The Economics of Money, Banking and Financial Markets. Money and Banking ( BE 220 ) The Economics of Money, Banking and Financial Markets. By: Frederic S. Mishkin

Financial Market is: Complex Comprises many different types of private financial institutions As : Banks Insurance companies Mutual funds Finance companies Investment banks All regulated by governments Individual go to financial intermediaries

Why? Financial intermediaries are important to well-functioning financial markets? Extend credit to one party but not to another? Write complicated legal documents? They are most regulated business in the economy?

Banks Are financial institutions that: Accept deposits Make loans Commercial banks Savings and loan associations Mutual savings banks Credit unions

A person to buy a car, house... He goes to the bank Most people keep portion of their wealth in banks Banks are largest financial intermediaries in our economy Insurance companies also Finance companies also

Financial innovation: In old days… We deal with human to cash money or ask about our account balance... Now … we deal with ATM ( Auto Teller Machines ) We have new means of delivering new financial services (E-Finance )

Money: Money Supply: Any thing is accepted in payments for goods or services. Or repayment of debts.

Money and business cycles: 1981-1982 total production of goods and services in USA decreased Unemployment rate increased to 10% After 1982 the economy began to expand rapidly 1989 unemployment rate decline to 5% 1990 expansion ended Unemployment raised to 7% Why these cycles happened? Money plays important role in generating business cycles

Money and inflation Old days ...Thirty years ago… We buy one kilo of meet with SR 5 We buy one kilo of sugar with SR 1 Now... We buy one kilo of meet with SR 30 We buy one kilo of sugar with SR 4 The average price of goods and services is called Average Price Level

To solve inflation We have to know its causes!! Increase in money supply leads to increase in price level (Inflation) Positive association between inflation and growth rate of money supply

Money and Interest rate: Money plays important role in interest rate fluctuations Central banks / Federal Res. System is responsible for conducting the monetary policy

Fiscal Policy and Monetary Policy: Fiscal policy involves decisions about government spending and taxation Budget deficit = excess of government expenditures over government revenues for a particular time period Budget surplus = Government must finance any deficit by borrowing Budget surplus leads to a lower government debt burden GDP (Gross Domestic Product)

What is Money? ( Meaning of Money ) Any thing that is generally accepted in payment for goods or services or in repayment of depts. Currency = Paper money or Coins Checks , Checking account deposits considered as Money Word Money is frequently used with wealth Wealth includes not only money but also other assists such as bonds, stocks, art, land, furniture, cars and houses Money describe income Income is flow of earning per unit of time

Functions of Money: In all market transactions, Money is a medium of exchange It promote economic efficiency by minimizing time spent in exchanging goods and services Transaction cost is time spent trying to exchange goods or services

First role of Money: Money to be used effectively: Easily standardized , to ascertain its value Widely accepted Divisible Easy to carry

Second role of Money: Is to provide a unit of account It is used to measure value in economy

Third role of money: Is store of value To save purchasing power from time of income received until time of spent Money is not only store of value any asset (stocks, bonds, land, houses..) can be used to store value Liquidity is highly desirable, so the money but not other assets Hyperinflation : the inflation rate exceeds 50% per month

Evolution of Money: Commodity Money: Money universally accepted Every one must be willing to take it in payment for goods and services Gold and silver served a commodity money Gold and silver were very heavy and hard to carry from one place to another

Fiat Money: Checks: Electronic Payment: Paper Currency: It carried a guarantee that it was convertible into coins or into fixed quantity of precious metal Checks: A check is an instruction from you to your bank to transfer money from your account to someone' else account Electronic Payment: Development of cheap computers and spread of internet

E-money: Electronic payments technology can substitute not only for checks, but for cash also First form of e-money was Debit Card Debit card enable consumers to purchase goods and services by electronically transferring funds directly from their bank accounts to a merchant's bank