Course Outline for Econ 3210 -The Financial System and the Economy Lectures

Chapter 1
Introducing Money and the Financial System

  1. Getting Started
    1. The financial system and U.S. economy.
    2. Financial markets in the U.S.
    3. Financial institutions in the U.S.
    4. How money influences economic activity, prices, and interest rates.
  2. The Financial System and the Economy
    1. A financial system brings savers and borrowers together.
    2. The four groups of potential savers and borrowers in the economy are households, businesses, governments, and foreigners.
    3. The financial system transfers funds from savers to borrowers by creating financial instruments.
    4. The financial system provides three key financial services; namely:
      1. Risk sharing
      2. Liquidity
      3. Information about borrowers' and savers' circumstances.
    5. The financial system as a source of jobs and income.
    6. Financial markets: markets transfer funds from savers to borrowers.
    7. Financial institutions act as intermediaries between savers and borrowers.
      1. Financial intermediaries gather funds from savers and lend them to borrowers.
      2. The majority of funds that U.S. businesses raise comes from bank loans.
    8. What money is.
      1. The Federal Reserve System and the U.S. money supply.
      2. Monetary policy refers to management of the money supply.
      3. Monetary theory examines the link between changes in the money supply and changes in economic activity and prices.
  3. Economic Analysis as a Tool
Chapter 2
Money and the Payments System

  1. Meeting the needs of Exchange with Money
    1. Money makes value exchange more efficient and allows for specialization.
    2. Barter, where goods and services are traded directly, is inefficient because it incurs high transaction costs.
    3. Government allocation of goods and services.
    4. The four key functions of money.
      1. Medium of exchange.
      2. Unit of account.
      3. Store of value.
      4. Standard of deferred value.
    5. The value of money depends on its purchasing power.
      1. Inflation and deflation.
      2. How price indexes work.
    6. The characteristics of Money:
      1. Must be acceptable.
      2. It should be of standardized quality.
      3. It should be durable (nonperishable).
      4. It should be valuable relative to its weight.
      5. It should be divisible.
  2. The Payments System
    1. What is a payments system?
    2. Definitive money vs. commodity money.
    3. Legal tender and fiat money.
    4. Federal Reserve Notes.
    5. Checks
    6. Electronic funds transfer systems (EFTS): credit and debit cards, automatic teller machines (ATMs) and stored value cards (SVCs).
    7. Efficiency of the payments system.
  3. Measuring the Money Supply via the Monetary Aggregates (M1, M2, M3 & L)
  4. The Monetary Aggregates and Output: MV = PT.
Chapter 3
Overview of the Financial System

  1. Purpose of the Financial System
    1. The financial system channels funds from savers to borrowers.
    2. Savers provide funds to borrowers in return for promises of repayment.
    3. Borrowers use savers funds to buy consumer durables, houses, or business plant and equipment.
    4. Financial markets issue claims on individual borrowers (liabilities) directly to savers as their assets.
    5. Financial institutions or intermediaries act as go-betweens.
  2. Key Services Provided by the Financial System
    1. Risk sharing.
      1. A collection of assets is called a portfolio.
      2. Including a variety of assets in a portfolio is known as diversification.
      3. Financial markets also can create instruments to transfer risks.
    2. Liquidity.
    3. Information about returns on financial assets.
  3. Financial Markets in the Financial System
    1. Primary markets
      1. Debt markets (Long-term vs. Short-term)..
      2. Equity markets
    2. Secondary markets.
    3. Capital markets.
    4. Money markets.
    5. Auction markets
    6. Over-the-counter (OTC) markets
    7. Cash markets.
    8. Derivative markets.
    9. Financial futures and options.
  4. Financial Intermediaries in the Financial System
    1. Commercial Banks
    2. Thrift Institutions
    3. Contractual intermediaries (insurers)
    4. Others
  5. Competition and Change in the Financial System.
  6. Regulation of Financial Intermediaries
    1. Purposes of regulation
    2. Regulatory Agencies
Chapter 4
Interest Rates and Rates of Return

  1. Debt Instruments and How they Work
    1. Simple Loans.
    2. Discount Notes & Bonds.
    3. Coupon Bonds.
    4. The concept of present value.
    5. The yield to maturity concept.
  2. Bond Yields and Prices
    1. The price of a debt instrument.
    2. As interest rates change, the market prices of bonds move in the opposite direction.
    3. The current yield on a bond.
    4. The yield to maturity on a bond.
      1. If the current price is less than the face value, the yield to maturity is greater than the current yield, which in turn is greater than the coupon rate.
      2. If the current price is greater than the face value, the yield to maturity is less than the current yield, which in turn is less than the coupon rate.
    5. A bond's price and its yield to maturity are inversely related.
    6. Reinvestment risk.
    7. Finding the Total Rate of Return on a bond.
  3. Real versus Nominal Interest Rates
Chapter 5
The Theory of Portfolio Allocation

