Download Day 4 PPT

Financial Institutions and
Markets
FIN 304
Dr. Andrew L. H. Parkes
Day 4
“How do financial markets work?”
卜安吉
Price Indices
GDP deflator

Uses Current Year Quantities
– Bought today
Consumer Price Index

Uses Base Year Quantities –
Bought in the Base Year
Are they the same?
Shanghai Dow Stock Index - WSJ
Financial Institutions & Markets, Misc
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What did you buy in 1967?

OK then try 1982?

These are the base years

Were the goods the same?

Notice even our example!

Chain Weighted GDP
Price index now
Dow Jones World Stock Index
Financial Institutions & Markets, Misc
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What did today’s purchase cost in
1982? 1967?

That’s the Paasche Index

Today’s goods, base year
prices

An MP3 player in 1982?

A digital Camera?

So there are problems
with Price indices …
Financial Institutions & Markets, Misc
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What happened yesterday in the U. S.?

The Fed did what?

Lowered the Fed Funds
Rate – the interest rate
that banks borrow
reserves from each other
(at the Fed)

Lowered the Discount
Rate
Financial Institutions & Markets, Misc
Graph source: WSJ
5
What happened yesterday in the U. S.?

Usually both move
together

Fed lowered Discount
Rate alone .5% once a few
months ago
 Notice inflation – going in
the opposite direction –
this is NOT a good sign!
Financial Institutions & Markets, Misc
Source: NY Times
6
Economic Growth Slowing – AND …

"Economic growth is
slowing, reflecting the
intensification of the
housing correction and
some softening in
business and consumer
spending," the Fed said.
"Moreover, strains in
financial markets have
increased in recent
weeks." (Fed Statement)
Financial Institutions & Markets, Misc
Sources: Fed and BLS
7
Inflation Risks remain – More?

At the same time, "some inflation
risks remain" due to elevated
energy and commodity prices. (Fed
Statement)

Unlike last October, when the Fed said the
risks of weaker growth and higher inflation
were roughly balanced, implying no
predisposition to cut rates again, Tuesday it
elected not to assess the balance of risks. It
said it "will continue to assess the effects of
financial and other developments on
economic prospects and will act as needed."
Sources: Fed and BLS
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What have I Hammered ON in Class?
3
Goals of any
Macroeconomy
 Full
Employment
 Economic Growth
 Price Stability
Sources: WSJ and BLS
Financial Institutions & Markets, Misc
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Anemic new jobs?

New private-sector jobs
increased an "anemic"
64,000 last month, he said.
The average monthly
increase for private-sector
jobs has been 74,000 this
year through November,
compared with an average
gain of 169,000 jobs a
month last year -- a 56%
decline.
Sources: WSJ and BLS
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Notice “They” always help me!
 Whatever I Teach
 The
Markets help
 The Fed helps
 Actually, it really
happens every single
day!
The Labor Department reported that
employment at nonfarm businesses
rose by 94,000 jobs in November.
That followed revised increases of
170,000 in October and 44,000 in
September; those gains were
initially estimated at 166,000 and
96,000, respectively. The
unemployment rate stayed at 4.7%
for the third-consecutive month.
Sources: WSJ and BLS
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Recession – 38% Risk so … “Maybe”

Macroeconomic Advisers, a
widely-followed forecasting
firm, said Tuesday it now
expects the economy to contract
slightly in the current quarter,
the first time it would have
done so since the recession of
2001. It expects growth to
return to 1.8% in the first
quarter of next year.
ONE Quarter of Negative Growth
THIS QUARTER – 4th!
Sources: http://online.wsj.com/article/SB119739876442121375.html?mod=hps_us_whats_news
Accessed on December 12, 2008 at 6:02 am
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Inflationary Expectations?

Inflation expectations for the
coming year rose to 3.5%,
while long-term expectations
increased as well. The share
of people who say that now
is a good time to buy a
house because of low prices
or a good deal hit 55%, a
record high.
Source: WSJ see slide 12
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WAGE Inflation?

The Labor Department said that
average hourly earnings jumped
a substantial $0.08, or 0.5%, to
$17.63. But earnings are up just
3.8% from a year ago,
suggesting that wage pressures
are in check. That gives the
Federal Reserve additional
leeway to cut interest rates at
next Tuesday's meeting.
Source: Wall Street Journal
Source: http://online.wsj.com/article/SB119703361873717116.html?mod=theafternoonreport
Accessed on December 12, 2008 at 5:58 am
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TODAY’S MARKET REACTION?

Investors reacted by sending stocks
plunging and by bidding up Treasury
bond prices. The Dow Industrials fell
more than 200 points in a matter of
minutes and kept sinking through the
afternoon, closing off more than 294
points, or 2.1 percent, for the day,
according to preliminary figures.
Broader indexes like the Standard &
Poor's 500 and the Nasdaq
Composite fared even worse.
Dow Jones Industrials (30)
Source: New York Times
Source: http://www.nytimes.com/2007/12/11/business/11cnd-fed.html?hp
Accessed on December 12, 2008 at 5:54 am
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Problem Set #2

TUTORIAL - Cheers

Let’s work on Problem Set
#2 in class for a while at
least.

U.S. Males around New
Years call this College
BOWL TIME

See ESPN
BOWLING TIME!!! (College - American Football)
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