraging and a decline in lending?
How does a deterioration in balance sheets of financial institutions and the simultaneous failures of these institutions cause a decline in economic activity?
How does a general increase in uncertainty as a result of a failure of a major financial institution lead to an increase in adverse selection and moral hazard problems?
What are the two ways that spikes in interest rates lead to an increase in adverse selections and moral hazard problems?
How can government fiscal imbalances lead to a financial crisis?
How can financial liberalizations lead to financial crises?
What role does weak financial regulation and supervision play in causing financial crises?
Why do debt deflations occur in advanced countries, but not in emerging market countries?
What technological innovations led to the development of the subprime mortgage market?
True, false, or uncertain: Financial engineering always leads to a more efficient financial system.
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