Transcript 1111823359_323913

DEAN CROUSHORE
M&B
PowerPoint Slides prepared by:
Andreea CHIRITESCU
Eastern Illinois University
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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INTRODUCTION TO
MONEY and BANKING
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PowerPoint Slides prepared by:
Andreea CHIRITESCU
Eastern Illinois University
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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What Is in This Text?
• The value of money and banking for
everyday life
– What determines the interest rates on
loans
– What causes the stock market to fluctuate
• Why is government policy so crucial for
money and banking?
– Policymakers - why are they so important
– What is the Federal Reserve
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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What Is in This Text?
• Policy decisions
– Affect the efficiency of the money and
banking system
• When they cause problems, such as in the
financial crisis of 2008
• When they help the economy grow rapidly, as
in the 1990s
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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What Is in This Text?
• The Federal Reserve
– A key policymaking institution
– Making sure that our system of payments
works well
– Monitoring banks
– Determining the nation’s money supply
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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Ten (Surprising) Facts
Concerning Money and Banking
1. Most financial formulas - no matter how
complicated they look - are based on the
compounding of interest
– Gains to investing (or costs of borrowing)
grow at a compound rate over time
2. More U.S. Currency is held in foreign
countries than in the United States
– Some foreigners prefer U.S. dollars
because of inflation
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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Ten (Surprising) Facts
Concerning Money and Banking
3. Interest rates on long-term loans
generally are higher than interest rates on
short-term loans
– Factors: lender’s preferences, the
riskiness of the loans, expected future
changes in short-term interest rates
– The difference between short- and longterm interest rates
• Indicator of the state of the economy
• Forecasting how fast the economy will grow
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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Ten (Surprising) Facts
Concerning Money and Banking
4. To understand how interest rates affect
economic decisions, you must account for
expected inflation
– Expected inflation rate: the expected rate
of change of prices
– Real interest rate
5. Buying stocks is the best way to increase
your wealth - and the worst
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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Ten (Surprising) Facts
Concerning Money and Banking
6. Banks and other financial institutions
made major errors that led to the
Financial Crisis of 2008
– Subprime loans and foreclosures
– Mortgage-backed securities
– Fannie Mae and Freddie Mac – bankrupt
– Investment banks – highy leveraged
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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Ten (Surprising) Facts
Concerning Money and Banking
7. Recessions are difficult to predict
– Recession - the overall level of business
activity in the economy declines
persistently
– Unemployment and declining profits
8. The Fed creates money by changing a
number in its computer system
– The Federal Reserve buys government
securities
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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Ten (Surprising) Facts
Concerning Money and Banking
9. In the long run, the only economic
variable the Federal Reserve can affect is
the rate of inflation
– Increase in the money supply
• The economy speeds up a bit
– When the Fed increases the growth rate
of the money supply - inflation rate rises
– When the Fed decreases money growth the inflation rate falls
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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Ten (Surprising) Facts
Concerning Money and Banking
10. You can predict how the federal reserve
will change interest rates using a simple
equation
– The Taylor rule
• Relates the interest rate to the output gap and
the inflation rate
– The output gap
• Percentage by which real gross domestic
product (GDP) is above or below its potential
level
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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