Solution Manual for Economics of Money, Banking and Financial Markets Global Edition, 10th Edition

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Instructor’s ManualforThe Economics of Money, Banking,and Financial MarketsTenthEditionGlobal EditionFrederic S. MishkinColumbiaUniversity

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iiiContentsPreface....................................................................................................................................................vPart OneHow to Use the Instructor’s Manual and Other Textbook Ancillaries......................1Organization of the Instructor’s Manual................................................................................................3Alternative Course Outlines...................................................................................................................5Overviews of the Textbook Chapters and Teaching Tips......................................................................9Answers to End-of-Chapter Problems....................................................................................................10PowerPoint Presentation.........................................................................................................................11Test Bank................................................................................................................................................12Course Management with MyEconLab..................................................................................................13The Mishkin Companion Web Site........................................................................................................14ReadingsinMoney, Banking, and Financial Markets(Online Reader).................................................15Study Guide............................................................................................................................................21Part TwoOverviews of the Textbook Chapters and Teaching Tips............................................23Part ThreeAnswers to End-of-Chapter Problems...........................................................................59Part FourTransparency Masters: Chapter Outlines....................................................................163

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vPrefaceFrom my experience, the demands for good teaching have increased dramatically in recent years. To aidinstructors in this challenging environment, I have worked hard to make this Instructor’s Manual a valuableteaching aid that should help save you time in preparing your class.Rather than proceeding chapter by chapter, this Instructor’s Manual is broken into four parts. Part Onecontains pedagogic suggestions on such topics as how to organize the course and how to use the ancillaries.Part Two offers chapter overviews and teaching tips that I have found useful in the classroom. Part Threecontains the answers and solutions to the end-of-chapter problems. Part Four provides the transparencymasters for the chapter outlines.Ihavefound that this organizational structure makes it easy to use theInstructor’sManual.I believe that this Instructor’s Manual will be an extremely valuable tool in teaching the money and bankingcourse. I would appreciate any suggestions or comments for improving the manual.Please direct allcorrespondence to me at the address below:Frederic S. MishkinGraduate School of BusinessUris Hall 817Columbia UniversityNew York, NY 10027

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PARTONEHow to Use theInstructor’s Manualand Other TextbookAncillaries

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3Organization of the Instructor’s ManualTo help instructors cope with the increased demands for good teaching in recent years,The Economicsof Money, Banking, and Financial Markets,TenthEdition, includes the most comprehensive packageof supplementary materials of any money, banking, and financial markets textbook. As part of thesesupplemental materials, I have designed the Instructor’s Manual to help save you time in preparingclass materials, such as class outlines, solutions to homework problems, lecture notes, and overheadtransparencies.This Instructor’s Manual is divided into four parts. Part One discusses how to use the Instructor’s Manualand the other textbook ancillaries to make your teaching of the money and banking course both moreeffective and less time-consuming. Part Two contains an overview of all the textbook chapters alongwith teaching tips that I have found effective. Part Three contains the answers to the end-of-chapterproblemsfor use by the instructor to preparesolution setsfor the problems he or she assigns to thestudents asproblem sets. Part Four contains transparency masters of chapter outlines, which can beused either tomake overhead transparencies for use in class or to make handouts for the students.To obtain any of the available ancillaries, adopters of the text just need to get in touch with theirPearson sales representative, or alternatively they can visit the Instructor’s Resource Centeratwww.pearsonglobaleditions.com/mishkin.

