01.why study money, banking, and financial markets
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Chapter 1
Why Study Money, Banking, andFinancial Markets?
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Why Study Financial Markets?
1. Financial markets channel funds from savers
to investors, thereby promoting economic
efficiency
2. Financial markets are a key factor in
producing economic growth
3. Financial markets affect personal wealth and
behaviour of business firms
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The Bond Market & Interest Rates
A security (financial instrument) is a claim on
the issuers future income or assets
An asset is any financial claim that is subjectto ownership
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The Bond Market & Interest Rates
A bond is a debt security that promises
periodic payments for a specified time
An interest rate is the cost of borrowing orthe price paid on the rental of funds
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The Bond Market & Interest Rates
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The Stock Market
A stock represents a share of ownership in a
corporation
A stock is a security that is a claim on theearnings and assets of that corporation
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Stock Market
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Financial Institutions and Banking
Financial Intermediaries - institutions that borrowfunds from people who have saved and make loans toother people
Financial Crises disruption of the financial markets
that lead to decline in asset prices
Banks - institutions that accept deposits and makeloans
Other Financial Institutions - insurance companies,finance companies, pension funds, mutual funds andinvestment banks
Financial Innovation- in particular, the advent of theinformation age and e-finance
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Money and Monetary Policy
Evidence suggests that moneyplays an important role in generatingbusiness cycles
Recessions (unemployment) and booms(inflation) lead to changes in aggregateeconomic activity
Monetary Theory ties changes in the moneysupply to changes in aggregate economicactivity and the price level
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Money and Business Cycles
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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
Data shows a connection between the moneysupply and the price level
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Money and the Price Level
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Money Growth and Inflation
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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 bonds wereclosely tied
Since then, the relationship is less clear but
still an important determinant of interestrates
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Money Growth and Interest Rates
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Monetary and Fiscal Policy
Monetary policy is the management of the
money supply and interest rates
Conducted by the Bank of Canada
Fiscal policy is government spending
and taxation
Budget deficit/surplus is the excess of
expenditures/revenue overrevenues/expenditures for a particular year
Any deficit must be financed by borrowing
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Fiscal Policy
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Why Study International Finance?
Increasing integration of financial markets
Canadian companies borrow in foreign
markets and foreign markets borrow from
Canada
Banks and other financial institutions
increasingly international foreign exposures
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Foreign Exchange Market
The foreign exchange market is where onecountrys currency is exchanged for another
The exchange rateis the price of one countryscurrency in terms of another
Appreciation (depreciation) is a rise (fall) in thevalue of a countrys currency
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Foreign Exchange Market
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The International Financial System
Larger capital flows between countries
Greater importance of foreign financial
systems on domestic economy.
Potentially larger role for international
institutions (e.g. IMF)
Return to discussion of International Financial
Systems in Chapter 20.
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How We Study Money and Banking
Simplified approach to the demand for assets
Partial equilibrium framework
Basic supply and demand approach to
understand behaviour in financial markets
Profit maximization
Transactions cost and asymmetric information
approach to financial structure
Aggregate supply and demand analysis
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How We Study Money and Banking II
Learning Tools:
1. Case studies
2. Applications3. Special-interest boxes
4. Financial News boxes
6. Web Exercises and References
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