15 questions about Money and Banking-No copy, use your own word, can not give the answer to someone else.-use the textbook, do not copy online
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1. What are the three main functions of money? Explain each function using the example of how
cigarettes performed each function in the prisoner of war camp article. Which function is the most
important and why?
2. Create an example of barter and explain the problem of the double coincidence of wants between
two fictional people and two goods. Now introduce a third person and third good and show how
this problem can possibly be resolved. What qualities would we expect to see in a good that
emerges as a medium of exchange and why?
3. What is the difference between the direct financial market and the indirect financial market?
Name some entities other than commercial banks that make up the indirect financial market. Why
do you think the indirect financial still exists in the presence of a strong and well-developed direct
financial market?
4. Explain the difference between stocks and bonds.
5. How is illiquidity different from insolvency? Show each scenario using two separate balance
sheets for a commercial bank.
6. What is fractional reserve banking? Draw a balance sheet of a bank that engages in fractional
reserve banking.
7. Explain the difference between commodity money and fiat money and provide examples of
each.
8. Create an example involving 4 separate banks and 4 separate people that depicts the money
creation process inherent in fractional reserve banking through balance sheets. Assume that the
initial injection of cash worth $500 is made by the first person in the first bank and that each bank
maintains a 10% reserve ratio.
9. Draw a balance sheet for New Bank, which started its first day of operations with $6 million
in capital. A total of $100 million in checkable deposits is received. The bank makes a $25
million commercial loan and lends another $25 million in mortgage loans. Required reserves
are 8%.
10.The bank you own has the following balance sheet: Reserves: 50 million, Deposits: $500
million, Bank Borrowings: $25 million, Securities: $125 million, Loans: $400 million. Draw a
balance sheet for this bank and calculate this bank’s capital or equity. What is the reserve ratio that
this bank keeps?
11. Explain the argument that asymmetric information between depositors and bank managers
justifies the need for an institution such as the FDIC.
12. Explain the advantages or arguments for having an independent Central Bank.
13. Draw a graph that shows the distinct phases of the business cycle. Explain the main
characteristics of the first phase or upswing of the business cycle.
14. What are open market operations? Explain how an open market purchase works. Now show
the impact of an open market purchase of $500 million worth of bonds by the Fed on the
balance sheets of the banking system. Assume a reserve ratio of 10%.
15. Now show the impact on the money supply of an open market sale by the Fed on the
banking system worth $200 million, assume a reserve ratio of 8%.
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THE ECONOMICS OF
MONEY, BANKING, AND
FINANCIAL MARKETS
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THE ECONOMICS OF
MONEY, BANKING, AND
FINANCIAL MARKETS
Twelfth Edition
Frederic S. Mishkin
Columbia University
New York, NY
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ISBN 13: 978-0-13-473382-1
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About the Author
Frederic S. Mishkin is the Alfred Lerner Professor of Banking and Financial
Institutions at the Graduate School of Business, Columbia University.
He is also a Research Associate at the National Bureau of Economic
Research, co-director of the U.S. Monetary Policy Forum, a member of
the Squam Lake Working Group on Financial Reform, and past president
of the Eastern Economics Association. Since receiving his Ph.D. from
the Massachusetts Institute of Technology in 1976, he has taught at the
University of Chicago, Northwestern University, Princeton University,
and Columbia. He has also received an honorary professorship from
the People’s (Renmin) University of China. From 1994 to 1997, he was
Executive Vice President and Director of Research at the Federal Reserve
Bank of New York and an associate economist of the Federal Open Market
Committee of the Federal Reserve System. From September 2006 to
August 2008, he was a member (governor) of the Board of Governors of
the Federal Reserve System.
Professor Mishkin’s research focuses on monetary policy and its impact on
financial markets and the aggregate economy. He is the author of more than
twenty books, including Macroeconomics: Policy and Practice, Second Edition
(Pearson, 2015); Financial Markets and Institutions, Ninth Edition (Pearson, 2018); Monetary
Policy Strategy (MIT Press, 2007); The Next Great Globalization: How Disadvantaged Nations
Can Harness Their Financial Systems to Get Rich (Princeton University Press, 2006); Inflation
Targeting: Lessons from the International Experience (Princeton University Press, 1999); Money,
Interest Rates, and Inflation (Edward Elgar, 1993); and A Rational Expectations Approach to
Macroeconometrics: Testing Policy Ineffectiveness and Efficient Markets Models (University of
Chicago Press, 1983). In addition, he has published more than 200 articles in such journals
as American Economic Review, Journal of Political Economy, Econometrica, Quarterly Journal of
Economics, Journal of Finance, and Journal of Monetary Economics.
