Professor Yamin Ahmad, Money and Banking – ECON 354 ECON 354 Money and Banking...

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Transcript of Professor Yamin Ahmad, Money and Banking – ECON 354 ECON 354 Money and Banking...

  • Slide 1
  • Professor Yamin Ahmad, Money and Banking ECON 354 ECON 354 Money and Banking Lecture 1 Syllabus Introduction to Financial Markets and Money Real World Observations and Basic Definitions
  • Slide 2
  • Professor Yamin Ahmad, Money and Banking ECON 354 Note: These notes are incomplete without having attended lectures Resources Needed For This Class Aplia Website: http://econ.aplia.com http://econ.aplia.com Use course code: M363-5FTK-EX38 Mishkin, Frederick S. (2010), The Economics of Money, Banking and Financial Markets, 9 th Edition, Pearson 8 th edition is also fine if you have it. 28/6/2015
  • Slide 3
  • Professor Yamin Ahmad, Money and Banking ECON 354 Note: These notes are incomplete without having attended lectures Success in an (Any!) Economics Course To do well in Economics, you need to be able to do 3 things well (in conjunction): 1.Think Mathematically: Dont be afraid of equations! 2.Think graphically! 3.Abstract Logic! (Often the hardest part) 38/6/2015
  • Slide 4
  • Professor Yamin Ahmad, Money and Banking ECON 354 Note: These notes are incomplete without having attended lectures A Model of the Economy As in Principles of Macro, divide the economy into different sectors and see how those sectors interact: Agents in the Economy Markets where Agents Interact Equilibrium 48/6/2015
  • Slide 5
  • Professor Yamin Ahmad, Money and Banking ECON 354 Note: These notes are incomplete without having attended lectures The Agents in the System There are four agents that we will focus on when constructing a model of the economy: Households Firms Government The Rest of the World (ROW) 58/6/2015
  • Slide 6
  • Professor Yamin Ahmad, Money and Banking ECON 354 Note: These notes are incomplete without having attended lectures Markets There are three markets that we typically focus on in macroeconomics: The Factor Market The Goods Market The Financial Market (- we examine in detail in this course) 68/6/2015
  • Slide 7
  • Professor Yamin Ahmad, Money and Banking ECON 354 Note: These notes are incomplete without having attended lectures The Map of the Economy That is: Y = C + I + G + (X M) = + + +( ) 78/6/2015
  • Slide 8
  • Professor Yamin Ahmad, Money and Banking ECON 354 Note: These notes are incomplete without having attended lectures The Economy HOUSEHOLDS FIRMS GOVERNMENT Overview of the Course Financial Markets: -Interest Rates -Risk -Expectations Financial Institutions - Financial Intermediaries Central Banking & Monetary Policy REST OF THE WORLD 88/6/2015
  • Slide 9
  • Professor Yamin Ahmad, Money and Banking ECON 354 Note: These notes are incomplete without having attended lectures Overview of the Course Money Monetary Theory and Monetary Policy Financial Markets and Financial Intermediaries 98/6/2015
  • Slide 10
  • Professor Yamin Ahmad, Money and Banking ECON 354 Note: These notes are incomplete without having attended lectures Some Definitions Money: Anything that is generally accepted in payment for goods and services In the United States: M1 = Currency + Traveler's Checks + Demand Deposits + Other Checkable Deposits M2 = M1 + Small denomination time deposits & repurchase agreements + Savings Deposits and money market deposit accounts + retail Money Market mutual fund shares There also used to be a broader measure of money, M3 which was discontinued as of March 2006. See: http://www.federalreserve.gov/releases/h6/hist/http://www.federalreserve.gov/releases/h6/hist/ 108/6/2015
  • Slide 11
  • Professor Yamin Ahmad, Money and Banking ECON 354 Note: These notes are incomplete without having attended lectures Role of Money Medium of exchange Form of transaction technology Unit of account Store of value Purchasing Power Hence money helps to: Lower transaction costs Increase Liquidity in an economy 118/6/2015
  • Slide 12
  • Professor Yamin Ahmad, Money and Banking ECON 354 Note: These notes are incomplete without having attended lectures Overview of the Course Money Monetary Theory and Monetary Policy Financial Markets and Financial Intermediaries 128/6/2015
  • Slide 13
  • Professor Yamin Ahmad, Money and Banking ECON 354 Note: These notes are incomplete without having attended lectures Monetary Theory and Policy Why study Monetary Theory and Policy? Influence on business cycles, inflation, and interest rates. How Central Bank (Fed) can have a big influence on the economy?. 138/6/2015
  • Slide 14
