Chapter 1

Why Study Money,

Banking and Financial
Market?
 Alan Greenspan
1926 - ?
• Fifth and final term since 1987

• FRBKC, Jackson Hole, Greenspan Era: Lessons for the

Future (Aug. 25-27, 2005)
– http://www.kc.frb.org/PUBLICAT/SYMPOS/2005/sym05prg.htm
– Economist (Monetary Policy, Sep. 5th, 2005)

• Reputation for his obfuscation

Andrea Mitchell (Chief Foreign Affairs Correspondent, NBC News, 1946 - ?) said
that Greenspan had to propose 3 times before she understood him.

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 World GDP (2004, CIA)
• Gross World Product (PPP) - $55.5 trillion
Per Capital - $8,800
• USA GDP (PPP) - $11.75 trillion
Per Capital - $40,100
• Guatemala GDP- $59.47 billion
Per Capital - $4,200
• China GDP - $7.262 trillion
Per Capital - $5,600
• EU GDP - $11.65 trillion
Per Capital - $26,900
• Japan GDP - $3.745 trillion
• Per Capital - $29,400

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Why Study Money and Monetary Policy?

• Money and business cycles

• Money and inflation
• Money and interest rates
• Conduct of Monetary Policy
• Fiscal Policy and Monetary Policy
– DOES MONEY MATTER? (Neutrality)

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 BANGUAT (since 1945)
Fundamental objective of the Bank of Guatemala
The Bank of Guatemala has as fundamental objective, to contribute to
the creation and maintenance of the most favorable conditions to the
orderly development of the national economy, to which, will propitiate
the monetary exchange and credit conditions that promote the stability
in the general level of prices. Article 3 of the Decree Number 16-2002
of the Congress of the Republic of Guatemala, Organic Law of the
Bank of Guatemala
Mission of the Bank of Guatemala
To promote the stability in the general level of prices
Lic. Lizardo Arturo Sosa López
President

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 Textbook
• Mishkin, Frederic (2004), The Economics of
Money, Banking, and Financial Markets, Seventh
Edition, Addison Wesley. www.aw.com/mishkin.

• This course covers five main topics

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 1. Money and interest rates
• Ch. 1 Why Study Money, Banking, and
Financial Markets?
• Ch. 3 What Is Money?
• Ch. 4 Understanding Interest Rates
• Ch. 5 The Behavior of Interest Rates

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 2. Money supply
• Ch. 15 Multiple Deposit Creation and the
Money Supply Process
• Ch. 16 Determinants of the Money
Supply
• Ch. 17 Tools of Monetary Policy
• Ch. 18 Conduct of Monetary Policy:
Targets and Goals

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 3. Money demand
• Ch. 22 The Demand for Money
• Ch. 23 The Keynesian Framework and
the ISLM Model
• Ch. 24 Monetary and Fiscal Policy in the
ISLM Model

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 4. Monetary policy

• Ch. 25 Aggregate Demand and Supply

Analysis
• Ch. 26 Transmission Mechanisms of
Monetary Policy: The Evidence
• Ch. 27 Money and Inflation
• Ch. 28 Rational Expectations:
Implications for Policy

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 5. International Finance and
Monetary Policy
• Ch. 19 The Foreign Exchange Market
• Ch. 20 The International Financial
System
• Ch. 21 Monetary Policy Strategy: The
International Experience

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 Course requirements

• 3 midterm exam on Monday (06/05, 06/19, and 07/03)

45%

• Final exam 25%

• Class discussion of questions in the textbook

10%

• 2 homework (IS-LM model and data analysis using WDI)

20%

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 End-of-chapter questions

• The following questions are assigned to help you

understand the course material and prepare for the
exams. Although you are not required to submit
your answers, we will discuss the solutions in
class. Your participation will count for 10% of the
final grade.

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 Appendix: Definitions
Aggregate Output
Gross Domestic Product (GDP) = Value of all final goods and services
produced in domestic economy during year
Aggregate Income
Total income of factors of production (land, capital, labor) during year
Distinction Between Nominal and Real
Nominal = values measured using current prices
Real = quantities, measured with constant prices
Aggregate Price Level
nominal GDP
GDP Deflator =
real GDP
$10 trillion
GDP Deflator = = 1.11
$9 trillion
Consumer Price Index (CPI) price of “basket” of goods and services

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 Appendix: Definitions

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 Appendix: Definitions

Growth Rates and the Inflation Rate

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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 Basic Concepts

• Stock vs. Flow

Wealth vs. saving; capital vs. investment; debt vs. deficit
GDP (flow), M1(stock)

• Using WDI (World Development Indicators)

• Comparative Static
ISLM
Cramer’s Rule

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