Transcript Document

Chapter 1
Why Study Money,
Banking, and
Financial Markets?
Why Study Financial Markets?
1. Channel funds from savers to investors, thereby
promoting economic efficiency
2. Affect personal wealth and behavior of business firms
Why Study Banking and Financial Institutions?
1. Financial Intermediation
Helps get funds from savers to investors
2. Banks and Money Supply
Crucial role in creation of money
3. Financial Innovation
Why Study Money and Monetary Policy?
1. Influence on business cycles, inflation, and interest
rates
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Bond Market
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The Bond Market
• A security is a claim on the issuer’s future income
or assets.
• A bond is a debt security that promises to make
payments periodically for a specified period of
time.
• An interest rate is the cost of borrowing or the
price paid for the rental of funds.
• There are many interest rates.
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The Stock Market
• A common stock represents a share of ownership
in a corporation.
• It is a security that is a claim on the earnings and
assets of the corporation.
• Both the bond market and the stock market are
important factors in business investment decisions.
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Stock Market
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The Foreign Exchange Market
• The foreign exchange market is where the
conversion of currency between countries take
place.
• The foreign exchange rate is the price of one
country’s currency in terms of another’s.
• A change in the exchange rate has a direct effect
on American consumers because it affects the cost
of imports.
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Foreign Exchange Market
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Structure of the Financial System
• The financial system comprises banks, insurance
companies, mutual funds, finance companies, and
investment banks.
• The financial intermediaries are institutions that
borrow funds from people who have saved and in
turn make loans to others
• Questions to be answered in Chapter 9.
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Banks and Other Financial Institution
• Banks are financial institutions that accept
deposits and make loans.
• Included under the term banks are firms such as
commercial banks, savings and loan associations,
mutual savings banks, and credit unions.
• Other financial institutions include insurance
companies, finance companies, pension funds,
mutual funds, and investment banks.
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Questions to Address
• How financial institutions make profits? (9)
• Why bank regulation takes the current form? (10)
• How the competitive environment has changed for
banking industry and other financial institutions?
• How the financial institutions manage risk? (13)
• How the financial system change over time? (10)
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Money and Business Cycles
• Money is store of value, unit of account and
medium of exchange.
• Business cycles are the upward and downward
movements of aggregate output produced in the
economy.
• Data: Every recent recession has been preceded by
a decline in the rate of money growth.
• Theory: transmission mechanism (22-28)
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Money and Business Cycles
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Money and Inflation
• The inflation rate is defined as the growth rate of
the aggregate price level.
• What explains inflation?
• Data: Inflation seems tied with increases in the
money supply across time and countries.
• Theory: Money’s role in creating inflation (27).
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Money and the Price Level
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Money Growth and Inflation
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Other Interesting Issues
• Money and Interest Rates (5)
• Conduct of Monetary Policy (14-18, 21)
• Fiscal Policy and Monetary Policy (8,21,27)
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Money Growth and Interest Rates
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Fiscal Policy and Monetary Policy
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How We Study Money and Banking
Basic Analytic Framework
1. Simplified approach to the demand for assets
2. Concept of equilibrium
3. Basic supply and demand approach to understand behavior in financial
markets
4. Search for profits
5. Transactions cost and asymmetric information approach to financial
structure
6. Aggregate supply and demand analysis
Features
1. Case studies
2. Applications
3. Special-interest boxes
4. Following the Financial News boxes
5. Reading the Wall Street Journal
6. Web Exercises and URLs
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Appendix: Definitions
Aggregate Output
Gross Domestic Product (GDP) = Value of all final goods and services
produced in domestic economy during year
Aggregate Income
Total income of factors of production (land, capital, labor) during year
Distinction Between Nominal and Real
Nominal = values measured using current prices
Real = quantities, measured with constant prices
Aggregate Price Level
nominal GDP
GDP Deflator =
real GDP
$10 trillion
GDP Deflator =
= 1.11
$9 trillion
Consumer Price Index (CPI) price of “basket” of goods and services
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Appendix: Definitions
Growth Rates and the Inflation Rate
xt  xt 1
Growth Rate 
 100
xt 1
$9.5 trillion  $9 trillion
GDP Growth Rate 
100  5.6%
$9 trillion
113  111
Inflation Rate 
100  1.8%
111
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