  • Professor Yamin Ahmad, Money and Banking ECON 354 Note: These notes are incomplete without having attended lectures Money and Business Cycles Shaded areas represent Recessions Note: Figure above shows a decline in money growth rate prior to every recession (except the most recent one)! 148/6/2015
  • Slide 15
  • Professor Yamin Ahmad, Money and Banking ECON 354 Note: These notes are incomplete without having attended lectures Money and the Price Level Note: Positive Relationship between Money and the Aggregate Price Level 158/6/2015
  • Slide 16
  • Professor Yamin Ahmad, Money and Banking ECON 354 Note: These notes are incomplete without having attended lectures Money Growth and Inflation Note: Across different countries, positive correlation between avg. money growth rates and avg. inflation rates 168/6/2015
  • Slide 17
  • Professor Yamin Ahmad, Money and Banking ECON 354 Note: These notes are incomplete without having attended lectures Money Growth and Interest Rates Positive correlation between money growth rates and interest rates in 1960s & 1970s Relationship breaks down in 1980s 178/6/2015
  • Slide 18
  • Professor Yamin Ahmad, Money and Banking ECON 354 Surpluses and Deficits Figure 10(a) shows the changing surplus and deficit of the federal and provincial governments in the United States since 1971. Persistent federal deficit during the 1970s through 1990s. Surplus from 1998 to 2001 More deficits following. Source: Congressional Budget Office 1980s expansion 1990s expansion 2002 2007 expansion 2001 2002 Recession 1991 Recession 1982 Recession OPEC Recession 18 Note: These notes are incomplete without having attended lectures 8/6/2015
  • Slide 19
  • Professor Yamin Ahmad, Money and Banking ECON 354 Surpluses and Deficits International Surplus and Deficit If a nation imports more than it exports, it has an international (trade) deficit. If a nation exports more than it imports, it has an international (trade) surplus. The current account deficit or surplus is the balance of exports minus imports plus net interest paid to and received from the rest of the world. 19 Note: These notes are incomplete without having attended lectures 8/6/2015
  • Slide 20
  • Professor Yamin Ahmad, Money and Banking ECON 354 Surpluses and Deficits Figure 10(b) shows The U.S. current account balance since 1960. Persistent current account deficit since 1983 The deficit has swollen during the past few years OPEC Recession 1981-82 Recession 1991 Recession 2001 2002 Recession 1990s Expansion 1980s Expansion 2008 Recession Source: Bureau of Economic Analysis 20 Note: These notes are incomplete without having attended lectures 8/6/2015
  • Slide 21
  • Professor Yamin Ahmad, Money and Banking ECON 354 Note: These notes are incomplete without having attended lectures Interaction of Monetary and Fiscal Policy Surpluses good? Deficits bad? Examine how fiscal irresponsibility can lead to the onset of financial crises. Why deficits might lead to a higher money growth rate, a higher rate of inflation and higher interest rates?. 218/6/2015
  • Slide 22
  • Professor Yamin Ahmad, Money and Banking ECON 354 Note: These notes are incomplete without having attended lectures Overview of the Course Money Monetary Theory and Monetary Policy Financial Markets and Financial Intermediaries 228/6/2015
  • Slide 23
  • Professor Yamin Ahmad, Money and Banking ECON 354 Note: These notes are incomplete without having attended lectures Why Study Financial Markets? Channel funds from savers to investors, thereby promoting economic efficiency Affect personal wealth and behavior of business firms Brief Introduction to: Bond Market Stock Market Foreign Exchange Market Financial Markets 238/6/2015
  • Slide 24
  • Professor Yamin Ahmad, Money and Banking ECON 354 Note: These notes are incomplete without having attended lectures Function of Financial Markets: Flow of Funds Allows transfers of funds from person or business without investment opportunities to one who has them. Improves economic efficiency. Lender-Savers Households Firms Government Foreigners Financial Markets Borrowers-Spenders Business-Firms Government Households Foreigners Direct Finance Indirect Finance Financial Intermediaries 248/6/2015
  • Slide 25
  • Professor Yamin Ahmad, Money and Banking ECON 354 Note: These notes are incomplete without having attended lectures Bond Market: 1953 - 2010 Bonds, securities. what are they? Bond Market (and Money Markets): determines interest rates 258/6/2015
  • Slide 26
  • Professor Yamin Ahmad, Money and Banking ECON 354 Note: These notes are incomplete without having attended lectures Stock Market: 1950 - 2010 Stocks: Share of ownership in a corporation/firm. Stock Price volatility Bull Market vs. Bear Market Stock Price Bubbles Technology bubble in 1