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ECON302: Money, Banking, And Financial Markets

Unit 1: Money and Banking   Money and banking institutions are extremely important to the modern economy.  The flow of funds (literally trillions of dollars) is indispensable to the production and distribution of all goods and services, both nationally and internationally.  They have a profound influence on all facets of our daily lives.  This unit will lay the foundation for an understanding of the most important aspects of money and banking by introducing you to financial markets, the banking system, and other financial systems, as well as providing you with a comprehensive discussion of money and its various functions.  

Unit 1 Time Advisory
This unit should take you 10.5 hours to complete.

☐    Subunit 1.1: 1.5 hours

☐    Subunit 1.2: 1.5 hours

☐    Subunit 1.3: 1.5 hours

☐    Subunit 1.4: 1.0 hours

☐    Subunit 1.5:  2.0 hours

☐    Assessments: 3 hours

Unit1 Learning Outcomes
Upon successful completion of this unit, the student will be able to:
- Discuss the structure of financial markets, explain the importance of financial markets in the economy, and identify financial market participants and the consequences for market failure.

  • Identify and describe some of the more common instruments used in financial markets.
  • Identify examples of direct finance and indirect finance, explain the differences between direct finance and indirect finance.
  • Explain what financial intermediaries do.
  • Define and identify examples of money in a modern economy.
  • Explain the importance of money in the economy.

1.1 Why Study Financial Markets?   Note: The concept of financial Markets is critical to understanding how the financial system channels funds from savers to investor and its role in economic growth.  With the understanding of financial markets, you will make sense of the financial activities that are so widely reported in the media.  For example, why do different financial markets exist?  How do they operate?  How are they interrelated?  The bond market is also known as the debt, credit, or fixed income market.  The bond market is sensitive to interest rates, because interest rates are the price paid for bonds.  The stock market is one of the most important sources for companies to raise money.  The foreign exchange market allows businesses to convert one currency to another currency.  The importance of foreign exchange markets has grown with increased global economic activity, trade, and investment, as well as with technology that makes real-time exchange of information and trading possible.

  • Reading: Slide Finder’s version of Frederic S. Mishkin’s “Chapter 1: Why Study Money, Banking, and Financial Markets?” Lecture Notes Link: Slide Finder’s version of Frederic S. Mishkin’s “Chapter 1: Why Study Money, Banking, and Financial Markets?” Lecture Notes (Microsoft PowerPoint)
     
    Instructions: When you click on the link above, you will be directed to a webpage that lists 20 slides.  In the "Details" box to the right of the screen, just above the sharing options, there is an arrow button which you may click to download the presentation.  To cover the topics in sections 1.1.1-1.1.3, please read slides 1-9.  

    Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.

  • Reading: Money and Banking: “Chapter 2, Section 4: Financial Markets” Link: Money and Banking:Chapter 2, Section 4: Financial Markets” (PDF)
     
    Instructions: When you click on the link above, you will be directed to Chapter 2, Section 4 “Financial Markets” of an e-book Money and Banking. Please read Chapter 2, Section 4 in its entirety to cover the topics in sections 1.1.1-1.1.3.
    Note on the Text: Section 4 of the Quadrini reading explains the ways in which financial markets and instruments can be grouped.
     
    Terms of Use: “The text was adapted by The Saylor Foundation under a Creative Commons-Attribution-NonCommercial-ShareAlike 3.0 License without attribution as requested by the works original creator or licensee”

  • Web Media: YouTube: McGraw-Hill Irwin’s “Finance Video Series”: “Financial Markets” Link: McGraw-Hill Irwin’s “Finance Video Series”: “Financial Markets”(YouTube)
     
    Instructions: When you click on the link above, you will be directed to McGraw-Hill Irwin’s “Finance Video Series”: “Financial Markets” on YouTube.  For subunits 1.1.1-1.1.3, please view the brief video (6:20 minutes) linked above in its entirety.  
     
    Note on the Media: This video will give you a quick overview of financial markets.
     
    Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.

1.1.1 The Bond Market and Interest Rate   1.1.2 The Stock Market   1.1.3 The Foreign Exchange Market   1.2 Why Study Banking and Financial Institutions?   Note: The financial system is the system that allows the transfer of money between savers and borrowers.  It comprises financial institutions, markets, instruments, services, practices, and transactions.  A financial institution is an institution that provides financial services for its clients or members, for example banks, insurance companies, and investment firms.  The health of the economy is closely related to the soundness of its banking system.  The borrowing, lending, and related activities of banks facilitate the process of production, distribution, exchange, and consumption of wealth.  Financial innovation refers to the creating and marketing of new types of securities.