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5Alternative Course OutlinesThere are many different ways to teach a course on money, banking, and financial markets. For this reason,the material inThe Economics of Money, Banking, and Financial Markets,TenthEdition, hasbeen arrangedwith flexibility in mind, so that many teaching styles can be accommodated. The following sections suggestsample outlines for four main approaches to teaching money, banking, and financial markets, showing howthe text can be adapted to each approach, as well as to quarter and semester teaching schedules. Note,however, that many variations on these outlines are possible.◼Outline for General Money and Banking CourseCore ChaptersChapter No.Chapter Title1.Why StudyMoney, Banking, and Financial Markets?2.An Overview of the Financial System3.What Is Money?4.Understanding Interest Rates5.The Behavior of Interest Rates11.Banking and the Management of Financial Institutions12.Economic Analysis of Financial Regulation13.Banking Industry: Structure and Competition14.Central Banks: A Global Perspective16.Tools of Monetary Policy17.The Conduct of Monetary Policy:Strategy and Tactics23.Aggregate Demand and Supply Analysis24.Monetary Policy TheoryFor a one-semester course, cover any six of the following optional chapters:Chapter No.Chapter Title6.The Risk and Term Structure of Interest Rates7.The Stock Market, the Theory of Rational Expectations, and theEfficient Market Hypothesis8.An Economic Analysis of Financial Structure9.Financial Crisesin Advanced Economies10.Financial Crises in EmergingMarketEconomies15.The Money Supply Process18.The Foreign Exchange Market19.The International Financial System20.Quantity Theory, Inflation,and theDemand for Money21.TheISCurve22.TheMonetaryPolicy and Aggregate Demand Curves25.The Role of Expectations in Monetary Policy26.Transmission Mechanisms of Monetary Policy

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6Mishkin•TheEconomics of Money, Banking, and Financial Markets,Tenth EditionA one-quarter course would probably only include one or two of the optional chapters unless some of thechapters on central banking and the conduct of monetary policy (Chapters14,16, and17) were deleted.

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6Mishkin•TheEconomics of Money, Banking, and Financial Markets,Tenth Edition◼Outline for General Money and Banking Coursewith an International EmphasisCore ChaptersChapter No.Chapter Title1.Why Study Money, Banking, and Financial Markets?2.An Overview of the Financial System3.What Is Money?4.Understanding InterestRates5.The Behavior of Interest Rates11.Banking and the Management of Financial Institutions12.Economic Analysis of Financial Regulation13.Banking Industry: Structure and Competition14.Central Banks: A Global Perspective16.Tools of Monetary Policy17.The Conduct of Monetary Policy: Strategy and Tactics18.The Foreign Exchange Market19.The International Financial System23.Aggregate Demand and Supply Analysis24.Monetary Policy TheoryFor a one-semester course, cover any four of the following optional chapters:Chapter No.Chapter Title6.The Risk and Term Structure of Interest Rates7.The Stock Market, the Theory of Rational Expectations, and theEfficient Market Hypothesis8.An Economic Analysis of Financial Structure9.Financial Crises in Advanced Economies10.Financial Crises in EmergingMarketEconomies15.The Money Supply Process20.Quantity Theory, Inflation,and the Demand for Money21.TheISCurve22.The Monetary Policy and Aggregate Demand Curves25.The Role of Expectations in Monetary Policy26.Transmission Mechanisms of Monetary PolicyA one-quarter course would probably not include any other chapters unless some of the chapters oncentral banking and the conduct of monetary policy (Chapters14,16, and17) were deleted.

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Part One: How to Use the Instructor’s Manual and Other Textbook Ancillaries7◼Outline for Financial Markets and Institutions CourseCore ChaptersChapter No.Chapter Title1.Why Study Money, Banking, and Financial Markets?2.An Overview of the Financial System3.What Is Money?4.Understanding Interest Rates5.The Behavior of Interest Rates6.The Risk and Term Structure of Interest Rates7.The Stock Market, the Theory of Rational Expectations, and theEfficient Market Hypothesis8.An Economic Analysis of Financial Structure9.Financial Crisesin Advanced Economies10.Financial Crises in EmergingMarketEconomies11.Banking and the Management of Financial Institutions12.Economic Analysis of Financial Regulation13.Banking Industry: Structure and CompetitionFor a one-semester course, cover any seven of the following optional chapters:Chapter No.Chapter Title14.Central Banks: A Global Perspective15.The Money Supply Process16.Tools of Monetary Policy17.The Conduct of Monetary Policy: Strategy and Tactics18.The Foreign Exchange Market19.The International Financial System20.Quantity Theory, Inflation,and the Demand for Money21.TheISCurve22.The Monetary Policy and Aggregate Demand Curves23.Aggregate Demand and Supply Analysis24.Monetary Policy Theory25.The Role of Expectations in MonetaryPolicy26.Transmission Mechanisms of Monetary PolicyA one-quarter course would probably only include one or two of the optional chapters.

