8/6/2017

Topic 1
Why study Money, Banking
and Financial Markets?
Instructor: Lai T. Hoang

Preview
To examine how financial markets such as
bond, stock and foreign exchange markets
work
To examine how financial institutions such
as banks, investment and insurance
companies work
To examine the role of money in the
economy

The Bond Market and Interest

Rates
What is:
Security (also called financial
instrument)
Bond
Interest rate

Lai T. Hoang 1
 8/6/2017

The Bond Market and Interest

Rates
A security (financial instrument) is a claim
on the issuers future income or assets.
A bond is a debt security that promises to
make payments periodically for a specified
period of time.
An interest rate is the cost of borrowing or
the price paid for the rental of funds.

U.S Interest Rates on Selected

Bonds, 1950 - 2011

The Stock Market

What is stock?

Lai T. Hoang 2
 8/6/2017

The Stock Market

Common stock represents a share of
ownership in a corporation
Claim on the residual earnings and
assets of the corporation
What is residual earnings?
Is a stock a security?

Banks and Financial Institutions

Accept deposits or borrow funds from
people who have saved and make loans
to others
Why banks are important?
Provide safe instruments for saving
Provide sources of funds
Help the central bank implement monetary policy

Money and Monetary Policy

Lai T. Hoang 3
 8/6/2017

Money and Business cycles

Evidence suggests that money plays an
important role in generating business
cycles
What can happen during recessions?

10

Money Growth (M2 Annual Rate)

and the Business Cycle in the
United States 19502011
Shaded areas represent recessions

11

Money and Inflation

How does inflation affect us?
What causes inflation?

12

Lai T. Hoang 4
 8/6/2017

Aggregate Price Level and the Money

Supply in the US, 1950 - 2011

13

Average Inflation Rate Versus

Average Rate of Money Growth for
Selected Countries, 2000-2010

14

Money Growth (M2 Annual Rate)

and Interest Rates (Long-Term U.S.
Treasury Bonds), 19502011

15

Lai T. Hoang 5
 8/6/2017

Money and Interest Rate

Prior to 1980, the rate of money
growth and the interest rate on long-
term Treasury bonds were closely tied
Since then, the relationship is less clear
but the rate of money growth is still an
important determinant of interest rates

16

Monetary Policy
Monetary policy: the process by which
the monetary authority of a country
(normally the central bank) controls the
supply of money

17

Lai T. Hoang 6