  • Reading: Slide Finder’s version of Frederic S. Mishkin’s “Chapter 1: Why Study Money, Banking, and Financial Markets?” Lecture Notes Link: Slide Finder’s version of Frederic S. Mishkin’s “Chapter 1: Why Study Money, Banking, and Financial Markets?”Lecture Notes (Microsoft PowerPoint)
     
    Instructions: When you click on the link above, you will be directed to a webpage that lists 20 slides. In the "Details" box to the right of the screen, just above the sharing options, there is an arrow button which you may click to download the presentation.  For sections 1.2.1-1.2.3, please read only slide 10.
     
    Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.

  • Reading: Money and Banking: “Chapter 2, Section 5: Financial Intermediaries” Link: Money and Banking: “Chapter 2 Section 5: Financial Intermediaries” (PDF)
     
    Instructions: When you click on the link above, you will be directed to Chapter 2, Section 5 “Financial Intermediaries” of the e-book Money and Banking. Please read Chapter 2, Section 5 in its entirety to cover the material in sections 1.2.1-1.2.3.
     
    Note on the Text: This section of Money and Banking explains ways in which financial intermediaries can be classified.
     
    Terms of Use: The text was adapted by The Saylor Foundation under a Creative Commons-Attribution-NonCommercial-ShareAlike 3.0 License without attribution as requested by the work's original creator or licensee.

  • Lecture: Yale University: Professor Robert J. Shiller’s “Lecture 13: Banking: Successes and Failures”

    Link: Yale University: Professor Robert J. Shiller’s “Lecture 13: Banking: Successes and Failures” (YouTube) and transcript (PDF)

    Also available in:
    iTunes U
    Quicktime (Low bandwidth/slow connection)
    MP3 format
    Transcript (HTML)
     
    Instructions: When you click on the link above, you will be directed to Professor Robert J. Shiller’s lecture 13 “Banking: Successes and Failures.”  Please watch this video lecture in its entirety to cover the topics in sections 1.2.1-1.2.3.  You may download the video lecture using Flash or QuickTime.  You may also want to use the audio version (mp3) or view the transcript (html.
     
    Note on the Media: Lecturer, Robert J. Shiller, is the Arthur M. Okun Professor of Economics at Yale University.  This video lecture was created for his Financial Markets course.
     
    Terms of Use: Robert Shiller, Financial Markets (Yale University: Open Yale Courses), http://oyc.yale.edu (Accessed March 2, 2011).  License: Creative Commons BY-NC-SA 3.0. The original version can be found here.

1.2.1 Structure of the Financial System   1.2.2 Banks and Other Financial Institutions   1.2.3 Financial Innovation   1.3 Why Study Money and Monetary Policy?   Note: The business cycle refers to economy-wide fluctuations in production or economic activities over several months or years.  Money is one of the factors that cause business cycles.  Monetary inflation is a rise in the general level of prices of goods and services, which is caused by a sustained increase in the money supply of a country.  Generally speaking, a higher real interest rate reduces the broad money supply.  Fiscal policy is the use of government expenditure and revenue collection to influence the economy.  Monetary policy is the use of the supply of money by the monetary authority of a country to affect the economy.

  • Reading: Slide Finder’s version of Frederic S. Mishkin’s “Chapter 1: Why Study Money, Banking, and Financial Markets?” Lecture Notes Link: Slide Finder’s version of Frederic S. Mishkin’s “Chapter 1: Why Study Money, Banking, and Financial Markets?”Lecture Notes (Microsoft PowerPoint)
     
    Instructions: When you click on the link above, you will be directed to a webpage that lists 20 slides. In the "Details" box to the right of the screen, just above the sharing options, there is an arrow button which you may click to download the presentation. Please read slides 11-23 for information that addresses sections 1.3.1-1.3.4 of this course.  
     
    Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.