Professor Mishkin has served on the editorial board of American Economic Review and
has been an associate editor at Journal of Business and Economic Statistics, Journal of Applied
Econometrics, Journal of Economic Perspectives, Journal of International Money and Finance, and
Journal of Money, Credit and Banking; he also served as the editor of the Federal Reserve Bank
of New York’s Economic Policy Review. He is currently an associate editor (member of the
editorial board) at six academic journals, including International Finance; Finance India; Review
of Development Finance; Borsa Economic Review; PSU Research Review and Emerging Markets, and
Finance and Trade. He has been a consultant to the Board of Governors of the Federal Reserve
System, the World Bank, and the International Monetary Fund, as well as to many central
banks throughout the world. He was also a member of the International Advisory Board to
the Financial Supervisory Service of South Korea and an advisor to the Institute for Monetary
and Economic Research at the Bank of Korea. Professor Mishkin was a Senior Fellow at the
Federal Deposit Insurance Corporation’s Center for Banking Research and was an academic
consultant to and serves on the Economic Advisory Panel and Monetary Advisory Panel of
the Federal Reserve Bank of New York.
vii
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Brief Contents
PART 1
Introduction
1
1 Why Study Money, Banking, and Financial Markets?……………………………………………..2
2 An Overview of the Financial System……………………………………………………………………. 22
3 What Is Money?……………………………………………………………………………………………………… 49
PART 2
Financial Markets
4
5
6
7
PART 3
An Economic Analysis of Financial Structure……………………………………………………… 164
Banking and the Management of Financial Institutions……………………………………. 188
Economic Analysis of Financial Regulation………………………………………………………… 217
Banking Industry: Structure and Competition……………………………………………………. 236
Financial Crises……………………………………………………………………………………………………… 268
Central Banking and the Conduct of Monetary Policy
13
14
15
16
PART 5
The Meaning of Interest Rates………………………………………………………………………………. 64
The Behavior of Interest Rates………………………………………………………………………………. 86
The Risk and Term Structure of Interest Rates……………………………………………………. 117
The Stock Market, the Theory of Rational Expectations, and the
Efficient Market Hypothesis…………………………………………………………………………………. 141
Financial Institutions 163
8
9
10
11
12
PART 4
63
293
Central Banks and the Federal Reserve System………………………………………………….. 294
The Money Supply Process………………………………………………………………………………….. 318
Tools of Monetary Policy……………………………………………………………………………………… 343
The Conduct of Monetary Policy: Strategy and Tactics……………………………………… 369
International Finance and Monetary Policy
403
17 The Foreign Exchange Market……………………………………………………………………………… 404
18 The International Financial System…………………………………………………………………….. 432
PART 6
Monetary Theory
19
20
21
22
23
24
25
461
Quantity Theory, Inflation, and the Demand for Money………………………………….. 462
The IS Curve………………………………………………………………………………………………………….. 480
The Monetary Policy and Aggregate Demand Curves………………………………………. 500
Aggregate Demand and Supply Analysis……………………………………………………………. 515
Monetary Policy Theory………………………………………………………………………………………. 559
The Role of Expectations in Monetary Policy…………………………………………………….. 588
Transmission Mechanisms of Monetary Policy………………………………………………….. 608
ix
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x
Brief Contents
Additional Chapters on MyLab Economics
1
2
3
4
5
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Financial Crises in Emerging Market Economies
The ISLM Model
Nonbank Finance
Financial Derivatives
Conflicts of Interest in the Financial Services Industry
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Contents in Detail
PART 1
Introduction
1
CHAPTER 1
Why Study Money, Banking, and Financial Markets? 2
Why Study Financial Markets?…………………………………………………………………………………………2
Debt Markets and Interest Rates…………………………………………………………………………………. 3
The Stock Market………………………………………………. …
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