Chapter One. Why Study Money, Banking, and Financial Markets ?. We study money because :. 1. Its growth rate may be a driving force behind inflation . 2. Money plays an important role in generating the business cycle i.e. upward and downward
Why Study Money, Banking, and Financial Markets ?
behind inflation .
the business cycle i.e. upward and downward
movement of aggregate output in the economy
3. Money plays an important role in the fluctuation of interest rate . Therefore :
greater efficiency .
An Overview of the Financial System
1. Direct Finance ( Financial Market )
2. Indirect Finance (Financial Intermediaries)
( Bonds )
( Common Stock )
1. Organized Exchange Market
2. Over-the-counter (OTC) Market
Insurance Company .
Funds or Money Market Mutual Funds .
Such as -Demand deposits
- Saving Deposits
- Time Deposits
- Make consumer loans
- Make Business loans
- and buy securities .
What is Money?
Understanding Interest Rate
( 1 + i )
10,000 + 10,000 i = 11,000
10,000 i = 1,000 Therefore i = 1000 . = 10%
Required : Find the Yield to maturity or i ?
1000 = A ( PVIFA, i , n )
( 1 + i ) Pd
900 = 1000 or i = 1000 – 900 =11.1%
1 + i 900
900 + 900 i = 1000 therefore i = 11.1%
RET = ic + g
where : Pt+1 = the price at time t+1
Pt = the price at time t ; ic = current yield
The Behavior of Interest Rates
i years with face value $1000
100 200 300 400 500
Risk and Term Structure of Interest Rate
Multiple Deposit Creation and the Money supply Process
how the money supply is determined ?
Non-bank public , Banking system , and the central bank is as follows :
Currency in Circulation +100
Reserves of Banks - 100
Determinants of The Money Supply
r + E/D + C/D
Tools of Monetary Policy
What Should Central Bank do ? Monetary Policy: Goals, Strategy, and Tactics
The Foreign Exchange Market
This condition is called “ Interest Parity condition”
The Demand For Money
The Keynesian Framework and the ISLM Model
The ISLM model will help you understand how monetary policy affect economic activity and interacts with fiscal policy ( Change in Govt. Exp. And Taxes) to produce a certain level of aggregate output.