1. Economics 330 – Money and Banking
M and W from 3:30pm to 4:45pm
Text: Mishkin, Economics of Money, Banking, and Financial Markets, Pearson, 5th Business School Edition.

2. Who am I ?
Dr. John Neri
Office Hours: M and W from 10:30am to 11:30am.
Office: Morrill Hall, Room 1106

3. Who you are: 265 as of 8/22/18 Accounting – 12 Bio – 2 BMGT Undec -4
Computer Science – IAP - 18
LTSC Sup MGMT - 1
Economics – Foreign Exch - 13
Finance – Psychology - 1
G & P – Journalism - 2
Govt. Intlrel - 4
Marketing/Int. Bus/Mgnt – 16
MathStat- 4

4. Course Webpage http://www.terpconnect.umd.edu/~jneri/Econ330
Students using ADS, please see me within the first 2 weeks of class.
NOTE: upper-case E

5. Can you define each of the following?
Federal Reserve System
FOMC
Federal Funds Market
Federal Funds Rate
Discount Loan
Discount Rate
Open Market Operation
Quantitative Easing
Financial Intermediary
Money Market
Capital Market
MMMF
Large Scale Asset Purchase
Term Structure
Yield Curve

6. What is this?
Assets Liabilities & NW

7. What is this?

8. Chapter 1 Why Study Money, Banking, and Financial Markets?

9. Preview Understand how financial markets work.
bond, stock, foreign exchange markets.
We focus on the bond market.
To examine how financial institutions such as banks, investment and insurance companies work
- we focus on banks.
To examine the role of money in the economy

10. Financial Markets
Markets in which funds are transferred from people and firms who have an excess of available funds to people and firms who have a need of funds
Also, transfer risk from individuals and firms that do not want to bear risk to parties willing to take on risk.

11. The Bond Market and Interest Rates
A financial instrument is a claim on the issuer’s future income or assets.
A security is a financial instrument that can be bought and sold in a financial market.
A bond is a debt security that promises to make specified payments on specified dates for a specified period of time.

12. The Bond Market and Interest Rates
An interest rate is the cost of borrowing or the price paid for the rental of funds.
price paid for the rental of funds, expressed as a percentage.
pay $5.00 to rent $100 for one year, the interest rate is 5.0%.

13. Interest Rates on Selected Bonds, 1950–2015 Three things this graph demonstrates??
3-month Treasury Bill
10-year Treasury Bond
10-year Corporate Baa 13

14. The Stock Market
Common stock represents a share of ownership in a corporation.
A share of stock is a claim on the residual earnings and assets of the corporation.

15. Figure 2 Stock Prices as Measured by the Dow Jones Industrial Average, 1950–2016
Source: Federal Reserve Bank of St. Louis, FRED database:

16. Financial Institutions and Banking
Financial Institutions give access to financial markets.
Financial Intermediaries are institutions that “borrow funds from” (“issue liabilities to”) people who save and make loans to other people:
Commercial Banks: accept deposits and make loans
Other financial institutions: insurance companies, finance companies, pension funds, mutual funds and investment banks 16

17. Commercial Banks
Insurance Companies
Loans
deposits
Bonds
Stocks
Insurance Policies
Pension Funds
Mutual Funds
Retirement Plans
Bonds
Stocks
Stocks
Shares
Money Market Mutual Funds
Commercial paper
T-Bills
Shares/ “deposits”

18. Why Study Money and Monetary Policy?
Evidence suggests that money plays an important role in generating business cycles.
Recessions (unemployment) and expansions in economic activity.
Monetary theory ties changes in the money supply to changes in aggregate economic activity and the price level.

19. Money and Aggregate Economic Activity Money Growth (M2 Annual Rate) and the Business Cycle in the United States 1950–2014
Source: Federal Reserve Bank of St. Louis, FRED database:

20. Money, the Price Level, and Inflation
The aggregate price level is the average price of goods and services in an economy
Inflation is a continual rise in the price level
Data shows a connection between the money supply and the price level

21. Aggregate Price Level and the Money Supply in the United States, 1950–2014
Source: Federal Reserve Bank of St. Louis, FRED database:

22. Inflation Rate and the Rate of Money Growth, Selected Countries, 2003-2013

23. Average Inflation Rate Versus Average Rate of Money Growth for Selected Countries, 1997–2007
Source: International Financial Statistics. 23

24. Examples of Hyperinflation:1980s and Early 1990s

25. M2 Money Growth and Inflation - US

26. Inflation and Nominal Interest Rates
Mankiw

27. Inflation and Nominal Interest rates

28. Appendix 1: Defining Aggregate Output, Income, the Price Level, and the Inflation Rate

29. Aggregate Output and Income
The most commonly reported measure of aggregate output, the gross domestic product (GDP), is the market value of all final goods and services produced in a country during the course of a year.
Aggregate income, the total income of factors of production (land, labor, and capital) from producing goods and services in the economy during the course of the year, is equal to aggregate output.

30. Real versus Nominal Magnitudes
When the total value of final goods and services is calculated using current prices, the resulting GDP measure is referred to as nominal GDP. The word nominal indicates that values are measured using current prices.

31. Real versus Nominal Magnitudes
A more reliable measure of economic production expresses values in terms of prices for an arbitrary base year, currently GDP measured with constant prices is referred to as real GDP, the word real indicating that values are measured in terms of fixed prices.

32. Aggregate Price Level
The aggregate price level is a measure of average prices in the economy.
Three measures of the aggregate price level are commonly encountered in economic data:
The GDP deflator
The PCE deflator
The Consumer Price Index (CPI)