m&b dean croushore powerpoint slides prepared by: andreea chiritescu eastern illinois university...
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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.
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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.
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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.
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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.
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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.
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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.
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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
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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
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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
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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
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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
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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.