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8Mishkin•TheEconomics of Money, Banking, and Financial Markets,Tenth Edition◼Outline for Monetary Theory and Policy CourseCore ChaptersChapter No.Chapter Title1.Why Study Money, Banking, and Financial Markets?2.An Overview of the Financial System3.What Is Money?4.Understanding Interest Rates5.The Behavior of Interest Rates14.Central Banks: A Global Perspective15.The Money Supply Process16.Tools of Monetary Policy17.The Conduct of Monetary Policy: Strategy and Tactics23.Aggregate Demand and Supply Analysis24.Monetary Policy Theory25.The Role of Expectations in Monetary Policy26.Transmission Mechanisms of Monetary PolicyFor a one-semester course, cover any six of the following optional chapters:Chapter No.Chapter Title6.The Risk and Term Structure of Interest Rates7.The Stock Market, the Theory of Rational Expectations, and theEfficient Market Hypothesis8.An Economic Analysis of Financial Structure9.Financial Crises in Advanced Economies10.Financial Crises in EmergingMarketEconomies11.Banking and the Management of Financial Institutions12.Economic Analysis of Financial Regulation13.Banking Industry: Structure and Competition18.The Foreign Exchange Market19.The International Financial System20.Quantity Theory, Inflation,and the Demand for Money21.TheISCurve22.The Monetary Policy and Aggregate Demand CurvesA one-quarter course would probably only include three or four of the optional chapters.

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Part One: How to Use the Instructor’s Manual and Other Textbook Ancillaries9Overviews of the Textbook Chaptersand Teaching TipsI have been teaching money and banking now for overthirtyyears. The overviews and teaching tips inPart Two of the Instructor’s Manual are intended to share with you some of my experiences in theclassroom with teaching the material in the textbook. The overview and teaching tips for each chapterprovide a brief description of the contents of the chapter, discuss the novel features of the chapter, indicatewhat central points need to be transmitted to the student, suggest teaching tips that I have found useful inclass, and provide guidance as to what material can easily be skipped in each chapter.

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10Mishkin•TheEconomics of Money, Banking, and Financial Markets,Tenth EditionAnswers to End-of-Chapter ProblemsPart Three of the Instructor’s Manual contains the answers to end-of-chapter problems. Some of thesequestions require students to look up current data, and in these cases no answers are given; however, forthe rest of the questions, the answers are quite complete.Many instructors will use the end-of-chapter questions for homework assignments, as I do. I have found ituseful to hand out answers to the questions provided in Part Three to the students as solutions sets after theyhave completed their assignments; they find them to be an invaluable study aid. Making up these solutionsets for reproduction should be quite easy, either by cutting and pasting from Part Threeor downloadingthe files from the Instructor’s Resource Center atwww.pearsonglobaleditions.com/mishkin.

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Part One: How to Use the Instructor’s Manual and Other Textbook Ancillaries11PowerPoint PresentationAlso offered in the instructor’ssupplement package is a PowerPoint Presentation that contains lecture notesand all the textbook’s figures and tables. These slides are comprehensive and outline all the major pointscovered in the text. The lecture notes have been class-tested successfully—they are the ones that I use inclass—and they should help other instructors prepare their lectures as they have helped me.Please note that unless you have access to PowerPoint version 4.0 or higher you will only be able to projectthe provided images using the viewer that is included; editing or adding material will not be possible unlessyou have the software program.To obtainthePowerPoint files, adopters of the text just need to get intouch with their Pearson salesrepresentative, or visit the Instructor’s Resource Center atwww.pearsonglobaleditions.com/mishkintodownload the available electronic files.

