Chapter 1 Introduction:

Overview of the Study on

Money,
Banking and Financial Markets

Main Textbook:
Mishkin, Frederic S. (2009). The Economics of Money, Banking & Financial
Market, 9th Edition, New York : Pearson Addison – Wesley
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Market where funds are transferred from people who
have excess of a available funds to people who have
shortage.

Well-functioning financial markets are a key factor in

producing high economic growth, and poor
performing financial markets are one reason that
many countries in the world remain desperately poor.

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Also called a financial instrument

Security is a claim on the issuer’s future income or assets.

An example of security is bond.

•Bond is a debt security that promises to make payments periodically for a

specified period of time.

Another example is stock.

•Stock represents a share of ownership in a corporation. It is a security that
is a claim on the earnings and asset of the corporation

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Also known as the price of money.

It is generally the cost of borrowing or the price

paid for the rental of funds.

Many types of interest rates are found in the

economy.

For example, interest rates on loans (mortgage

interest rate, car loan rates), savings, bonds,
etc. 4
It represents a share of ownership in a corporation. It is a security
that is a claim on the earnings and assets of the corporation.

Issuing stock and selling it to the public is a way for

corporations to raise funds to finance their activities.

For example: The Dow Jones Industrial Average (DJIA)

Bursa Malaysia, formerly Kuala Lumpur Stock Exchange (KLSE),
Malaysia
HNX, Hanoi Stock Exchange, Vietnam HOSE, HoChiMinh Stock
Exchange, Vietnam
IDX, Indonesia Stock Exchange, previously Jakarta Stock Exchange,
Indonesia
PSE, Philippine Stock Exchange, Philippines SET, The Stock
Exchange of Thailand, Thailand SGX, Singapore Exchange, Singapore

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 institutions that borrow funds from
people who have saved and make loans
to other people:
• Banks: accept deposits and make loans
• Other Financial Institutions: insurance companies,
finance companies, pension funds, mutual funds
and investment companies

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 Major disruptions in financial markets
that are characterized by sharp declines
in asset prices and the failures of many
financial and nonfinancial firms.

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Also referred to as money supply.

It is defined as anything that is generally accepted as a

medium of exchange or in the repayment of debts.

Money is linked to changes in economic variables

(business cycle, inflation, economic growth,
employment, unemployment, and interest rate)…(later
on)

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 8) Aggregate output
• is the total production of goods & services (g&S)
• The most commonly reported measure of aggregate output is
the GDP. It is the value of all final g&S produced in a country
during the course of the year.
• On the other hand, another measure of total production of
g&S is the Aggregate Income. It is the total income of factor
of production (land, labor, capital) from producing g&S in the
economy during the course of the year.

Aggregate income is best thought of as being equal to

aggregate output because the payments for final g&S must
eventually flow back to the owners of the factors of prod as
income. Hence income payments must equal payments for
final g&S.

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9) Unemployment rate

• The percentage of the available labor force unemployed

10)Business cycles

• The upward and downward movement of aggregate output

produced in the economy.
• When output is rising, it is easier to find a good job; when
output is falling, finding a good job might be difficult.

11) Recessions

• Periods when aggregate output is declining.

12) Monetary Theory

• The theory relates the quantity of money and monetary policy

to changes in aggregate economy activities and inflation. 10
Aggregate price level (Price level)

• Is defined as the average price of goods and

services in an economy.
• We can use two tools to measure the aggregate
price level.
a. GDP Deflator
• is defined as nominal GDP divided by real GDP.

• Is measured by pricing a ‘basket’ of g&S bought by a

typical urban household over a given period.

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14) MONETARY POLICY
Refers to the overall program (or part of it) in terms of
regulating money supply and credit.

The management of money and interest rates

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15) Nominal
• Values are measured using current prices.
• Nominal GDP
• The total goods and services is calculated using current prices.
16) Real
• Values are measured using fixed (constant) prices.
• Real GDP
• GDP measured with constant prices

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17) FISCAL POLICY
Involves decisions about the government spending
and government receipts (taxation).

a. Budget deficit
•The excess of government expenditures over tax revenues for a
particular time period, typically a year.

b. Budget surplus
•When tax revenues exceed government expenditures.

c.Gross domestic product (GDP)

• A measure of aggregate output, is the market value of all final

goods and services produced in a country during the course
of the year.
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 18) ASYMMETRIC INFORMATION

A situation when a party in a transaction has more

information than the other party. May cause
market failure such as adverse selction and moral
hazards.
Adverse selection (occurs before transaction)
•Is a result of asymmetric informationn where a party risks
selecting dishonest party to do business.

Moral hazards (occurs after transaction)

•The risk that a party to a transaction has not entered into the
contract in good faith, has provided misleading information
about its assets, liabilities or credit capacity, or has an incentive
to take unusual risks in a desperate attempt to earn a profit
before the contract settles. 18
1. Household - Owener of resources
• Sell resoucers to firms (i.e., land, labour, capital and entreprenur)
• Households are paid for the resources they provide

2. Firm - Produces goods & services

• Hire the factor of production to produce goods & services.
• Sell goods & services to the household sector

3. Government - Collect taxes and spends them

• Levies taxes on households and on firm, purchases goods & services from firm
and attain factors of production from household.

4.Foreign sector - Involves in the M & X of goods and

services

Money market / Financial markert

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