Eco 212 Money & Banking Fall 2008 Course information Course policies Course information Course policies

Who am I? Dr. Anwar Al-Shriaan Office hours:  MW 12:30-1:30,  and by appt. Dr. Anwar Al-Shriaan Office hours:  MW 12:30-1:30,  and by appt.

About this course Intro Financial markets  Interest rates, exchange rates, stock market, derivatives Financial institutions  structure, regulation Federal Reserve System & monetary policy Role of money in the economy Intro Financial markets  Interest rates, exchange rates, stock market, derivatives Financial institutions  structure, regulation Federal Reserve System & monetary policy Role of money in the economy

Course materials required:  textbook  Mishkin, Frederic S., "The Economics of Money, Banking, and Financial Markets." Sixth edition, Addison Wesley (2001).  in bookstores required:  textbook  Mishkin, Frederic S., "The Economics of Money, Banking, and Financial Markets." Sixth edition, Addison Wesley (2001).  in bookstores

recommended:  course web site It’s free! Address on syllabus  course list  me with ur name and ur class time recommended:  course web site It’s free! Address on syllabus  course list  me with ur name and ur class time

GradingGrading Point Structure: Class Participation & Attendance 10 points Homework and Quizzes10 points Exam 120 points Exam 220 points Final Exam40 points Point Structure: Class Participation & Attendance 10 points Homework and Quizzes10 points Exam 120 points Exam 220 points Final Exam40 points

grading scale in syllabus extra credit  About 10 pts. during the semester  must be present in class when assigned attendance is graded and important to earn extra credits, grading scale in syllabus extra credit  About 10 pts. during the semester  must be present in class when assigned attendance is graded and important to earn extra credits,

MakeupsMakeups one week’s notice (except emergencies) require documented excused absence may be essay exams or I may reweight the other exams one week’s notice (except emergencies) require documented excused absence may be essay exams or I may reweight the other exams

AttendanceAttendance explicitly graded I expect regular attendance & punctuality  homework due at beginning of class you are responsible for information in class extra credit only available to those in attendance when it is offered explicitly graded I expect regular attendance & punctuality  homework due at beginning of class you are responsible for information in class extra credit only available to those in attendance when it is offered

CheatingCheating cheating on an exam means a failing grade in the course copied or very identical homework will receive a zero cheating on an exam means a failing grade in the course copied or very identical homework will receive a zero

Having problems in the course? see me sooner, not later! Need accomodation? see me after class or in my office

Chapter 1: Intro to Money & the Financial System 5 Core Principles of Money & Banking  Time has value  Risk requires compensation  Information is the basis for decisions  Markets set prices and allocate resources  Stability improves welfare 5 Core Principles of Money & Banking  Time has value  Risk requires compensation  Information is the basis for decisions  Markets set prices and allocate resources  Stability improves welfare

in the news… Subprime lending market meltdown  impact on mortgage markets  Impact on financial institutions  impact on the stock market  impact on the economy Subprime lending market meltdown  impact on mortgage markets  Impact on financial institutions  impact on the stock market  impact on the economy

The U.S. dollar  parity with the Canadian $!  Revaluation of the Chinese yuan? Federal Reserve Chair Ben Bernanke  Reduction of federal funds rate Largest since 1984  A re-emergence of stagflation? The U.S. dollar  parity with the Canadian $!  Revaluation of the Chinese yuan? Federal Reserve Chair Ben Bernanke  Reduction of federal funds rate Largest since 1984  A re-emergence of stagflation?

1. Time has value $100 today vs. $100 in one year  Are you indifferent? Forensic economics Value of a financial instrument depends on SIZE and TIMING of payments $100 today vs. $100 in one year  Are you indifferent? Forensic economics Value of a financial instrument depends on SIZE and TIMING of payments

Example: HGTV My House is Worth What?  House purchased 2001: $225,000  Renovations over 5 years: $41,000  Estimated current value: $350,000  Profit: $84,000…..Really? NO! not really! My House is Worth What?  House purchased 2001: $225,000  Renovations over 5 years: $41,000  Estimated current value: $350,000  Profit: $84,000…..Really? NO! not really!

2. Risk requires compensation Risk comes from uncertainty Risk is unavoidable We don’t like it. Risk comes from uncertainty Risk is unavoidable We don’t like it.

To take on risk, we demand compensation  Subprime mortgage rates > prime mortgage rates We pay to avoid certain risks  Auto, life insurance  Low rates on checking, savings accounts To take on risk, we demand compensation  Subprime mortgage rates > prime mortgage rates We pay to avoid certain risks  Auto, life insurance  Low rates on checking, savings accounts

The value of a financial asset depends on the  size,  timing, and  CERTAINTY of its payments. The value of a financial asset depends on the  size,  timing, and  CERTAINTY of its payments.

3. Information is the basis for decisions Rational decisions use all available info Asymmetric info can impede markets Financial institutions play a big role in gathering info Financial regulation demands disclosure of certain info Rational decisions use all available info Asymmetric info can impede markets Financial institutions play a big role in gathering info Financial regulation demands disclosure of certain info

4. Markets set prices and allocate resources Eco 110! Markets set a price that rations scarce resources  Prices send a signal Financial market prices allocate funds Eco 110! Markets set a price that rations scarce resources  Prices send a signal Financial market prices allocate funds

5. Stability improves welfare Back to #2—we do not like uncertainty Financial stability feeds economic growth and standards of living  Role of institutions, Federal Reserve Back to #2—we do not like uncertainty Financial stability feeds economic growth and standards of living  Role of institutions, Federal Reserve