Money and Banking Instructor: Dr. Ming-Jang Weng Department of Applied Economics, NUK C02-Room 316 Phone: 07-5919316, 5919186 Email: mjweng@nuk.edu.tw 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 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 Bond 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 depreciates USD appreciates

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