ECON 2035

ECON 2035 - Why Study Money, Banking, and Financial Markets...

Info iconThis preview shows pages 1–13. Sign up to view the full content.

View Full Document Right Arrow Icon
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Background image of page 2
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Background image of page 4
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Background image of page 6
Background image of page 7

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Background image of page 8
Background image of page 9

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Background image of page 10
Background image of page 11

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Background image of page 12
Background image of page 13
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: Why Study Money, Banking, and Financial Markets 0 To examine how financial markets such as bond, stock and foreign exchange markets work a To examine how financial institutions such as banks and insurance companies work a To examine the role of money in the economy 8/24/2010 8/24/2010 Financial Markets 0 Markets in which funds are transferred from people who have an excess of available funds to people who have a shortage of funds The Bond Market and Interest Rates 0 A security (financial instrument) is a claim on the issuer’s future income or assets 0 A bond is a debt security that promises to make payments periodically for a specified period of time a An interest rate is the cost of borrowing or the price paid for the rental of funds .J (A 5 ' m \ 'h‘ * a" A cm”, A xi. bur 2» so .u tramq {Lafmfazr‘rmy‘x 1;)? «i “5: I e“— -"‘-.)/-\r\- '4‘ . ‘ " '.1 f T- 1, ‘ = .r. x WEE???” Wadi/3%” A , M ._ . Q . c, - im‘i‘éf‘ffit 8/24/2010 FIGURE 1 Interest Rates on Selected Bonds, 1950—2008 interest Rate {9%) 20 :5 Corporate Baa Bonds $0 13.5. Governmen? Long-Term acacia tthe-mm Weasury fiilis 1958 1955 1960 1965 1970 1975 1980 1985 1990 1995 2 2005 2019 Sources: Federal Reserve Bulletin; www.federalreserve.gov/releases/H15/data.htm. The Stock Market 0 Common stock represents a share of ownership in a corporation 0 A share of stock is a ciaim on the earnings and assets of the corporation 8/24/2010 FIGURE 2 Stock Prices as Measured by the Dow Jones Industrial Average, 1950—2008 DWI Jams :msinai Avalagfi €5.50fl $2.000 9,094} 5.006 - 0 ‘ E r - x i 1 J 1350 1355 1933 $555 197:} 15??! 1966 1585 2990 1995 2090 2905 29‘0 Source: Dow Jones Indexes: http:flfinance.yahoo.com/?u. Financial Institutions and Banking a Financial Intermediaries: institutions that borrow funds from people who have saved and make loans to other people: — Banks: accept deposits and make loans — Other Financial Institutions: insurance companies, finance companies, pension funds, mutual funds and investment banks - Financiai Innovation: in particular, the advent of the information age and e- finance In ‘-.-.--L A “3-: - 2535" .m ‘ 1 .h - ‘ Ewan? {35-1-le <3 mum‘- Qpnda atto- in Sauna at» AEfitrr‘nfiti " . t ‘. : . a \. ‘ ,_ 1,331.4, F‘qrf‘ t bOthG‘vl«~’tiz-f5 ~ imrflvfité Lina. - iittm , owing, legagnlmwitg H» Financial Crises - Financial crises are major disruptions in financial markets that are characterized by sharp declines in asset prices and the failures of many financial and nonfinancial C. “Q Eu? fl rms. \ 3 I K r‘ 7'" «n. ; u a. >— ‘ u r '22 M- - m affirm-i”? wt r. «w- r’v f P; “Slowwxcj 6—9 EQ‘ A m (fix/Effig— ._J 7 ‘( J Q0. we‘re: +0 ‘b‘or‘ “swam; Money and Business Cycles - Evidence suggests that money plays an important role in generating business cycles - Recessions (unemployment) and expansions affect all of us o Monetary Theory ties changes in the money supply to changes in aggregate economic activity and the price level r a {fiégc' wfl/ \ | A E 1 $1 i A A "'5 I “é r ‘ C2 8/24/2010 {oz élfliQ‘J/‘l @ 0 FIGURE 4 Aggregate Price Level and the Money Supply in the United States, 1950— 2008 imll9§?i‘150‘p figgregab: Price Lew! {GDP Wfimzzr] ! 