1. Money and Banking Instructor: Dr. Ming-Jang Weng
Department of Applied Economics, NUK
C02-Room 316
Phone: ,
Office Hours: Wednesdays 10:00-12:00 am.
Book: The Economics of Money, Banking, and
Financial Markets, Mishkin, 7th ed., 2004

2. The Economics of Money, Banking, and Financial Markets Mishkin, 7th ed
The Economics of Money, Banking, and Financial Markets Mishkin, 7th ed. Chapter 1
Introduction

3. Financial markets
Transfers funds from low-valued uses to higher-valued uses (promoting economic efficiency)
Promotes economic growth
Affect personal wealth
Impacts the business cycle

4. Basic definitions Security (also called a “financial instrument”) Bond
Claim on the issuer’s future income or assets
Bond
Debt security that provides payments at specified future dates
Interest rate
Cost of borrowing (usually expressed as an annual percentage)
Various kinds of interest rates

5. Interest rates

6. Stock market Claim on the earnings and assets of the corporation
Common stock
share of ownership in a corporation
very volatile
A place people can get rich/poor quickly
10/19/1987
Black Monday
DJIA fell 22%
In 2000
High-Tech Bubble
DJIA fell 30% by 2002

7. Foreign exchange market
Foreign exchange rate = price on one currency in terms of another
USD depreciates
USD appreciates

8. Financial intermediation
Institutions that borrow funds from people who have saved and in turn make loans to others call intermediaries
Lowers transaction costs
Reduces risk
Moral hazards and Adverse selection

9. Why study bank behavior?
Bank decisions affect the size of the money supply
Changes in the money supply affect the price level, inflation rate, level of output and the rate of economic growth

10. Why study money and monetary policy? Money and the business cycles
Recessions, periods of declining aggregate output
Every recession has been preceded by a decline in the rate of money growth in the 20th century

11. Money and the price level
Prices increased more than sixfold during
The price level and the money supply move closely
a continuing increase in M might be an important factor in causing a continuing increase in P

12. Money growth and inflation (1992-2002)
A positive association b/w inflation money growth rate
Milton Friedman: Inflation is always and everywhere a monetary phenomenon

13. Money growth and interest rates
Monetary policies are conducted by a country’s central bank, e.g. the Federal Reserve System (the Fed)

14. Federal deficit/surplus
Fiscal policy involves decisions about gov’t spending and taxation
President Clinton brought back a budget surplus in his 2nd term
The budget came back to deficit again after the 911 attacks in 2001

15. Macroeconomic definitions
Gross Domestic Product (GDP) = Value of all final goods and services produced in domestic economy during year
Excludes items produced in the past, and in process
Excludes household production
Nominal variable = values measured using current prices
Real variable = adjusted for inflation, values measured using constant prices (base-year prices)

16. Macroeconomic definitions (continued)
Aggregate Price Level
GDP deflator = nominal GDP / real GDP
Consumer Price Index (CPI) = price of “basket” of goods and services in current year / price of the same basket of goods in the base year (usually expressed as a percentage)
Do the Web Exercises in p.15
Read Wall Street Journal on the web