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Money and Banking
Instructor: Dr. Ming-Jang Weng
Department of Applied Economics, NUK
C02-Room 316
Phone: 07-5919316, 5919186
Email: [email protected]
Office Hours: Wednesdays 10:00-12:00 am.
Book: The Economics of Money, Banking, and
Financial Markets, Mishkin, 7th ed., 2004
The Economics of Money,
Banking, and Financial Markets
Mishkin, 7th ed.
Chapter 1
Introduction
Financial markets




Transfers funds from low-valued
uses to higher-valued uses
(promoting economic efficiency)
Promotes economic growth
Affect personal wealth
Impacts the business cycle
Basic definitions

Security (also called a “financial instrument”)


Bond


Claim on the issuer’s future income or assets
Debt security that provides payments at
specified future dates
Interest rate


Cost of borrowing (usually expressed as an
annual percentage)
Various kinds of interest rates
Interest rates
Stock market



Claim on the earnings and assets of the corporation
Common stock
 share of ownership in a corporation
 very volatile
A place people can get rich/poor quickly
10/19/1987
Black Monday
DJIA fell 22%
In 2000
High-Tech Bubble
DJIA fell 30% by 2002
Foreign exchange market

Foreign exchange rate = price on
one currency in terms of another
USD
appreciates
USD
depreciates
Financial intermediation




Institutions that borrow funds from
people who have saved and in turn
make loans to others call intermediaries
Lowers transaction costs
Reduces risk
Moral hazards and Adverse selection
Why study bank behavior?


Bank decisions affect the size of
the money supply
Changes in the money supply
affect the price level, inflation rate,
level of output and the rate of
economic growth
Why study money and monetary policy?
Money and the business cycles
Recessions,
periods of declining
aggregate output
Every recession has been preceded
by a decline in the rate of money
growth in the 20th century
Money and the price level


Prices increased more than sixfold during 1950-2002
The price level and the money supply move closely
 a continuing increase in M might be an important
factor in causing a continuing increase in P
Money growth and inflation
(1992-
2002)


A positive association b/w inflation money growth rate
Milton Friedman: Inflation is always and everywhere a
monetary phenomenon
Money growth and interest rates

Monetary policies are conducted by a country’s central
bank, e.g. the Federal Reserve System (the Fed)
Federal deficit/surplus

Fiscal policy involves decisions about gov’t spending
and taxation
President Clinton
brought back a
budget surplus in
his 2nd term
The budget
came back to
deficit again
after the 911
attacks in 2001
Macroeconomic definitions

Gross Domestic Product (GDP) = Value of all
final goods and services produced in
domestic economy during year




Excludes items produced in the past, and in
process
Excludes household production
Nominal variable = values measured using
current prices
Real variable = adjusted for inflation, values
measured using constant prices (base-year
prices)
Macroeconomic definitions
(continued)
Aggregate Price Level


GDP deflator = nominal GDP / real GDP
Consumer Price Index (CPI) = price of
“basket” of goods and services in current year
/ price of the same basket of goods in the base
year (usually expressed as a percentage)
Do the Web Exercises in p.15
 Read Wall Street Journal on the web