Part Three

Answers to End-of-Chapter
Problems

Chapter 1

ANSWERS TO QUESTIONS

1. 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.

2. 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.

3. Higher stock prices mean that consumers’ wealth is higher, and they will be more likely to increase their spending.

4. They channel funds from people who do not have a productive use for them to people who do, thereby resulting in higher economic efficiency.

5. The United States economy was hit by the worst financial crisis since the Great Depression. Defaults in subprime residential mortgages led to major losses in financial institutions, producing not only numerous bank failures, but also the demise of two of the largest investment banks in the United States. These factors led to the “Great Recession” which began late in 2007.

6. The basic activity of banks is to accept deposits and make loans.

7. Savings and loan associations, mutual savings banks, credit unions, insurance companies, mutual funds, pension funds, and finance companies.

8. Answers will vary.

9. In the period from 2007 to 2011, both inflation and interest rates have generally trended downward compared to before that period.

10. The data in Figures 3, 5, and 6 suggest that real output, the inflation rate, and interest rates would all fall.

11. Businesses would increase investment spending because the cost of financing this spending is now lower, and consumers would be more likely to purchase a house or a car because the cost of financing their purchase is lower.

12. No. It