M&BDEAN CROUSHORE

PowerPoint Slides prepared by: Andreea CHIRITESCU

Eastern Illinois University

1© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

PowerPoint Slides prepared by: Andreea CHIRITESCU

Eastern Illinois University

1INTRODUCTION TO

MONEY and BANKING

2© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

What Is in This Text?

• The value of money and banking for everyday life– What determines the interest rates on

loans

– What causes the stock market to fluctuate

• Why is government policy so crucial for money and banking?– Policymakers - why are they so important

– What is the Federal Reserve

3© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

What Is in This Text?

• Policy decisions – Affect the efficiency of the money and

banking system • When they cause problems, such as in the

financial crisis of 2008• When they help the economy grow rapidly, as

in the 1990s

4© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

What Is in This Text?

• The Federal Reserve – A key policymaking institution

– Making sure that our system of payments works well

– Monitoring banks

– Determining the nation’s money supply

5© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Ten (Surprising) Facts Concerning Money and Banking

1. Most financial formulas - no matter how complicated they look - are based on the compounding of interest– Gains to investing (or costs of borrowing)

grow at a compound rate over time

2. More U.S. Currency is held in foreign countries than in the United States– Some foreigners prefer U.S. dollars

because of inflation

6© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Ten (Surprising) Facts Concerning Money and Banking

3. Interest rates on long-term loans generally are higher than interest rates on short-term loans – Factors: lender’s preferences, the

riskiness of the loans, expected future changes in short-term interest rates

– The difference between short- and long-term interest rates • Indicator of the state of the economy• Forecasting how fast the economy will grow

7© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Ten (Surprising) Facts Concerning Money and Banking

4. To understand how interest rates affect economic decisions, you must account for expected inflation– Expected inflation rate: the expected rate

of change of prices

– Real interest rate

5. Buying stocks is the best way to increase your wealth - and the worst

8© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Ten (Surprising) Facts Concerning Money and Banking

6. Banks and other financial institutions made major errors that led to the Financial Crisis of 2008– Subprime loans and foreclosures

– Mortgage-backed securities

– Fannie Mae and Freddie Mac – bankrupt

– Investment banks – highy leveraged

9© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Ten (Surprising) Facts Concerning Money and Banking

7. Recessions are difficult to predict – Recession - the overall level of business

activity in the economy declines persistently

– Unemployment and declining profits

8. The Fed creates money by changing a number in its computer system– The Federal Reserve buys government

securities

10© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Ten (Surprising) Facts Concerning Money and Banking

9. In the long run, the only economic variable the Federal Reserve can affect is the rate of inflation – Increase in the money supply

• The economy speeds up a bit

– When the Fed increases the growth rate of the money supply - inflation rate rises

– When the Fed decreases money growth - the inflation rate falls

11© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Ten (Surprising) Facts Concerning Money and Banking

10. You can predict how the federal reserve will change interest rates using a simple equation– The Taylor rule

• Relates the interest rate to the output gap and the inflation rate

– The output gap• Percentage by which real gross domestic

product (GDP) is above or below its potential level

12© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.