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12Mishkin•TheEconomics of Money, Banking, and Financial Markets,Tenth EditionTest BankThe Test Bankcontains over 2,500 multiple-choice questionsthat are appropriate for useas quiz or test questions. It is provided as aset of Word filesin Macintosh and Windows versions,as well as a set of .BOK Testgen files. It can be downloaded from the Instructor’s Resource Centeratwww.pearsonglobaleditions.com/mishkin.These forms provide alternative methods for the instructor tomake up exams.The Pearson TestGen program offered is a computerized test generator that lets you construct tests bychoosing questions from theTestBank that was prepared specifically for this textbook and your course.The test construction process involves the use of a simple TestGen screen that you fill in on the computerto choose questions for your test. If desired, test questions can be viewed on the screen, and test questionscan be edited, saved, or printed. In addition, you can add questions, which may include graphics.The program features:TheTestBank can includefourtypes of questions: multiple choice,true/false,short answer,andessay.A supplementary page attached to eachTestBank question can contain its topic, objective, skill,difficulty, and other user-added information.Test questions can be chosen in a variety of ways including manual selection, random selection,choose while viewing, and choose by searching.Questions chosen for a test can be viewed and edited without affecting the original versions of thequestions in the item bank.Test size is limited only by the memory size of the computer and the length of the questions you choose.Test questionscanbe printed in the exact order you specify or grouped and sorted automatically bythe program.Printer files can be created or modified to take advantage of the capabilities of your printer.

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Part One: How to Use the Instructor’s Manual and Other Textbook Ancillaries13Course Management with MyEconLabMyEconLab delivers rich online content and innovative learning tools to your classroom. Instructors whouse MyEconLab gain access to powerful communication and assessment tools, and their students receiveaccess to the additional learning resources described below.Students and MyEconLabMyEconLab delivers the content and tools your students need to succeed online. Students whose instructorsuse MyEconLab gain access to a variety of study and practice tools that put them in control of their ownlearning:•Practice tests enable students to check their understanding and identify areas in which they need to dofurther work.•A personalized study plan based on test results will show students where further study is needed.•Interactive exercises based on specific end-of-chapter questions as well as general topics allow thestudent to review the material at any time. Some exercises require students to draw a graph.•The textbookisonline, withkey figures.•A selection ofReadingsinMoney, Banking, and Financial Markets,regularly updated by meand James W. Eaton of Bridgewater College, provides current articles related to topics coveredin the textbook.•Each week during the semester, students will be asked to read an article from a major online newssource and answer questions on it. This is an effective and natural way to bring current events intothe classroom.•Sample quizzes give students a chance to double-check their understanding and application of the maintopics in each test chapter.•Supplements to the textbook, such as chapter synopses, glossary flashcards, and links to other Web sites,help instructors to expand on the material.Instructors and MyEconLabWith MyEconLab instructors can customize existing content and add their own. They can manage, create,and assign tests to students, choosing from the exercises in the Study Plan as well as from our Test Banks.MyEconLab also includes advanced tracking features that record students’ usage and performance and aGradebook feature to see students’ test results.Please contact your Pearsonsales representative tosee howMyEconLab can workfor your course.

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14Mishkin•TheEconomics of Money, Banking, and Financial Markets,Tenth EditionThe Mishkin Companion WebsiteTheCompanion Website forThe Economics of Money, Banking, and Financial Markets,TenthEdition,atwww.pearsonglobaleditions.com/mishkin, offers a brief chapter preview, a review quiz, links to relatedWeb sites, and glossary flashcards.Otherfeatures such as the electronic textbook and interactiveexercises are only available via MyEconLab.

