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The Economics of Money, Banking, and Financial Markets Thirteenth Edition Chapter 1 Why Study Money, Banking, and Financial...

The Economics of Money, Banking, and Financial Markets Thirteenth Edition Chapter 1 Why Study Money, Banking, and Financial Markets? ‫سواق ا!الية‬0‫!اذا ندرس ا!ال والبنوك وا‬ Copyright © 2022, 2019, 2016 Pearson Education, Inc. All Rights Reserved Preview To examine how the workings of financial markets such as bond, stock and foreign exchange markets affect your everyday life To examine how financial institutions such as banks, investment and insurance companies work To examine the role of money in the economy Copyright © 2022, 2019, 2016 Pearson Education, Ltd. All Rights Reserved Learning Objectives 1.1 Recognize the importance of financial markets in the economy. 1.2 Describe how financial intermediation and financial innovation affect banking and the economy. 1.3 Identify the basic links among monetary policy, the business cycle, and economic variables. 1.4 Explain the importance of exchange rates in a global economy. 1.5 Explain how the study of money, banking, and financial markets may advance your career. Copyright © 2022, 2019, 2016 Pearson Education, Ltd. All Rights Reserved  ‫سواق ا&الية؟‬+‫&اذا ندرس ا‬ Why Study Financial Markets? The financial difficulties of 2007-2009 surrounding the collapse of housing markets in several countries and the recent pandemic have had deep and profound consequences for economic agents around the world. Financial markets are 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 Financial markets important to promoting greater economic efficiency by channeling funds from people who don’t have productive use for them to those who have Copyright © 2022, 2019, 2016 Pearson Education, Ltd. All Rights Reserved  ‫سواق ا&الية؟‬+‫&اذا ندرس ا‬ Why Study Financial Markets? Well-functioning financial markets are a key factor in producing high economic growth and poorly-performing financial markets are a key factor that remain desperately poor. Copyright © 2022, 2019, 2016 Pearson Education, Ltd. All Rights Reserved The Bond Market and Interest Rates Important to economic activity because: 1. It enables corporation and government to borrow to finance their activity. 2. Interest rates (the cost of borrowing) are determined in the bond market. Copyright © 2022, 2019, 2016 Pearson Education, Ltd. All Rights Reserved The Bond Market and Interest Rates A security (financial instrument) is a claim on the issuer’s future income or assets. A bond is a debt security that promises to make payments periodically for a specified period of time. An interest rate is the cost of borrowing or the price paid for the rental of funds. Copyright © 2022, 2019, 2016 Pearson Education, Ltd. All Rights Reserved 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. Copyright © 2022, 2019, 2016 Pearson Education, Ltd. All Rights Reserved Why Study Financial Institutions and Banking? (1 of 3) ‫!اذا ندرس ا!ؤسسات ا!الية وا!صرفية؟‬ Financial intermediaries: institutions that borrow funds from people who have saved and in turn make loans to people who need funds. – Banks: accept deposits and make loans – Other financial institutions: insurance companies, finance companies, pension funds, mutual funds and investment companies Copyright © 2022, 2019, 2016 Pearson Education, Ltd. All Rights Reserved Why Study Financial Institutions and Banking? (2 of 3) ‫!اذا ندرس ا!ؤسسات ا!الية وا!صرفية؟‬ Financial innovation: the development of new financial products and services – Can be an important force for good by making the financial system more efficient – E-finance: the ability to deliver financial services electronically Copyright © 2022, 2019, 2016 Pearson Education, Ltd. All Rights Reserved Why Study Financial Institutions and Banking? (3 of 3) ‫!اذا ندرس ا!ؤسسات ا!الية وا!صرفية؟‬ Financial crises: major disruptions in financial markets that are characterized by sharp declines in asset prices and the failures of many financial and nonfinancial firms. Copyright © 2022, 2019, 2016 Pearson Education, Ltd. All Rights Reserved  ‫!اذا ندرس ا!ال والسياسة النقدية؟