Chapter 1

WhyStudyMoney,
Banking,and
FinancialMarkets?

2005 Pearson Education Canada Inc.

WhyStudyFinancialMarkets?
1. Channelfundsfromsaverstoinvestors,thereby
promotingeconomicefficiency
2. Affectpersonalwealthandbehaviorofbusinessfirms
WhyStudyBankingandFinancialInstitutions?
1. FinancialIntermediation
Helpsgetfundsfromsaverstoinvestors
2. BanksandMoneySupply
Crucialroleincreationofmoney
3. FinancialInnovation
WhyStudyMoneyandMonetaryPolicy?
1. Influenceonbusinesscycles,inflation,andinterestrates

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Bond Market

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Stock Market

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Foreign Exchange Market

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Money and Business Cycles

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Money and the Price Level

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Money Growth and Inflation

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Money Growth and Interest Rates

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Fiscal Policy and Monetary Policy

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 How We Study Money and Banking
BasicAnalyticFramework
1. Simplifiedapproachtothedemandforassets
2. Conceptofequilibrium
3. Basicsupplyanddemandapproachtounderstandbehaviorinfinancialmarkets
4. Searchforprofits
5. Transactionscostandasymmetricinformationapproachtofinancialstructure
6. Aggregatesupplyanddemandanalysis
Features
1. Casestudies
2. Applications
3. Specialinterestboxes
4. FollowingtheFinancialNewsboxes
5. Readingthefinancialpages
6. WebExercisesandURLs

2005 Pearson Education Canada Inc.

1-11
Appendix: Definitions
AggregateOutput
GrossDomesticProduct(GDP)=Valueofallfinalgoodsandservicesproducedin
domesticeconomyduringyear
AggregateIncome
Totalincomeoffactorsofproduction(land,capital,labor)duringyear
DistinctionBetweenNominalandReal
Nominal=valuesmeasuredusingcurrentprices
Real=quantities,measuredwithconstantprices
AggregatePriceLevel
nominalGDP
GDPDeflator=
realGDP
$10trillion
GDPDeflator= =1.11
$9trillion
ConsumerPriceIndex(CPI)priceofbasketofgoodsandservices

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Appendix: Definitions

GrowthRatesandtheInflationRate

xt xt 1
Growth Rate 100
xt 1

$9.5 trillion $9 trillion

GDP Growth Rate 100 5.6%
$9 trillion

113 111
Inflation Rate 100 1.8%
111

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