  • Reading: Money and Banking: “Chapter 3, Section 1: Of Love, Money, and Transactional Efficiency” Link: Money and Banking: “Chapter 3, Section 1: Of Love, Money, and Transactional Efficiency” (PDF)
     
    Instructions: When you click on the link above, you will be directed to Chapter 3, Section 1 “Of Love, Money, and Transactional Efficiency” of an on-line book Money and Banking.  Please read Chapter 3, Section 1 in its entirety to cover the topics in sections 1.3.1-1.3.4.

    Terms of Use: The text was adapted by The Saylor Foundation under a CreativeCommons-Attribution-NonCommercial-ShareAlike 3.0 License without attribution as requested by the work's original creator or licensee.

  • Lecture: Yale University: Professor Robert J. Shiller’s “Lecture 16: The Evolution and Perfection of Monetary Policy” Link: Yale University: Professor Robert J. Shiller’s “Lecture 16: The Evolution and Perfection of Monetary Policy” (transcript PDF)

    Also available in: 
    iTunes U
    Quicktime (Low bandwidth/slow connection) 
    MP3 format 
    Transcript (HTML)
     
    Instructions: When you click on the link above, you will be directed to Robert J. Shiller’s lecture 16 “The Evolution and Perfection of Monetary Policy.”  To download this video, you will need to click on the Flash icon or the QuickTime icon in the lower right corner of the webpage.  Please watch the video in its entirety for information on the topics covered in sections 1.3.1-1.3.4.  You may also choose to listen to the audio version (mp3) or to read the transcript (html format).  
     
    Note on the Media: Lecturer, Robert J. Shiller, is the Arthur M. Okun Professor of Economics at Yale University.  This video lecture was created for his Financial Markets course.
     
    Terms of Use: Robert Shiller, Financial Markets (Yale University: Open Yale Courses), http://oyc.yale.edu (Accessed March 2, 2011).  License: Creative Commons BY-NC-SA 3.0. The original version can be found here.

1.3.1 Money and Business Cycle   1.3.2 Money and Inflation   1.3.3 Money and Interest Rates   1.3.4 Fiscal Policy and Monetary Policy   - Assessment: Internet Archive: Pearson Education: Frederic S. Mishkin’s Multiple Choice Quiz on “Chapter 1: Why Study Money, Banking, and Financial Markets?” Link: Internet Archive: Pearson Education: Frederic S. Mishkin’s Multiple Choice Quiz on Chapter 1: Why Study Money, Banking, and Financial Markets?” (HTML)

 Instructions: This quiz will assess the material you learned about
in sections 1.1-1.3.  When you click on the link above, you will be
directed to Frederic S. Mishkin’s Multiple Choice Quiz on “Chapter
1: Why Study Money, Banking, and Financial Markets?” from his book
*The Economics of Money, Banking, and Financial Markets.  ***Please
note that the automatic grading function is not available; no answer
key is currently available!**  

 Terms of Use: Please respect the copyright and terms of use
displayed on the webpage above.

1.4 Overview of the Financial System   Note: The financial system is a critical element in a well-functioning economy. Financial markets (bond and stock markets) and financial intermediaries (banks, insurance companies, and pension funds) move funds from lender-savers to borrower-spenders.  The diversity of both lenders and borrowers is responsible for the enormous array of different financial instruments.  Financial markets move these funds directly from lender-savers to borrower-spenders, while financial intermediaries accomplish this function indirectly. 

  • Reading: Slide Finder’s version of Frederic S. Mishkin’s “Chapter 2: An Overview of the Financial System” Lecture Notes Link: Slide Finder’s version of Frederic S. Mishkin’s “Chapter 2: An Overview of the Financial System” Lecture Notes (Microsoft PowerPoint)
     
    Instructions: When you click on the link above, you will be directed to a webpage that lists 20 slides.  In the "Details" box to the right of the screen, just above the sharing options, there is an arrow button which you may click to download the presentation. Please review all of the slides for Chapter 2 to cover the material in sections 1.4.1-1.4.4.  
     
    Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.

  • Reading: Money and Banking: “Chapter 2, Section 2: Financial Systems” Link: Money and Banking: “Chapter 2, Section 2: Financial Systems” (PDF)
     
    Instructions: Please note this reading covers material in sections 1.4.1-1.4.4.  When you click on the second link above, you will be directed to Chapter 2, Section 2 “Financial Systems” of the e-book Money and Banking.  Please read Chapter 2, Section 2 in its entirety.

