Ch. 1 Notes (BUS G-345; Money, Banking; and Capital Markets; Self)

Ch. 1 Notes (BUS G-345; Money, Banking; and Capital Markets; Self)

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Unformatted text preview: 3 min ass SHIN! Chapter 1 ' -- Eili‘limr Why Study Money, Banking, and Financial Markets? ._'v;_.1 N -- 099mm 02m Pollun Milan-Manor. in mm W. Chapter One: Why Study Money, Banking, and Financial Markets 0 To examine how financial markets such as bond, stock and foreign exchange markets work 0 To examine how financial institutions such as banks and insurance companies work a To examine the role of money in the economy Financial Markets - 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 - A security (financial instrument) is a claim on the issuer’s future income or assets .________H__._.——-.——.——._.._, o A bond is a debt security that promises to make payments periodically for a specified period of time n An interest rate is the cost offlpfiorrowjgg or the price paid for the rental—6f funds FIGURE 1 Interest Rates on Selected Bonds, 1950—2008 Interesl Hate PM 2B U.S. Govern ment- Long-Terrn Bonds 1950 1955 1960 1965 1970 19?5 1980 1935 1990 1995 2000 2005 2010 Sources: Federal Reserve Bulien'n', www.federalreservegovfreleasesffll5Xdata.htm. The Stock Market - Common stock represents a share of ownership in a corporation - A share of stock is a claim on the earnings and assets of the corporation FIGURE 2 Stock Prices as Measured by the Dow Jones Industrial Average, 1950—2008 now .Inm IurJunrml nmge 15M 0 J._._J I | ' I I I .1 _J._-._J 193D 1955 Im ‘95!) 191‘" IETS 19m 1935 I?” 1995 2000 7005 2010 Source: Dow Jones Indexes: http:flfinance.yahoo.com/?u. Financial Institutions and Banking - inancial Intermediar' : 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, pensmn funds, mutual funds and investment banks -,,Financial Innovation; in particular, the advent of the information age and e— finance Financial Crises ' financial crises are major disruptions in financial markets that are characterized by shfldeclines in asset prices and the 131mg; of many financial and nonfinancial firms. Money and Business Cycles - Evidence suggests that money plays an important role in generating business cycles - Recessions (unemployment) and expansions affect all of us - Monetaiyjhegfy ties changes in the money supply to changes in aggregate economic activity and the price level FIGURE 4 Aggregate Price Level and the Money Supply in the United States, 1950— 2008 law (we? - IDDJ BUD 275 250 — 225 m . [1'5 100 .m _ Aggregate Print Level so (ens: Dllnllnfsrj 25 D 1950 '955 INC! 1965 1970 1915 HBO 1085 1900 1995 20K! 2005 2010 Sources: wwyétls.frb.org[frgdgdatggggngdpggf; www‘federa|reservag0v}releaseslhfifhistfhéhistl 0.1;xt. Money and Inflation - The aggregate rice level is the average price of goods and services in an economy 0 A continual rise in the price level (inflation) affects all economic players - Data shows a connection between the money supply and the price level 6 FIGURE 5 Average Inflation Rate Versus Average Rate of Money Growth for Selected Countries, 1997—2007 Average Inflation Rate 1%: so — 70 50 50 40 Romania Ecuador ‘3 30 - g Uruguay Venezuela 20 / Colombia ‘ :Flussia l i i /Mexioo Unlled Kingdom SHE Ema ‘ .31.; Brazil United Stales—D - "'“- ‘ f Pew ‘ I ‘ 10 20 30 an 50 60 70 30 ‘30 mo Argentina Average Money Growth Hale Lee] Swilzerland Source: International Financial Statistics. FIGURE 6 Money Growth (M2 Annual Rate) and Interest Rates (Long-Term US. Treasury Bonds), 1950—2008 Inlerest Honey Growth Hall.- Flats We) .mnuu‘i -.':l-.'.-] 16 -- ' 1950 1955 1960 1965 19?!) 1975 1930 1935 1990 1995 2000 2005 2010' Sources: Federal Reserve Bulletinf D. A4, Table 1.10; wwwfladeraIreserveqovfreleasesfhfifhistfhéhistlixt. Money and Interest Rates - Interest rates are the price of money - Prior to 1980, the rate of money growth and the interest rate on longmterm 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 Government Budget Surplus or Deficit as a Percentage of Gross Domestic Product, 1960— 2009 Percentage of GDP 24% :- j Spending 22% H W J 20% I - 16% : Revenues — 14% — ' K.‘ 2% 0% —2% 41% 49% 1960 1980 1990 Monetary and Fiscal Policy - Monetary polic is the management of the money supp y an Interest rates ~ Conducted in the US. by the Federal Reserve System (Fed) - Fiscal poLLgy deals with government spending and taxation — Budget deficit is the excess of expenditures over revenue—sffor a particular year — Budgetsurplus is the excess of revenues over expenditures for a particular year — any deficit must be financed by borrowing FIGURE 8 Exchange Rate of the US. Dollar, 1970—2008 Index [March 19?3 = 100} 150 1 s.. 19?5 1980 1985 i990 1995 2000 Source: Federal Reserve: www.federalreserve.gov!releasesfH 10/Suml‘na ry/indexbc_m.txtl. The Foreign Exchange Market {Intimieigflw is where funds are converted from one currency into another - WW 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 Money Growth Rate (33} 15 Money Growth Rate {N121 / 1950 1955 1950 1965 19.70 1915 19130 1985 1990 1995 2000 2005 2010 Note: Shaded areas represent recesslons. Source: Federal Reserve Bulletin, p. A4, Table 1.10; www.federa|reservegov/releaseslhfig‘hist/hshistl.txt. 10 International Finance a Financial markets have become increasingly integrated throughout the world. a 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 like the IMF? How We Will Study Money, Banking, and Financial Markets - A simplified approach to the demand for assets 0 The concept of equilibrium - Basic supply and demand to explain behavior in financial markets a The search for profits - An approach to financial structure based on transaction costs and asymmetric information - Aggregate supply and demand analysis 11 ...
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Ch. 1 Notes (BUS G-345; Money, Banking; and Capital Markets; Self)

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