Econ Solution Manual

PART THREE Answers to End-of-Chapter Problems

Chapter 1

Why Study Money, Banking, and Financial Markets?

2. The data in Figures 1, 2, 3, and 4 suggest that real output, the inflation rate, and interest rates would all fail. 4. You might be more likely to buy a house or a car because the cost of financing them would fall, or you might be less likely to save because you earn less on your savings. 6. No. It is true that people who borrow to purchase a house or a car are worse off because it costs them more to finance their purchase; however, savers benefit because they can earn higher interest rates on their savings. 7. The basic activity of banks is to accept deposits and make loans. 8. They channel funds from people who do not have a productive use for them to people who do, thereby resulting in higher economic efficiency. 9. The interest rate on three-month Treasury bills fluctuates more than the other interest rates and is lower on average. The interest rate on Baa corporate bonds is higher on average than the other interest rates. 10. The lower price for a firm’s shares means that it can raise a smaller amount of funds, so investment in facilities and equipment will fall. 11. Higher stock prices means that consumers’ wealth is higher, and they will be more likely to increase their spending. 12. It makes foreign goods more expensive, so British consumers will buy fewer foreign goods and more domestic goods. 13. It makes British goods more expensive relative to American goods. Thus American businesses will find it easier to sell their goods in the United States and abroad, and the demand for their products will rise. 14. In the mid- to late 1970s and in the late 1980s and early 1990s, the value of the dollar was low, making travel abroad relatively more expensive; thus it was a good time to vacation in the United States and see the Grand Canyon. With the rise in the dollar’s value in the early 1980s, travel abroad became relatively cheaper, making it a good...