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prem_ppt_ch01.ppt
- 2. Copyright © Houghton Mifflin Company. All rights reserved. 1 | 2
• Money flows through the modern world with
astonishing speed . . .with the help of
banking institutions and financial markets.
• Economic policy determines the rules and
regulations by which banks work.
• The efficiency of money and banks is very
influential, both in individual’s lives and the
macroeconomy.
• Looking at the interactions between politics
and the banking system helps us to
understand financial markets and how they
work.
Money Makes the World Go ‘Round
- 3. Copyright © Houghton Mifflin Company. All rights reserved. 1 | 3
• The amount you pay for your student loan
depends in part on the actions of the Federal
Reserve.
• Your mortgage payment is influenced by
inflation, the health of the banking system,
and more.
• How can you make money in the stock
market?
The Value of Money
- 4. Copyright © Houghton Mifflin Company. All rights reserved. 1 | 4
• Government intervention influences how
markets perform, and financial markets are no
exception.
• Because of externalities, the government plays
a vital role in the financial system.
• Example: Bank runs used to be commonplace,
and often led to recession. Safeguards, such as
FDIC, today reduce the likelihood of such
events.
Government Policy & Money
- 5. Copyright © Houghton Mifflin Company. All rights reserved. 1 | 5
• The Federal Reserve
(a.k.a. the Fed)
determines the level of
the U.S. money supply,
sets rules for currency
flows and check clearing,
and supervises the
banking system.
• The Fed also decides on
the federal funds rate
eight times per year,
influencing interest rates
on everything from
Treasury bills to car
loans.
The Federal Reserve
- 6. Copyright © Houghton Mifflin Company. All rights reserved. 1 | 6
1. Most financial formulas—no matter how
complicated they look—are based on the
compounding of interest.
• The key feature of interest is that it compounds over
time…meaning interest is paid on interest earned in
previous periods.
• Interest compounds both ways . . .the interest you
pay (on a loan) compounds, as does the interest
you earn on investments.
Ten (Surprising) Facts Concerning
Money & Banking
- 7. Copyright © Houghton Mifflin Company. All rights reserved. 1 | 7
2. More U.S. currency is held in foreign
countries than in the United States.
• U.S. citizens need American dollars to buy goods
domestically . . .and they need foreign currency to
buy international goods.
• Some foreigners hold U.S. dollars to buy American
goods and services.
• Some hold dollars as protection against inflation.
Ten (Surprising) Facts
Concerning Money & Banking (cont’d)
- 8. Copyright © Houghton Mifflin Company. All rights reserved. 1 | 8
3. Interest rates on long-term loans generally
are higher than interest rates on short-
term loans.
• Though the press often refers to “the” interest rate,
there are many.
• Because long-term loans tend to be riskier and are
held longer, their rates need to be higher to
incentivize the loan process.
• The difference between short and long term rates is
an indicator of the state of the economy.
Ten (Surprising) Facts
Concerning Money & Banking (cont’d)
- 9. Copyright © Houghton Mifflin Company. All rights reserved. 1 | 9
4. To understand how interest rates affect
economic decisions, you must account for
expected inflation.
• Interest rates tell you only how much you will earn
on an investment, not what you can buy with it.
• Economic decisions must take into consideration
that prices change over time.
• People’s decisions about how much to save or
invest depend on interest rates as well as how
much they expect prices to rise.
Ten (Surprising) Facts
Concerning Money & Banking (cont’d)
- 10. Copyright © Houghton Mifflin Company. All rights reserved. 1 | 10
5. Buying stocks is the best
way to increase your
wealth—and the worst.
• All investment decisions
involve risk.
• While stock market investing
often pays off well, it also
carries more risk than many
other investments.
• Buying stocks does give you
ownership in corporations,
with a say in their operations.
Ten (Surprising) Facts
Concerning Money & Banking (cont’d)
- 11. Copyright © Houghton Mifflin Company. All rights reserved. 1 | 11
6. Banks are so healthy these days that
almost none are required to pay
premiums for deposit insurance.
• A strong economy requires the support of the
banking system.
• When depositors start a “run on the bank”, banks
become reluctant to lend, stifling economic growth.
• The U.S. government now manages a deposit
insurance program so depositors no longer have to
worry about their money.
Ten (Surprising) Facts
Concerning Money & Banking (cont’d)
- 12. Copyright © Houghton Mifflin Company. All rights reserved. 1 | 12
7. Recessions are difficult to predict.
• Recessions occur when the overall level of business
activity in the economy persistently declines.
• Recessions are harmful, bringing higher
unemployment and decreased profits.
• While sudden “shocks” to the economy may bring
on recessions, they are difficult to predict with any
accuracy.
Ten (Surprising) Facts
Concerning Money & Banking (cont’d)
- 13. Copyright © Houghton Mifflin Company. All rights reserved. 1 | 13
8. The Fed creates money by changing a
number in its computer system.
• The Fed buys government securities from Wall
Street firms, thereby increasing the money supply in
the economy.
• The Fed gives currency to banks in exchange for
reducing the amount of funds they must maintain on
deposit.
• This process holds the potential for abuse—if too
much money is created, inflation will result.
Ten (Surprising) Facts
Concerning Money & Banking (cont’d)
- 14. Copyright © Houghton Mifflin Company. All rights reserved. 1 | 14
9. In the long run, the only economic
variable the Federal Reserve can affect
is the rate of inflation-the Fed has no
effect on economic activity.
• When the Fed increases the money supply, the
economy speeds up…people buy more.
• But there are limits…In the long run, the economy
achieves the same level of economic activity no
matter how much money is circulating.
Ten (Surprising) Facts
Concerning Money & Banking (cont’d)
- 15. Copyright © Houghton Mifflin Company. All rights reserved. 1 | 15
10. You can predict how the Federal Reserve will
change interest rates using a simple equation.
• The Fed bases its decisions on two major variables-
the output gap and the inflation rate.
• The Taylor Rule can predict how the Fed will
respond to changes in these variables.
• While not perfect, the Taylor Rule is quite
accurate…You, too, can predict!!!
Ten (Surprising) Facts
Concerning Money & Banking (cont’d)