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Part One: How to Use the Instructor’s Manual and Other Textbook Ancillaries15ReadingsinMoney, Banking, and Financial Markets(Online Reader)A basic problem of textbooks in the money and banking field is that current events and financial innovationmake many of the facts in the textbook obsolete soon after publication. To minimize this problem,TheEconomics of Money, Banking, and Financial Markets,TenthEdition,focuses less on a set of facts, butrather stresses the underlying principles to understand money, banking, and financial markets. The advantageto this approach is that these principles never become obsolete, and as a result, the material in the textcontinues to promote understanding of the financial system as it evolves over time.Because of the emphasis on basic principles, the text works extremely well when it is supplemented bycurrent readings on banking and financial markets. To make it easy for instructors to supplement the textwith current readings, Pearson publishes an annualReadingsbook online, designed to supplement the textand edited by James W. Eaton of Bridgewater College and me. TheReadingscollection is unique in that itis updated over the life of this edition of the textbook, with well over half of the articles new with eachupdate. In addition, it includes summaries of the articles, provides suggestions for which textbookchapter(s) the reading might be assigned, and contains discussion questions that follow each reading inorder to encourage students to think about how the reading relates to material in the text. TheReadingsshould enable instructors to keep the subject matter of their course current throughout the life of theedition of the text.To provide you with a better feel for what theReadingscomprise, themost current table of contentsisprovided on the next several pages.

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16Mishkin•TheEconomics of Money, Banking, and Financial Markets,Tenth EditionReadings for Money, Banking,and Financial Markets*Reading 1“Is U.S. Federal Debt Too Large?” Pedro Amaral,Economic Commentary, No. 2010–10, Federal ReserveBank of Cleveland, August 24, 2010.Reading 2“Evaluating the Relative Strength of the U.S. Capital Markets.” Stavros Peristiani,Current Issues inEconomics and Finance13(6), Federal Reserve Bank of New York, June 2007.Reading 3“The Fate of One-Dollar Coins in the U.S.” Sébastien Lotz and Guillaume Rocheteau,EconomicCommentary, Federal Reserve Bank of Cleveland, October 15, 2004.Reading 4“Are Consumers Cashing Out?” Paul W. Bauer and Daniel Littman,Economic Commentary, FederalReserve Bank of Cleveland, October 1, 2007.Reading 5“Inflation Expectations: How the Market Speaks.” Simon Kwan,FRBSF Economic LetterNo.2005–25,Federal Reserve Bank of San Francisco, October 3, 2005.Reading 6“Flight to Safety and U.S. Treasury Securities.” Bryan Noeth and Rajdeep Sengupta,Regional Economist,Federal Reserve Bank of St. Louis, July 2010, 18–19.Reading 7“The Yield Curve as a Leading Indicator: Some Practical Issues.” Arturo Estrella and Mary R. Trubin,Current Issues in Economics and Finance12(5), Federal Reserve Bank of New York, July/August 2006.Reading 8“How Economic News Moves Markets.”Leonardo Bartolini, Linda Goldberg, and Adam Sacarny,Current Issues in Economics and Finance14(6), Federal Reserve Bank of New York, August 2008.Reading 9“The Price Is Right?” Renee Courtois,Region Focus, Federal Reserve Bank of Richmond,Fall 2009, 16–19, 34.Reading 10“For Better and For Worse: Three Lending Relationships.” Mitchell Berlin,Business Review, FederalReserve Bank of Philadelphia, November/December 1996, 3–12.Reading 11“How Will a Credit Crunch Affect Small Business Finance?” Gregory F. Udell,FRBSF Economic LetterNo. 2009–09, Federal Reserve Bank of San Francisco, March 6, 2009.*Please note that these are from the 2010 Reader to give you a feel for the type of articles chosen. The 2012 reading selections will be available inMyEconLab. Articles will also be updated periodically.

