Chapter 1 - Chapter 1 - Why Study Money and Banking? News:...

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Chapter 1 - Why Study Money and Banking? News: The stock market reacted today to the expectation that the Fed Reserve will raise (lower) int rates at their next meeting. Why are financial markets so sensitive to interest rate changes, even when it is only 1/4%? Typical issue that Money and Banking helps explain. In Money and Banking, we study several important issues that affect the economy - 1. The Role of Money in the Economy 2. The role of financial markets - stock, bond and derivative 3. The role of financial institutions (banks, mutual funds, ins cos.) Applied macro to policy issues and financial markets. .... Money and Banking is the most exciting part of economics - many important changes. Innovation in fin markets, deregulation of banking, the S&L collapse, the increased international integration of world currency and financial mkts. WHY STUDY MONEY AND MONETARY POLICY? Money or money supply (MS) is anything that is accepted as final payment for goods, services or debts. We now have a "Fiat" money system - no link to commodity. The FED directly controls the MS, which indirectly affects which important economic variables???? Why are commercial banks important in the MS process??? Money and Business Cycles: When we study monetary theory, we look at how money is linked to the business cycle, the alternating periods of economic expansion and contraction. We are in the expansionary phase of the 10th bus cycle since WWII. Money is linked to aggregate econ activity - GDP (aggregate output), unempl, recession, bus cycle, etc. See page 9. Money, Inflation and Interest Rates Money is also linked to inflation and interest rates. Inflation = percentage change (or growth rate) in the price level. Inflation: ((CPI t - CPI t-1 ) / CPI t-1 ) * 100 GDP deflator - aggregate, broad based price index. CPI - narrower, consumer-based index. Look at graphs on p. 10 and 11. "Inflation is always and everywhere a monetary phenomenon." Money affects int rates. See p. 12.
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Why Study Monetary Policy? - because money affects so much of the economy - bus cycle, un, inf, int rates - monetary policy is very important. FRS is responsible for
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This note was uploaded on 11/18/2011 for the course ECON 210 taught by Professor Blare during the Fall '10 term at Rutgers.

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Chapter 1 - Chapter 1 - Why Study Money and Banking? News:...

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