‬ Why Study Money and Monetary Policy? Evidence suggests that money, defined as anything that is generally accepted as payment for goods or services or in the repayment of debts, plays an important role in generating business cycles. Recessions (unemployment) and expansions affect all of us. Monetary theory ties changes in the money supply to changes in aggregate economic activity and the price level. Copyright © 2022, 2019, 2016 Pearson Education, Ltd. All Rights Reserved Money, Business Cycles, and Inflation The aggregate price level is the average price of goods and services in an economy A continual rise in the price level (inflation) affects all economic players Data show a connection between the money supply and the price level Copyright © 2022, 2019, 2016 Pearson Education, Ltd. All Rights Reserved Figure 3 Money Growth (M2 Annual Rate) and the Business Cycle in the United States, 1950–2020 Source: Federal Reserve Bank of St. Louis, F RED database: https://fred.stlouisfed.org/series/M2SL Copyright © 2022, 2019, 2016 Pearson Education, Ltd. All Rights Reserved  Figure 4 Aggregate Price Level and the Money Supply in the United States, 1960–2020 Source: Federal Reserve Bank of St. Louis, F RED database: https://fred.stlouisfed.org/series/M2S ; L https://fred.stlouisfed.org/series/GDPDEF Copyright © 2022, 2019, 2016 Pearson Education, Ltd. All Rights Reserved Money and Interest Rates Interest rates are the price of money Prior to 1980, the rate of money growth and the interest rate on long-term Treasury bonds were closely tied Since then, the relationship is less clear, but the rate of money growth is still an important determinant of interest rates Copyright © 2022, 2019, 2016 Pearson Education, Ltd. All Rights Reserved Fiscal Policy and Monetary Policy Monetary policy is the management of the money supply and interest rates – Conducted in the United States by the Federal Reserve System (Fed) Fiscal policy deals with government spending and taxation – Budget deficit is the excess of expenditures over revenues for a particular year – Budget surplus is the excess of revenues over expenditures for a particular year – Any deficit must be financed by borrowing Copyright © 2022, 2019, 2016 Pearson Education, Ltd. All Rights Reserved Figure 7 Government Budget Surplus or Deficit as a Percentage of Gross Domestic Product, 1950–2019 Source: Federal Reserve Bank of St. Louis, F RED database: https://fred.stlouisfed.org/series/FYFSGDA188S Copyright © 2022, 2019, 2016 Pearson Education, Ltd. All Rights Reserved Money, Banking, and Financial Markets and Your Career Understanding monetary policy may help you predict when interest rates will rise or fall, help you make decisions about whether it is better to borrow now or to wait until later, know how banks and other financial institutions are managed which may help you get a better deal when you need to borrow from them and may enable you to make better investment decisions, whether for yourself or for the company you work for Copyright © 2022, 2019, 2016 Pearson Education, Ltd. All Rights Reserved How We Will Study Money, Banking, and Financial Markets A simplified approach to the demand for assets The concept of equilibrium Basic supply and demand to explain behavior in financial markets The search for profits An approach to financial structure based on transaction costs and asymmetric information Aggregate supply and demand analysis Copyright © 2022, 2019, 2016 Pearson Education, Ltd. All Rights Reserved 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. Copyright © 2022, 2019, 2016 Pearson Education, Ltd. All Rights Reserved Real Versus Nominal Magnitudes (1 of 2) 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. Copyright © 2022, 2019, 2016 Pearson Education, Ltd. All Rights Reserved Real Versus Nominal Magnitudes (2 of 2) A more reliable measure of economic production expresses values in terms of prices for an arbitrary base year, currently 2005. GDP measured with constant prices is referred to as real GDP, the word real indicating that values are measured in terms of fixed prices. Copyright © 2022, 2019, 2016 Pearson Education, Ltd. All Rights Reserved 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 Consumer Price Index (CPI) Copyright © 2022, 2019, 2016 Pearson Education, Ltd. All Rights Reserved Aggregate Price Level Copyright © 2022, 2019, 2016 Pearson Education, Ltd. All Rights Reserved  Why Study? 1. Financial 2. Financial 3.International 4.Money and Markets Institutions and Finance Monetary Banking Policy The Foreign Money & Business The Stock Market Financial Crises Cycles Exchange Market The international Money & Inflation The Bond Banks & Other Finance System Markets Financial Institution Market Money & Interest Rates Financial Innovation Conduct of Monetary Policy Fiscal and Monetary Policy Copyright © 2022, 2019, 2016 Pearson Education, Ltd. All Rights Reserved