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Part One: How to Use the Instructor’s Manual and Other Textbook Ancillaries17Reading 12“Compensation and Risk Incentives in Banking and Finance.” Jian Cai, Kent Cherny, Todd Milbourn,Economic Commentary, No. 2010–13, Federal Reserve Bank of Cleveland, September 14, 2010.Reading 13“Going Private.” Vanessa Sumo,Region Focus,Federal Reserve Bank of Richmond, Winter 2008, 12–17.Reading 14“Perils of Price Deflation: An Analysis of the Great Depression.” Charles T. Carlstrom and Timothy S.Fuerst,Economic Commentary,Federal Reserve Bank of Cleveland, February 15, 2001.Reading 15“Predicting Crises, Part I: Do Coming Crises Cast Their Shadows Before?” Bharat Trehan,FRBSFEconomic Letter, No. 2009–29, Federal Reserve Bank of San Francisco, September 21, 2009.Reading 16“Reforming the Raters.” Renee Courtois,Region Focus, Federal Reserve Bank of Richmond,Spring 2009, 14–19.Reading 17“Mortgage-Backed Securities: How Important Is ‘Skin in the Game’?” Christopher M. James,FRBSFEconomic Letter, No. 2010–37, Federal Reserve Bank of San Francisco, December 13, 2010.Reading 18“De-Leveraging and the Financial Accelerator: How Wall Street Can Shock Main Street.” SatyajitChatterjee,Business Review, Federal Reserve Bank of Philadelphia, Second Quarter 2010, 1–8.Reading 19“Capital Cushions: The Basel Accords and Bank Risk.” Stephen Slivinski,Region Focus, Federal ReserveBank of Richmond, Spring 2009, 6–9.Reading 20“Why Economists Still Worry About Bank Runs.” Doug Campbell,Region Focus, Federal Reserve Bankof Richmond, Fall 2005, 36–38.Reading 21“Addressing TBTF by Shrinking Financial Institutions: An Initial Assessment.” Gary H. Stern and RonFeldman,The Region, Federal Reserve Bank of Minneapolis, June 2009, 8–13.Reading 22“The Costs and Benefits of Bank Supervisory Disclosure.” Edward Simpson Prescott and StephenSlivinski,Economic BriefEB09–05, Federal Reserve Bank of Richmond, May 2009.Reading 23“If Fed Becomes Super Regulator, Politicians Would Be Its Kryptonite.” Sharon K. Blei,The RegionalEconomist, Federal Reserve Bank of St. Louis, January 2009, 14–15.Reading 24“Federal Preemption of State Bank Regulation: A Conference Panel Summary.” Erin Davis and Tara Rice,Chicago Fed Letter230a, Federal Reserve Bank of Chicago, September 2006.

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18Mishkin•TheEconomics of Money, Banking, and Financial Markets,Tenth EditionReading 25“Out from the Shadows: The Run on Shadow Banking and a Framework for Reform.” Renee CourtoisHaltom,Region Focus, Federal Reserve Bank of Richmond, Third Quarter 2010, 22–25.Reading 26“U.S. Monetary Policy: An Introduction. Part 2: What Are the Goals of U.S. Monetary Policy?”FRBSFEconomic LetterNo. 2004–02, Federal Reserve Bank of San Francisco, January 23, 2004.Reading 27“How’s Business? The Role of the Beige Book in Fed Policymaking.” Renee Courtois,Region Focus,Federal Reserve Bank of Richmond, Summer 2009, 5–7.Reading 28“Explaining Bank Credit Crunches and Procyclicality.” Robert R. Bliss and George G. Kaufman,ChicagoFed LetterNo. 179, Federal Reserve Bank of Chicago, July 2002.Reading 29“Why Are Banks Holding So Many Excess Reserves?” Todd Keister and James J. McAndrews,CurrentIssues in Economics and Finance, 15 (8), Federal Reserve Bank of New York, December 2009.Reading 30“Federal Reserve Liquidity Programs: An Update.” Niel Williardson and LuAnne Pederson,The Region,Federal Reserve Bank of Minneapolis, June 2010, 14–25.Reading 31“Quantitative Easing: Entrance and Exit Strategies.” Alan S. Blinder,Review, Federal Reserve Bank ofSt. Louis, November/December 2010, 465–79.Reading 32“Monetary Policy in a World with Interest on Reserves.” Charles T. Carlstrom and Timothy Fuerst,Economic Commentary, No. 2010–4, Federal Reserve Bank of Cleveland, June 10, 2010.Reading 33“Conducting Monetary Policy when Interest Rates Are Near Zero.” Charles T. Carlstrom and AndreaPescatori,Economic Commentary, Federal Reserve Bank of Cleveland, October 2009.Reading 34“Disagreement about the Inflation Outlook.” Sylvain LeDuc, Glenn D. Rudebusch, and Justin Weidner,FRBSF Economic Letter, No. 2009–31, Federal Reserve Bank of San Francisco, October 5, 2009.Reading 35“Reflections on Monetary Policy: Flexibility, Transparency, and Inflation.” Michael H. Moskow,ChicagoFed LetterNo. 230, Federal Reserve Bank of Chicago, September 2006.Reading 36“Publishing Central Bank Interest Rate Forecasts.” Glenn D. Rudebusch,FRBSF Economic LetterNo. 2008–02, Federal Reserve Bank of San Francisco, January 25, 2008.Reading 37“U.S. Monetary Policy: An Introduction. Part 4: How Does the Fed Decide the Appropriate Setting forthe Policy Instrument?”FRBSF Economic LetterNo. 2004–04, Federal Reserve Bank of San Francisco,February 6, 2004.

