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Money-n-Banking.com

Why Do We Study Money and Banking?

Fall 2009

2009 by Michael McAteer

Money-n-Banking.com

What is Money and Banking? A means and method of allocating and reallocating resources The means is what we call Money The method is called Banking or the Financial System
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What is Money, and Banking?

The Financial system
Financial Markets Financial intermediaries

The role of money in the economy

Fall 2009

2009 by Michael McAteer

Money-n-Banking.com

Why Study Financial Markets?

Financial Markets channel funds from savers to investors. A method of acquiring personal wealth, hence effecting the behavior of firms.

Fall 2009

2009 by Michael McAteer

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Financial Markets
A financial instrument (otherwise known as a security) is a claim on the issuers future income or assets A bond is a claim on future income A stock is a claim on assets
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The Bond Market

A bond is a debt security that promises to make payments periodically for a specified period of time Interest is the cost of borrowing or the price paid for the rental of funds

Fall 2009

2009 by Michael McAteer

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20 18 16 14 12 10 8 6 4 2 0 Jan-55 Corporate Bonds BAA Three Month US Treasury Bills L/T US Gov't Debt

Jan-60

Jan-65

Jan-70

Jan-75

Jan-80

Jan-85

Jan-90

Jan-95

Jan-00

Jan-05

Source: Federal Reserve Statistical Release H.6

Fall 2009

2009 by Michael McAteer

Money-n-Banking.com

The Stock Market

Common stock represents a share of ownership in a corporation A share of stock is a claim on the earnings and assets of the corporation

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2009 by Michael McAteer

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16000 14000

12000

10000

8000

6000

4000

2000

Source: Federal Reserve Statistical Release H.6

Fall 2009

2009 by Michael McAteer

Money-n-Banking.com

The Foreign Exchange Market

Foreign Exchange Market - where funds are converted from one currency into another Foreign Exchange Rate - the price of one currency in terms of another currency The Foreign Exchange Rate is determined by the Foreign Exchange Market

Fall 2009

2009 by Michael McAteer

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140 130 120 110 100 90 80 70 60 50 40 1973

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Dollar Index 1973 - 2009

1978

1983

1988

1993

1998

2003

2008

Source: Source: Federal Reserve Statistical Release H.6

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2009 by Michael McAteer

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Banking and Financial Institutions

Financial Intermediaries borrow funds from people who have saved and make loans to other people Banksinstitutions that accept deposits and make loans Other Financial Institutionsinsurance companies, finance companies, pension funds, mutual funds and investment banks Financial Innovationa primary reason why financial intermediaries exist
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Money and Business Cycles

Evidence suggests that money plays an important role in generating business cycles Recessions (unemployment) and booms (inflation) affect all of us Monetary Theory ties changes in the money supply to changes in aggregate economic activity and the price level
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Money 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 Research shows a correlation between the money supply and the price level
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100 90 80 70 60 50 40 30 20 10 0 0 10
US UK Chile Peru Russia

Money Growth
Belarus

Brazil Argentina Colombia Uruguay Mexico

Romania Venezuela

Inflation Rate
30 40 50 60 70 80 90 100

20

Inflation Rates and Money Growth in Selected Countries 1998-2008

Source: International Financial Statistics

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2009 by Michael McAteer

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Money and Interest Rates

Interest rates are the price of money In the past interest rates on long-term Govt Bonds and the Money Supply were correlated Since the 1980s, this is no longer the case

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2009 by Michael McAteer

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18.00 16.00 14.00 12.00 10.00 8.00 6.00 4.00 2.00 0.00 Jan-60 M2 Growth Rate (Annual) L/T Gov't Bond Interest Rates

Jan-65

Jan-70

Jan-75

Jan-80

Jan-85

Jan-90

Jan-95

Jan-00

Jan-05

Source: Federal Reserve Statistical Release H.6

Fall 2009

2009 by Michael McAteer

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Monetary and Fiscal Policy

Monetary policy is conducted by a countries Central Bank- in the US that is the Federal Reserve Fiscal policy is government spending and taxation
Budget deficits are excess spending by the government Any deficit must be financed by borrowing Budget surpluses are excess revenues collected by the government
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Percentage of GDP
3.0 2.0 1.0 0.0 -1.0 -2.0 -3.0 -4.0 -5.0 -6.0 -7.0 1950 1960

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Surplus

Deficit
1970 1980 1990 2000

U. S. Government Budget Deficit/Surplus as Percentage of GDP

Source:

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2009 by Michael McAteer

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