01.why study money, banking, and financial markets

7/30/2019 01.Why Study Money, Banking, And Financial Markets

1/23

Copyright 2011 Pearson Canada Inc.

1 - 1

Chapter 1

Why Study Money, Banking, andFinancial Markets?


2/23


1 - 2

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


3/23


1 - 3

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


4/23


1 - 4


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


5/23


1 - 5



6/23


1 - 6

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


7/23Copyright 2011 Pearson Canada Inc.

1 - 7

Stock Market



1 - 8

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



1 - 9

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



1 - 10

Money and Business Cycles



1 - 11

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



1 - 12

Money and the Price Level



1 - 13

Money Growth and Inflation



1 - 14

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



1 - 15

Money Growth and Interest Rates


16/23


1 - 16

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


17/23


1 - 17

Fiscal Policy


18/23


1 - 18

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


19/23


1 - 19

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


20/23


1 - 20

Foreign Exchange Market


21/23


1 - 21

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.


22/23


1 - 22

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


23/23

Copyright 2011 Pearson Canada Inc

1 - 23

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

01.why study money, banking, and financial markets

Documents