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Part One: How to Use the Instructor’s Manual and Other Textbook Ancillaries19Reading 38“The Taylor Rule: A Guidepost for Monetary Policy?” Charles T. Carlstrom and Timothy S. Fuerst,Economic Commentary, Federal Reserve Bank of Cleveland, July 2003.Reading 39“Interest Rates, Carry Trades, and Exchange Rate Movements.” Michele Cavallo,FRBSF Economic LetterNo. 2006–31, Federal Reserve Bank of San Francisco, November 17, 2006.Reading 40“An Anchor of Gold.” Stephen Slivinski,Region Focus, Federal Reserve Bank of Richmond, SecondQuarter 2010, 5–7.Reading 41“Is the International Role of the Dollar Changing?” Linda S. Goldberg,Current Issues in Economics andFinance, 16 (1), Federal Reserve Bank of New York, January 2010.Reading 42“Dollarization Explained.” Stephen Slivinski,Region Focus,Federal Reserve Bank of Richmond,Fall 2008, 2–5.Reading 43“The Greek Crisis: Argentina Revisited?” Fernanda Nechio,FRBSF Economic Letter, No. 2010–33,Federal Reserve Bank of San Francisco, November 1, 2010.Reading 44“Raising Capital: The Role of Sovereign Wealth Funds.” Anna L. Paulson,Chicago Fed Letter,No. 258,Federal Reserve Bank of Chicago, January 2009.Reading 45“What We Do and Don’t Know about Discretionary Fiscal Policy.” Renee Courtois,Economic BriefEB09–04, Federal Reserve Bank of Richmond, April 2009.Reading 46“Can the Nation Stimulate Its Way to Prosperity?” Jason Saving,Economic Letter5 (8), Federal ReserveBank of Dallas, August 2010.Reading 47“The Great Moderation: Good Luck, Good Policy, or Less Oil Dependence?” Andrea Pescatori,EconomicCommentary, Federal Reserve Bank of Cleveland, March 2008.Reading 48“U.S. Monetary Policy: An Introduction. Part 3: How Does Monetary Policy Affect the U.S. Economy?”FRBSF Economic LetterNo. 2004–03, Federal Reserve Bank of San Francisco, January 30, 2004.Reading 49“Regulatory and Monetary Policies Meet ‘Too Big to Fail’.”Harvey Rosenblum, Jessica J. Renier, andRichard Alm,Economic Letter5 (3), Federal Reserve Bank of Dallas, April 2010.Reading 50“Why Policymakers Might Care about Stock Market Bubbles.” Paul Gomme,Economic Commentary,Federal Reserve Bank of Cleveland, May 15, 2005.

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20Mishkin•TheEconomics of Money, Banking, and Financial Markets,Tenth EditionReading 51“Rising Relative Prices or Inflation: Why Knowing the Difference Matters.” Owen F. Humpage,Economic Commentary, Federal Reserve Bank of Cleveland, June 2008.Reading 52“Do Deficits Matter? And, If So, How?” Stephen Slivinski,Region Focus, Federal Reserve Bank ofRichmond, Second Quarter 2010, 12–15.Reading 53“Getting Back on Track: Macroeconomic Policy Lessons from the Financial Crisis.” John B. Taylor,Review, Federal Reserve Bank of St. Louis, May/June 2010, 165–76.Reading 54“Sticky Situation.” Doug Campbell,Region Focus, Federal Reserve Bank of Richmond,Spring 2005, 20–23.Reading 55“Activist Monetary Policy For Good or Evil? The New Keynesians vs. the New Classicals.” Tom Starkand Herb Taylor,Business Review, Federal Reserve Bank of Philadelphia, March/April 1991, 17–25.

