MONEY AND BANKING
CHAPTER ONE
Why Study Money, Banking, and Financial Markets
I. Why Study Financial Markets.
A. The Bond Market and Interest Rates.
1. Financial Markets. Markets in which funds are transferred from people who have an excess of available funds to people who have a shortage.
2. Security. (Financial instrument) claim on issuer’s future income or asset.
3. Asset. Any financial claim of property that is subject to ownership.
4. Bond. Is a debt security that promises to make payments periodically for a specific period of time.
5. Different interest rates tend to move in unison.
B. The Stock Market
1. Common Stock. (Typically just called stock) represents a share of ownership in a corporation. It is a security that is a claim on the earnings and assets of a corporation.
2. Issuing and selling stock is a way corps. Raise funds to finance activities.
II. Why study Financial Institutions & Banking
A. Structure of the Financial System
1. Financial Intermediaries. Institutions that borrow funds from individuals that has saved and in turn makes loans to others.
B. Financial Crises.
1. Financial Crises Major disruption in financial markets which are characterizes by sharp declines in asset prices and failures of financial and non-financial firms.
C. Banks and other Financial Institutions.
1. Banks. Institutions that accept deposits and make loans.
2. Banks are the most common financial intermediaries
III. Why Study Money & Monetary Policy
A. Money and Business Cycles
1. Money (Money Supply) anything that is generally accepted in payment for goods or services or in the repayment of debts.
2. Aggregate output. Total production of goods and services
3. Unemployment rate. Percentage of available labor force unemployed
4. Business Cycle. the upward and downward movement of aggregate output
5. Recession. periods of declining aggregate output. Rate of money growth declines before a recession.
B. Money and Inflation
1. Aggregate Price level. Average price of goods and services in the economy
2. Inflation. Continual increase in price level
3. Money supply and price level rise together. Increased money supply in turn increases prices(inflation)
IV. Defining Aggregate Output, Income, the Price Level, and the Inflation Level.
A. Aggregate Output and Income.
1. GDP most commonly reported measure of aggregate output. (is the market value of all final goods and services produced by a country during the course of the year.
a. Excludes. ***Things produced in the past. (House, Art.) ***Purchase of Stocks and Bonds. ***intermediate goods , are included in the final price
2. Aggregate Income the total income from factors of production (Land Labor, Capital) from producing G&S. during the course of a year. Equal to Aggregate output. [economy aggregate output =$10mill/ = economy aggregate income =$10mil
B. Real vs Nominal Magnitudes
1. Nominal GDP – total value of G&S based on current prices. Nominal variables can be misleading measures of economic well-being.
2. Real GDP – a more reliable measure of economic production, expresses values in terms of prices for a arbitrary year. (Fixed Prices)
3. GDP