    Terms of Use: The text was adapted by The Saylor Foundation under a CreativeCommons-Attribution-NonCommercial-ShareAlike 3.0 License without attribution as requested by the work's original creator or licensee.

  • Web Media: YouTube: thetonkin’s post of John Clarke’s and Bryan Dawe’s “How Does the Financial System Work?” Discussion Link: thetonkin’s post of John Clarke’s and Bryan Dawe’s “How Does the Financial System Work?”Discussion (YouTube)
     
    Instructions: When you click on the link above, you will be directed to the video “How Does the Financial System Work.”  Please watch this short (2:42 minutes) video in its entirety to learn about the material outlined in sections 1.4.1-1.4.4.
     
    Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.

1.4.1 Function of Financial Markets   1.4.2 Structure of Financial Markets   1.4.3 Internationalization of Financial Markets   1.4.4 Function of Financial Intermediaries (and Transaction Costs)   - Assessment: Internet Archive: Pearson Education: Frederic S. Mishkin’s “Chapter 2: An Overview of the Financial System”: “Multiple Choice Quiz” Link: Internet Archive: Pearson Education: Frederic S. Mishkin’s “Chapter 2: An Overview of the Financial System”: “Multiple Choice Quiz” (HTML)
 
Instructions: Please note this assessment covers the material you have learned about in sections 1.4.1-1.4.4.  Please complete this Multiple Choice Quiz on Mishkin’s “Chapter 2: An Overview of the Financial System.” Please note that the automatic grading function is not available; no answer key is currently available!
 
Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.

1.5 What Is Money?   Note: Money has always been important to the economy, because it promotes economic efficiency.  In this subunit, we develop a current definition of money by addressing the functions of money and by learning about the different forms of money through history.  We have come to understand money as a social invention that serves to facilitate trade, and because of that, money has an important role to play in allowing and promoting economic growth.  In this subunit, we deal with a problem that has received increased attention among economists since the mid-1970s: just what is money or the money supply?  This topic allows us to consider the importance of money, discovering why it evolves in all but the most primitive societies.

  • Reading: Slide Finder’s version of Frederic S. Mishkin’s “Chapter 3: What Is Money?” Lecture Notes Link: Slide Finder’s version of Frederic S. Mishkin’s “Chapter 3: What Is Money?” Lecture Notes (Microsoft PowerPoint)
     
    Instructions: Please note these lecture notes address the material outlined in sections 1.5.1-1.5.3.  When you click on the link above, you will be directed to a webpage that lists 8 slides.  In the "Details" box to the right of the screen, just above the sharing options, there is an arrow button which you may click to download the presentation. Please read all slides for Chapter 3.
     
    Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.

  • Reading: Money and Banking: “Chapter 3: Money” Link: Money and Banking: “Chapter 3: Money” (PDF)

    Instructions: When you click on the link above, you will be directed to Chapter 3 “Money” of an on-line book Money and Banking.  Please read Chapter 3 in its entirety for information on the topics covered in sections 1.5.1-1.5.3.

    Terms of Use: The text was adapted by The Saylor Foundation under a CreativeCommons-Attribution-NonCommercial-ShareAlike 3.0 License without attribution as requested by the work's original creator or licensee.

  • Web Media: YouTube: Chris Martenson’s “Crash Course: Chapter 6—What Is Money?” Link: Chris Martenson’s “Crash Course: Chapter 6— What is Money?”(YouTube)
     
    Instructions: Please note that this video covers the material in sections 1.5.1-1.5.3.  When you click on the link above, you will be directed to Chris Martenson’s “Chapter 6: What is Money?” on YouTube.  Please watch this video (6:16 minutes) in its entirety.
     
    Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.

  • Assessment: Internet Archive: Pearson Education: Frederic S. Mishkin’s “Chapter 3: What Is Money?”: “Multiple Choice Quiz” Link: Internet Archive: Pearson Education: Frederic S. Mishkin’s “Chapter 3: What Is Money?”: “Multiple Choice Quiz” (HTML)
     
    Instructions: Please note this quiz assesses what you have learned in sections 1.5.1-1.5.3.  When you click on the link above, you will be directed to Frederic S. Mishkin’s “Chapter 3: What Is Money?” multiple choice quiz.  Please note that the automatic grading function is not available; no answer key is currently available!
     
    Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.

1.5.1 Meaning of Money   1.5.2 Functions of Money   1.5.3 Evolution of the Payment System