im1 - Part 1 Introduction Chapter 1 Introducing Money and...

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Part 1 Introduction Chapter 1 Introducing Money and the Financial System Overview Issues of money and banking are much in the news, giving most students a greater initial interest in this course than in most economics courses. Chapter 1 attempts to reinforce this interest while introducing students to the basics of the financial system. A preview of markets such as the stock, bond, and foreign- exchange markets is provided. The discussion illustrates the importance of financial markets and financial institutions in several ways. Reference is made to episodes such as the potential effects of the terrorist strikes on September 11 on financial markets and the struggles of the countries of Eastern Europe to reconstruct their financial systems, that students will probably have heard of and that they may well want to find out more about. The impact of developments in financial markets—such as fluctuations in interest rates—on students’ own lives is also brought out. Finally, a preview is given of the usefulness of some of the things they will be called upon to study—such as the information on the expected future course of the economy contained in differences among bond interest rates. The chapter also provides an introduction to one of the major themes of the text, and one of its strengths: the use of economic analysis to explain and predict behavior in financial markets. If most students in the class are familiar with economic modeling and the idea of testing a model’s predictions by comparing them to data, this material may be passed over briefly. However, if these ideas are unfamiliar to a significant number of students in the class, then some class time should be devoted to them. Outline I. Getting Started A) Five main topics are important in making financial decisions. 1. The financial system and the economy are connected in the United States and around the world. 2. Financial markets , which are markets for buying and selling bonds, stocks, foreign exchange, and other financial instruments, are an important part of the financial system. 3.
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im1 - Part 1 Introduction Chapter 1 Introducing Money and...

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