1. Chapter 1 Why Study Money, Banking and Financial Market?

2. © 2004 Pearson Addison-Wesley. All rights reserved 3-2 Alan Greenspan 1926 - ? Fifth and final term since 1987 FRBKC, Jackson Hole, Greenspan Era: Lessons for the Future (Aug. 25-27, 2005) –http://www.kc.frb.org/PUBLICAT/SYMPOS/2005/sym05prg.htmhttp://www.kc.frb.org/PUBLICAT/SYMPOS/2005/sym05prg.htm –Economist (Monetary Policy, Sep. 5 th, 2005) Reputation for his obfuscation Andrea Mitchell (Chief Foreign Affairs Correspondent, NBC News, 1946 - ?) said that Greenspan had to propose 3 times before she understood him.

3. © 2004 Pearson Addison-Wesley. All rights reserved 3-3 World GDP (2004, CIA) Gross World Product (PPP) - $55.5 trillion Per Capital - $8,800 USA GDP (PPP) - $11.75 trillion Per Capital - $40,100 Guatemala GDP- $59.47 billion Per Capital - $4,200 China GDP - $7.262 trillion Per Capital - $5,600 EU GDP - $11.65 trillion Per Capital - $26,900 Japan GDP - $3.745 trillion Per Capital - $29,400

4. © 2004 Pearson Addison-Wesley. All rights reserved 3-4 Why Study Money and Monetary Policy? Money and business cycles Money and inflation Money and interest rates Conduct of Monetary Policy Fiscal Policy and Monetary Policy –DOES MONEY MATTER? (Neutrality)

5. © 2004 Pearson Addison-Wesley. All rights reserved 3-5 BANGUAT (since 1945) Fundamental objective of the Bank of Guatemala The Bank of Guatemala has as fundamental objective, to contribute to the creation and maintenance of the most favorable conditions to the orderly development of the national economy, to which, will propitiate the monetary exchange and credit conditions that promote the stability in the general level of prices. Article 3 of the Decree Number 16-2002 of the Congress of the Republic of Guatemala, Organic Law of the Bank of Guatemala Mission of the Bank of Guatemala To promote the stability in the general level of prices Lic. Lizardo Arturo Sosa L ó pez President

6. © 2004 Pearson Addison-Wesley. All rights reserved 3-6 Textbook Mishkin, Frederic (2004), The Economics of Money, Banking, and Financial Markets, Seventh Edition, Addison Wesley. www.aw.com/mishkin.www.aw.com/mishkin This course covers five main topics

7. © 2004 Pearson Addison-Wesley. All rights reserved 3-7 1. Money and interest rates Ch. 1Why Study Money, Banking, and Financial Markets? Ch. 3What Is Money? Ch. 4Understanding Interest Rates Ch. 5The Behavior of Interest Rates

8. © 2004 Pearson Addison-Wesley. All rights reserved 3-8 2. Money supply Ch. 15Multiple Deposit Creation and the Money Supply Process Ch. 16Determinants of the Money Supply Ch. 17Tools of Monetary Policy Ch. 18Conduct of Monetary Policy: Targets and Goals

9. © 2004 Pearson Addison-Wesley. All rights reserved 3-9 3. Money demand Ch. 22 The Demand for Money Ch. 23 The Keynesian Framework and the ISLM Model Ch. 24Monetary and Fiscal Policy in the ISLM Model

10. © 2004 Pearson Addison-Wesley. All rights reserved 3-10 4. Monetary policy Ch. 25Aggregate Demand and Supply Analysis Ch. 26Transmission Mechanisms of Monetary Policy: The Evidence Ch. 27Money and Inflation Ch. 28Rational Expectations: Implications for Policy

11. © 2004 Pearson Addison-Wesley. All rights reserved 3-11 5. International Finance and Monetary Policy Ch. 19The Foreign Exchange Market Ch. 20The International Financial System Ch. 21Monetary Policy Strategy: The International Experience

12. © 2004 Pearson Addison-Wesley. All rights reserved 3-12 Course requirements 3 midterm exam on Monday (06/05, 06/19, and 07/03) 45% Final exam25% Class discussion of questions in the textbook 10% 2 homework (IS-LM model and data analysis using WDI) 20%

13. © 2004 Pearson Addison-Wesley. All rights reserved 3-13 End-of-chapter questions The following questions are assigned to help you understand the course material and prepare for the exams. Although you are not required to submit your answers, we will discuss the solutions in class. Your participation will count for 10% of the final grade.

14. © 2004 Pearson Addison-Wesley. All rights reserved 3-14 Appendix: Definitions Aggregate Output Gross Domestic Product (GDP) = Value of all final goods and services produced in domestic economy during year Aggregate Income Total income of factors of production (land, capital, labor) during year Distinction Between Nominal and Real Nominal = values measured using current prices Real = quantities, measured with constant prices Aggregate Price Level nominal GDP GDP Deflator = real GDP $10 trillion GDP Deflator = = 1.11 $9 trillion Consumer Price Index (CPI) price of “ basket ” of goods and services

15. © 2004 Pearson Addison-Wesley. All rights reserved 3-15 Appendix: Definitions

16. © 2004 Pearson Addison-Wesley. All rights reserved 3-16 Appendix: Definitions Growth Rates and the Inflation Rate

17. © 2004 Pearson Addison-Wesley. All rights reserved 3-17

18. © 2004 Pearson Addison-Wesley. All rights reserved 3-18 Basic Concepts Stock vs. Flow Wealth vs. saving; capital vs. investment; debt vs. deficit GDP (flow), M1(stock) Using WDI (World Development Indicators) Comparative Static ISLM Cramer ’ s Rule