Transcript File - Business at Sias

Chapter 1
Why Study
Money, Banking,
and Financial
Markets?
Quick Review What is Money?
Which items would be willing to accept as a medium of
exchange for a good or service? And Why
a. Traveler’s check; b. computer; c. an ounce of gold;
d. A refrigerator; e. a guitar; f. a bond or security.
Rank the following assets from the most liquid to least
liquid:
a. Checking account deposits; b. Houses; c. Currency;
d. Washing machines; e. Savings deposits; f. Common
stock.
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Why Study Money, Banking, and
Financial Markets
• To examine how financial markets
such as bond, stock and foreign
exchange markets work
• To examine how financial institutions
such as banks and insurance
companies work
• To examine the role of money in
the economy
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Financial Markets
• Markets in which funds are transferred
from people who have an excess of
available funds to people who have a
shortage of funds
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The Bond Market and Interest Rates
• A security (financial instrument) 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
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The Stock Market
• Common stock represents a share of
ownership in a corporation
• A share of stock is a claim on the
earnings and assets of the corporation
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The Foreign Exchange Market
• The foreign exchange market is where
funds are converted from one currency
into another
• The foreign exchange rate is the
price of one currency in terms of
another currency
• The foreign exchange market
determines the foreign exchange rate,
the price of one country’s currency in
terms of another’s.
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Banking and Financial Institutions
• Financial Intermediaries—institutions that
borrow funds from people who have saved
and make loans to other people
• Banks—institutions that accept deposits and
make loans
• Other Financial Institutions—insurance
companies, finance companies, pension
funds, mutual funds and investment banks
• Financial Innovation—in particular, the advent
of the information age and e-finance
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Money and Business Cycles
• Evidence suggests that money
plays an important role in generating
business cycles
• Recessions (unemployment) and booms
(inflation) affect all of us
• Monetary Theory ties changes in the
money supply to changes in aggregate
economic activity and the price level
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Measures of the Monetary
Aggregates
Value as of Dec 2005 (In Billions)
M1 = Currency
725.2
+ Travelers checks
7.3
+ Demand deposits
338.8
+ Other checkable deposits
317.8
Total M1
1389.1
M2 = M1
+ Time Deposits
+ Savings and Money Markets
+ Money Market Mutual Fund
968.8
3625.5
723.9
Total M2
5319.2
Total of M1 +M2
6708.3
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Discussion Questions – In pairs
1. If history repeats itself and we see a decline in the
rate of money growth, what might you expect to happen
to
a. real output? b. the inflation rate c. interest rates?
2. When interest rates fall, how might you change your
economic behavior?
3. Can you think of any financial innovation in the past 10
years that has affected you personally? Has it made you
better off or worse? Why?
4. Is everybody worse off when interest rates rise?
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Money and Inflation
• The aggregate price level is the
average price of goods and services in
an economy
• A continual rise in the price level
(inflation) affects all economic players
• Data shows a connection between the
money supply and the price level
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Money and Interest Rates
• Interest rates are the price of money
• Prior to 1980, the rate of money growth
and the interest rate on long-term
Treasure bonds were closely tied
• Since then, the relationship is less clear
but still an important determinant of
interest rates
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Monetary and Fiscal Policy
• Monetary policy is the management of the
money supply and interest rates

Conducted in the U.S. by the Federal Reserve
Bank (Fed)
• Fiscal policy is government spending
and taxation



Budget deficit is the excess of expenditures over
revenues for a particular year
Budget surplus is the excess of revenues over
expenditures for a particular year
Any deficit must be financed by borrowing
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How We Will Study Money, Banking,
and Financial Markets
• A simplified approach to the demand
for assets
• The concept of equilibrium
• Basic supply and demand to explain behavior
in financial markets
• The search for profits
• An approach to financial structure based on
transaction costs and asymmetric information
• Aggregate supply and demand analysis
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Summary of Lesson
1. Activities in financial markets have direct effects on
individuals’ wealth, the behavior of businesses, and the
efficiency of an economy. Three financial markets
deserve attention: the bond market (where interest rates
are determined), the stock market, and the foreign
exchange market.
2. Banks and other financial institutions direct funds from
people who might not put them to productive use to
people who can do so thus improving the efficiency of
the economy.
3. Money appears to be a major influence on inflation,
business cycles and interest rates. Because these
economic variables are so important to the health of an
economy, we need to understand how monetary policy is
and should be conducted.
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More Discussion Questions
5. What is the basic activity of banks?
6. Why are financial markets important to the health of
the economy?
7. What effect might a fall in stock prices have on
business investment?
8. What effect might a rise in stock prices have on
consumer’s decisions to spend?
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Web References
www.federalreserve.gov/
General information, monetary policy, banking
system, research, and economic data of the
Federal Reserve.
www.stockcharts.com/charts/historical/
Historical charts of various stock indexes over
differing time periods.
www.brillig.com/debt_clock/
USA National debt clock.
www.myeconlabcommunity.com
To help you learn more about this course
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Office Hours
8 am till Noon every Thursday
morning at the Peter Hall lobby.
Class Website
businessatsias.weebly.com
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