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Chapter 1 Why Study Money, Banking and Financial Market? Alan Greenspan 1926 - ? • Fifth and final term since 1987 • FRBKC, Jackson Hole, Greenspan Era: Lessons for the Future (Aug. 25-27, 2005) – http://www.kc.frb.org/PUBLICAT/SYMPOS/2005/sym05prg.htm – Economist (Monetary Policy, Sep. 5th, 2005) • Reputation for his obfuscation Andrea Mitchell (Chief Foreign Affairs Correspondent, NBC News, 1946 - ?) said that Greenspan had to propose 3 times before she understood him. © 2004 Pearson Addison-Wesley. All rights reserved 3-2 World GDP (2004, CIA) • Gross World Product (PPP) - $55.5 trillion Per Capital - $8,800 • USA GDP (PPP) - $11.75 trillion Per Capital - $40,100 • Guatemala GDP- $59.47 billion Per Capital - $4,200 • China GDP - $7.262 trillion Per Capital - $5,600 • EU GDP - $11.65 trillion Per Capital - $26,900 • Japan GDP - $3.745 trillion • Per Capital - $29,400 © 2004 Pearson Addison-Wesley. All rights reserved 3-3 Why Study Money and Monetary Policy? • • • • • Money and business cycles Money and inflation Money and interest rates Conduct of Monetary Policy Fiscal Policy and Monetary Policy – DOES MONEY MATTER? (Neutrality) © 2004 Pearson Addison-Wesley. All rights reserved 3-4 BANGUAT (since 1945) Fundamental objective of the Bank of Guatemala The Bank of Guatemala has as fundamental objective, to contribute to the creation and maintenance of the most favorable conditions to the orderly development of the national economy, to which, will propitiate the monetary exchange and credit conditions that promote the stability in the general level of prices. Article 3 of the Decree Number 16-2002 of the Congress of the Republic of Guatemala, Organic Law of the Bank of Guatemala Mission of the Bank of Guatemala To promote the stability in the general level of prices Lic. Lizardo Arturo Sosa López President © 2004 Pearson Addison-Wesley. All rights reserved 3-5 Textbook • Mishkin, Frederic (2004), The Economics of Money, Banking, and Financial Markets, Seventh Edition, Addison Wesley. www.aw.com/mishkin. • This course covers five main topics © 2004 Pearson Addison-Wesley. All rights reserved 3-6 1. Money and interest rates • Ch. 1 • Ch. 3 • Ch. 4 • Ch. 5 Why Study Money, Banking, and Financial Markets? What Is Money? Understanding Interest Rates The Behavior of Interest Rates © 2004 Pearson Addison-Wesley. All rights reserved 3-7 2. Money supply • Ch. 15 • Ch. 16 • Ch. 17 • Ch. 18 Multiple Deposit Creation and the Money Supply Process Determinants of the Money Supply Tools of Monetary Policy Conduct of Monetary Policy: Targets and Goals © 2004 Pearson Addison-Wesley. All rights reserved 3-8 3. Money demand • Ch. 22 • Ch. 23 • Ch. 24 The Demand for Money The Keynesian Framework and the ISLM Model Monetary and Fiscal Policy in the ISLM Model © 2004 Pearson Addison-Wesley. All rights reserved 3-9 4. Monetary policy • Ch. 25 • Ch. 26 • Ch. 27 • Ch. 28 Aggregate Demand and Supply Analysis Transmission Mechanisms of Monetary Policy: The Evidence Money and Inflation Rational Expectations: Implications for Policy © 2004 Pearson Addison-Wesley. All rights reserved 3-10 5. International Finance and Monetary Policy • Ch. 19 • Ch. 20 • Ch. 21 The Foreign Exchange Market The International Financial System Monetary Policy Strategy: The International Experience © 2004 Pearson Addison-Wesley. All rights reserved 3-11 Course requirements • 3 midterm exam on Monday (06/05, 06/19, and 07/03) 45% • Final exam 25% • Class discussion of questions in the textbook 10% • 2 homework (IS-LM model and data analysis using WDI) 20% © 2004 Pearson Addison-Wesley. All rights reserved 3-12 End-of-chapter questions • The following questions are assigned to help you understand the course material and prepare for the exams. Although you are not required to submit your answers, we will discuss the solutions in class. Your participation will count for 10% of the final grade. © 2004 Pearson Addison-Wesley. All rights reserved 3-13 Appendix: Definitions Aggregate Output Gross Domestic Product (GDP) = Value of all final goods and services produced in domestic economy during year Aggregate Income Total income of factors of production (land, capital, labor) during year Distinction Between Nominal and Real Nominal = values measured using current prices Real = quantities, measured with constant prices Aggregate Price Level nominal GDP GDP Deflator = real GDP $10 trillion GDP Deflator = = 1.11 $9 trillion Consumer Price Index (CPI) price of “basket” of goods and services © 2004 Pearson Addison-Wesley. All rights reserved 3-14 Appendix: Definitions © 2004 Pearson Addison-Wesley. All rights reserved 3-15 Appendix: Definitions Growth Rates and the Inflation Rate xt xt 1 Growth Rate 100 xt 1 $9.5 trillion $9 trillion GDP Growth Rate 100 5.6% $9 trillion 113 111 Inflation Rate 100 1.8% 111 © 2004 Pearson Addison-Wesley. All rights reserved 3-16 © 2004 Pearson Addison-Wesley. All rights reserved 3-17 Basic Concepts • Stock vs. Flow Wealth vs. saving; capital vs. investment; debt vs. deficit GDP (flow), M1(stock) • Using WDI (World Development Indicators) • Comparative Static ISLM Cramer’s Rule © 2004 Pearson Addison-Wesley. All rights reserved 3-18