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Money and Banking
Chapter 1:
Why Study Money, Banking, and Financial
- Financial Markets: (stock, bonds, foreign
- Financial institutions: (banks, insurance
- How financial markets affect our daily life?
- How financial markets affect our economy?
- The effect on other economies?
The importance of Money in the economy.
1- Why Study Financial Markets?
Markets in which funds are transferred:
(excess funds – shortage of funds)
A- Bonds and Stock markets: channeling funds
from savers to investors, thereby promoting
economic efficiency.
- The bond market and the interest rate:
A security (financial instrument): a claim on the
issuer’s future income or assets.
A bond is debt security that promises to make
payments periodically for a specific period of
Governments and corporations use bonds to
finance (borrow) their activities, therefore, it
affects the interest rate:
The interest rate is the cost of borrowing funds.
The effect of the level of interest rate on the
personal level and on the economy.
B-The Stock Market:
A stock is a share of ownership in a corporation.
It is a security (claim on earnings and assets)
Issuing a stock and selling it to finance a firm’s
2- The Foreign Exchange Market:
To convert funds from one currency to another,
we use the FEM.
Foreign exchange rate: the price of one
country’s currency in terms of another’s is
determined in the FEM.
What are the results of fluctuations on the
Affects the consumers and the private sector:
- Weaker KD leads to more expensive foreign
- Stronger KD means more expensive exports
2- Why Study Banking and Financial
- Banks and other financial institutions are
what make financial institutions work.
- Without them, cannot move funds from
people with excess funds to people with
shortage of funds.
Allocations towards productive investment
A- Structure of the Financial System:
Transactions are made through Financial
Intermediaries: institutions that borrow funds
from people who have excess funds and in turn
make loans to people with shortage of funds.
B- Banks and other Financial Institutions:
How they manage their assets and liabilities to
make profits? Why they are regulated? What
are the financial innovations? (ATM, banking
3- Why Study Money and Monetary Policy?
Money (Money Supply): is anything that is
generally accepted in payment for goods and
services or in the repayment of a debt.
- What is the role/effect of money in the
- Historical view
A- Money and Business Cycle:
A positive relation?
B- Money and Inflation:
Aggregate price level – Inflation rate
A positive relation?
C- Money and Interest Rate:
A clear relation?
D- Conduct of Monetary Policy:
Money affects many economic variables, its
important to the wellbeing of the economy and
the people.
Therefore, Monetary policy: the management of
money and interest rates (quantity of money), is
conducted by the central bank.