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Part One: How to Use the Instructor’s Manual and Other Textbook Ancillaries21Study GuideThe only way to learn effectively about money, banking, and financial markets is by continual, andactive, application of the basic concepts developed in the textbook. To help the student in this endeavor,we providetheStudy Guide.TheStudy Guidecontains the following elements for each chapter:Chapter Review:Each chapter begins with a summary of the chapter. The chapter review is divided into sections based onthe section headings provided in the text.Helpful Hints:This section provides some additional suggestions and examples to help clarify the more difficult material.Terms and Definitions:Students match key terms from the text to their definitions. This section is particularly important becausea working economic and financial vocabulary is necessary in order for the student to advance through thematerial.Problems and Short-Answer Questions:We provide a number of multi-step problems that require numerical, graphical, or written solutions.The problems are based on the larger issues developed in the chapter. Smaller issues are addressed withapproximately ten short-answer questions.Critical Thinking:This section provides a single multi-step problem that is an application of one of the major issuesdeveloped in the chapter.Self-Test:The self-test section provides fifteen true/false and twenty multiple-choice questions to validate areas ofsuccessful learning and to highlight areas needing improvement.Solutions:Detailed solutions for all problems and questions are provided at the end of each chapter.

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PARTTWOOverviewsof the TextbookChapters andTeaching Tips

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25Chapter 1Why Study Money, Banking,and Financial Markets?Before embarking on a study of money, banking, and financial markets, the student must be convincedthat this subject is worth studying. Chapter 1 pursues this goal in two ways. First, it shows the student thatmoney and banking is an exciting field because it focuses on economic phenomena that affect everyday life.Second, using eight figures, this chapter encourages the student to look at data that bear on the central issuesin this field. An additional purpose of Chapter 1 is to provide an overview for the entire book, previewingthe topics that will be covered in later chapters, and to indicate how the book will be taught.In teaching this chapter, the most important goal should be to get the student excited about the material.I have found that talking about the data presented in the figures helps achieve this goal. Furthermore, itshows the student that the subject matter of money and banking has real-world implications that thestudent should care about.The appendix to this chapter reviews concepts regarding the definitions of aggregate output, income, andthe price level that the student already has seen in an economic principles course. Since these concepts areextremely important, it might be worthwhile to have your students read this appendix outside of class tojog their memories.

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26Mishkin•TheEconomics of Money, Banking, and Financial Markets,Tenth EditionChapter 2An Overview of theFinancial SystemChapter 2 is an introductory chapter that contains the background information on the structure andoperation of financial markets that is needed in later chapters of the book. This chapter allows theinstructor to branch out to various choices of later chapters, thus allowing different degrees ofcoverage of financial markets and institutions.The most important point to transmit to the student is that financial markets and financial intermediaries arecrucial to a well-functioning economy because they channel funds from those who do not have a productiveuse for them to those who do. Professors who emphasize financial markets and institutions in their coursewill want to teach this chapter in detail, and those who focus on international issues will want to spend sometime on the section “Internationalization of Financial Markets.” However, those who slant their course tomonetary theory and policy may want to give this chapter a more cursory treatment. No matter how muchclass time is devoted to this chapter, I have found that it is a good reference chapter for students. You mightwant to tell them that if in later chapters they do not recall what some financial instrument is or who regulateswhom, they can refer back to this chapter, especially to summary tables, such as Tables 3 and 5.The chapter introduces Global boxes, which are sprinkled throughout the text, to get students to recognizethe growing importance of the global economy. The Global box in this chapter gets students to think abouthow the financial system in the United Statesis both similar to and different from financial systems in othercountries.

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