1550 1955 Ext) i965 1970 1975 1930 1985 1990 1995 2900 2055 5910 Sources: www.federaireservegov/releases/h6/hist/h6hist10.txt. 8/24/2010 W\UWQ‘Q§ $0 if}?! "Us/l5», iv“; J {Egg/E vagrant/3 ’3‘: or a fi’ ix -_.u- Money a‘ndenflation - The aggregate price level is the average price of goods and services in an economy a A continual rise in the price level (inflation) affects all economic players - Data shows a connection between the money supply and the price level an "3/ ,ch m “X5: 46 A ‘ixfl @V’W'iC/Q,» ‘Q'flfl'fl’t- jg. W FIGURE 5 Average Inflation Rate Versus Average Rate of Money Growth for Selected Countries, 1997-—2007 Average inflation Rate {%} SB 70 Belarus an § 5K} 4“ Romania Ecuador 9 3 Uruguay Venezueia ; Coiomma ’ aRussia- I 5/ l/Mexico Chile 3mm ' elven} 30 30 30 United Kingdom United States W; 20 30 40 50 68 30 80 9C} 100 l g “$953303 Average Money Growth Rate (“2a) Switzerland 1 in; Source: International Financial Statistics. FIGURE 6 Money Growth (M2 Annual Rate) and Interest Rates (Long-Term US. Treasury Bonds), 1950—2008 EnterEst 7 Money Growth Frame Rate {‘15} {‘53 annea; rate; 16 "$6 14 id 12 * I‘viegey fire-4:}?! Rina (9:32} W 10 ii} a 8 6 S 4 4 2 z 0 - 0 -2 —2 1958 19555 1960 1965 1970 1975 1980 1985 1990 1995 2006 2805 ZD‘EG Sources: Federal Reserve Bulletin, p. A4, Table 1.10; www.federa|reserve.gov/releasesihslhist/hfihéstl.bct. 8/24/2010 8/24/2010 Money and Interest Rates 0 Interest rates are the price of money - Prior to 1980, the rate of money growth and the interest rate on long-term Treasury bonds were closely tied - Since then, the relationship is less clear but the rate of money growth is still an important determinant of interest rates A page 1, Hg" “" ‘ f f \‘R i‘xfi‘; $3ng "inflict Tfiifififixbk QaC‘r‘r Dfi‘finci He \J H) ' ‘ 5 1M» «‘1‘, : "(mi—'5: m eati‘aimféé} «‘33 \ViTEA fffiffri W6k~»--s FIGURE 7 Government Budget Surplus or Deficit as a Percentage of Gross Domestic Product, 1950—2008 Percent of GDP Surpius CDU‘I‘hWN-nhamh 1950 1955 1960 1985 197$ 397$ $980 15385 1990 1995 2080 2005 2010 Source: www.gpoaccess.90v/usbudget/fy06/sheets/histo122.xls. Monetary and Fiscal Policy - Monetary policy is the management of the money supply and interest rates — Conducted in the U.S. by the Federal Reserve System (Fed) - Fiscal policy deals with government spending and taxation — Budget deficit is the excess of expenditures over revenues for a particular year — Budget surplus is the excess of revenues over expenditures for a particular year - Any deficit must be financed by borrowing FIGURE 8 Exchange Rate of the U.S. Dollar, 1970—2008 index (March 1973 =1€§03 150 135 W. :1} mo “x g” a . EWE" 105 :1 fix"; . “Mai V ,2? 5%, MM?“ ‘1'“ mjagm in g a; x W W , - my a . 2 a . . N.» ‘ H v " 90 we; fit “a; 333;” iii/M 3“ 75 19'“) 1975 $980 1985 1990 3995 2009 2965 2010 Source: Federal Reserve: www.federalreserve.gov/releases/H10/5ummary/indexbc_rn.txtl. 8/24/2010 The Foreign Exchange Market o The foreign exchange market is where funds are converted from one currency into another a The foreign exchange rate is the price of one currency in terms of another currency 0 The foreign exchange market determines the foreign exchange rate FIGURE 3 Money Growth (M2 Annual Rate) and the Business Cycle in the United States, 1950—2008 Mon ey C;th Rate ($53 :5 Mons}: Grewih’ff nae {F323 10 :-:s ‘2 .:: 3;; r :3- g 3 5;: 4.950 1955 3953 $955 1970 1575 3985 3955 1999 1995 2000 2005 2910 Note: Shaded areas represent recessions. Source: Federal Reserve Bulletin, p. A4, Table 1.10; www,federaIreserve.gov/release5/h6/hist/h6hist1.txt. 8/24/2010 10 International Finance 0 Financial markets have become increasingly integrated throughout the world. 0 The international financial system has tremendous impact on domestic economies: —— How a country’s choice of exchange rate policy affect its monetary policy? — How capital controls impact domestic financial systems and therefore the performance of the economy? — Which should be the role of international financial institutions iike the iMF? How We Will Study Money, Banking, and Financial Markets 0 A simplified approach to the demand for assets - The concept of equilibrium 0 Basic supply and demand to explain behavior in financial markets 0 The search for profits 0 An approach to financial structure based on transaction costs and asymmetric information - Aggregate supply and demand analysis 8/24/2010 11 8/24/2010 FIGURE 9 Federal Reserve Board Website HAS Selected Interest Rates Weekly) . WW I W! Was I W: Ml AW W arises-142nm- Release Dates Thmdalammleeseécecthday,3¢meflyaflfiGp,m. unicesMonda-yisa Whin- inwbich case mam WES be released caTneeday, Wally a: 2:30 pm. W This site 113 3.15 releases for 331:: following data): 1W Curran: "lease 13W mm msmm nm2mmtwvwmmmzww-vwm:21newwwwmmwwwwmmwmwm FIGURE 10 Excel Spreadsheet with Interest—Rate Data 12 8/24/2010 FIGURE 11 Excel Graph of Interest—Rate Data fl gfiifié ; 0,1,, 13 ...
View Full Document

This note was uploaded on 02/21/2011 for the course ECON 2035 taught by Professor Stahl during the Spring '08 term at LSU.

Page1 / 13

ECON 2035 - Why Study Money, Banking, and Financial Markets...

This preview shows document pages 1 - 13. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online