Financial and Monetary Theory Week 15: Revision lecture

Final exam Time: December 16, 2015 Venue: to be informed Working time: 2 hours Closed-book Total marks: 100, weighted 50% of total assessment You have to achieve at least 50 marks of this final exam to pass this course.

Final exam Structure: Part 1: 40 marks MCQ: 20 questions, 2 marks/each Part 2: Short-answer questions (30 marks) 3 questions, 10 marks/each Part 3: Problems and applications (30 marks). 2 problems, 15 marks/each

Final exam Topics to be covered: ALL topics

Final exam Hints: For Part 1: work again on all MCQs in the tutorials read again the text book, understand key words, For Part 2 & 3: work again on all tutorial problems, including duration calculation and application search more information about Vietnam ’ s facts: inflation, monetary tools, exchange rate…

Week 1 & 2 Overview of financial system Types of financial institutions and instruments Money definition and interest rates

Week 3&4: Behavior of interest rates Loanable funds framework: Demand and supply of bonds Theory of asset demand Factors affecting demand Factors affecting supply The Fisher effect: expected inflation The interest rates behavior in business cycle

Week 3&4: Behavior of interest rates Liquidity preference framework: demand and supply of money Factors affecting demand for money Factors affecting supply of money Effects of increase in money supply on interest rates (other factors are not constant): Liquidity effect Income effect Price-level effect Expected inflation effect

Week 5: The risk and term structure of the interest rates Risk structure: Different bond, same maturity, different IRs Default risk Liquidity Tax treatment Term structure: Same bond, different maturity, different IRs Expectations theory Segmented market theory Liquidity premium theory

Week 6: Stock market Gordon Growth Model Stock price determination The efficient market hypothesis

Week 7: Foreign exchange market Exchange rate definition Appreciation/depreciation In the long-run: Exchange rate determination The law of one price The purchasing power parity Factors changing exchange rates In the short run: Exchange rate determination Demand for and supply of assets denominated in one currency Factors changing exchange rates

Week 8: Bank and bank management A commercial bank balance sheet: Assets and liabilities How a commercial bank makes profits Liquidity management Asset management Liability management Capital adequacy management Credit risk management Interest rate management

Week 9: Analysis of financial structure Transaction costs Asymmetric information Adverse selection Moral hazard The role of direct finance vs. indirect finance

Week 10: Central banks and monetary tools Central banks: compare with commercial banks Intervention in the foreign exchange market: unsterilized and sterilized Fed funds rate: determination and movement Monetary tools: advantages and disadvantages

Week 13: Multiple deposit creation A central bank balance sheet Monetary base Effect of monetary tools on the final T-account of central bank, commercial banks, non-bank public. Change in the total deposit in the entire banking system Money multiplier m = (1 + c)/(r + e + c)

Week 14: Money and inflation Definition of inflation Inflation is a monetary phenomenon Fiscal policy Negative supply shock Other targets of the government will result in inflation: High employment rate: cost-push and demand pull inflation Low budget deficit: monetary base increase due to printing money/creating high-power money