  1. Determinants of Portfolio Choice
    1. The theory of portfolio allocation.
    2. The determinants of portfolio choice.
    3. Wealth elasticity of demand.
    4. Risk preferences of savers.
      1. Risk-averse savers.
      2. Risk-neutral savers.
      3. Risk-loving savers.
    5. Tax-exempt investments.
    6. Asset liquidity preferences.
    7. Savers prefer to hold assets with low information costs.
  2. Advantages of Diversification
    1. Why savers diversify their portfolios.
    2. Market (or systematic ) risk and the beta concept.
  3. Summary: Understanding Portfolio Allocation
Chapter 6
Determining Market Interest Rates

  1. Supply and Demand in the Bond Market and Loanable Funds
    1. The demand curve.
    2. The supply curve.
    3. Market equilibrium.
  2. Explaining Changes in Equilibrium Interest Rates
    1. Shifts in bond demand.
    2. Shifts in bond supply.
    3. Using the model to explain changes in interest rates.
    4. Back to the bond market's votes.
  3. The International Capital Market and the Interest Rate
    1. In a small open economy.
    2. In a large open economy.
Chapter 7
Risk Structure and Term Structure of Interest Rates

  1. The Term Structure of Interest Rates
    1. The Treasury Yield Curve.
    2. Why the term structure is shaped as it is.
  2. The Risk Structure of Interest Rates
    1. Default-risk-free-instruments.
    2. Rated debt instruments
    3. Unrated (Junk) debts.
    4. Interest rates on municipal bonds.
Chapter 8
The Foreign-Exchange Market, Exchange Rates, and the Balance of Payments

  1. Exchange Rates and Trade
    1. Nominal exchange rates
    2. Real exchange rates
  2. Foreign Exchange Markets
    1. Spot market transactions.
    2. Forward transactions.
  3. Determinants of Long-Run Exchange Rates
    1. The "Law of One Price."
    2. Purchasing Power Parity.
  4. The U.S. Balance of Payments
Chapter 10
Information and Financial Markets

  1. The Rational Expectations Concept
  2. The Efficient Markets Hypothesis
  3. Actual Efficiency in Financial Markets
  4. Costs of Inefficiency in Financial Markets
Chapter 11
Reducing Transactions and Information Costs

  1. Obstacles to Matching Savers and Borrowers
    1. What transactions costs are.
    2. Information costs.
      1. Asymmetric information.
      2. Adverse selection.
      3. Moral hazard.
  2. Information Costs and Financial Intermediaries
Chapter 12
What Financial Institutions Do

  1. Securities Market Institutions
  2. Investment Institutions
  3. Contractual Saving via Insurance Companies
  4. Contractual Saving via Pension Funds
    1. Defined Contribution Plans
    2. Defined Benefit Plans.
  5. Depository Institutions
    1. Commercial banks
    2. Savings institutions
    3. Credit unions
  6. Government Financial Institutions
  7. Blurring the Lines Between Financial Institutions
Chapter 13
The Business of Banking

  1. How Banks Earn Profits
    1. Bank balance sheets
    2. Bank Income Statements
    3. Bank Failures
  2. The Relationship between Banks and Savers
  3. The Relationship between Banks and Borrowers
  4. Expanding the Boundaries of Banking
Chapter 14
The Banking Industry

  1. Origins of Today's Banking Industry
  2. Who Regulates Banks?
  3. Why the Banking Industry is Regulated
  4. Government Intervention in the Banking Industry
  5. The Banking Industry in Other Countries
Chapter 15
Banking Regulation: Crisis and Response

  1. The Pattern of Regulation
    1. The first stage: crisis.
    2. The second stage: regulation.
    3. The third stage : response by the financial system.
    4. The fourth stage: regulatory response.
  2. The Lender of Last Resort Concept
  3. Anti-Competitive Bank Regulation
    1. The Great Depression laws & regulations
    2. The move toward deregulation
  4. The Deposit Insurance Crisis of the 1980s and Regulation of Banks.
Chapter 16:
Banking in the International Economy

  1. History of International Banking
    1. In the United States
    2. Abroad
  2. Types of Foreign Bank Organizations
  3. Services Provided by International Banks
  4. The Rise of Euromarkets
  5. Financial Regulation in International Banking
Chapter 19
Organization of Central Banks (and the Federal Reserve System)

  1. Power Sharing in the Federal Reserve System
  2. How the Fed Operates
  3. Central Bank Independence
    1. In the U.S.
    2. Elsewhere
Chapter 17
The Money Supply Process

  1. The Fed and the Monetary Base
    1. The Fed's powers.
    2. How it uses them.
  2. The Simple Deposit Multiplier
  3. The Money Multiplier and Decisions of the Nonbank Public
  4. Bank Behavior: Excess Reserves and Discount Loans
  5. Deriving the Money Multiplier and Money Supply
Chapter 18:
Changes in the Monetary Base

  1. How the Federal Reserve's Balance Sheet Affects the Banking Industry
    1. The Fed's Assets.
    2. The Fed's Liabilities.
    3. Connections to the Industry's Balance Sheet.
  2. Factors Affecting the Monetary Base
    1. Currency + Reserves (borrowed and non-borrowed).
    2. Fed Float, etc.
    3. Monetizing Federal Deficits.
  3. How the "Money Multiplier" acts on the Monetary Base
Chapter 20:
Monetary Policy Tools

  1. Open Market Operations
    1. What open market operations are.
    2. The Open Market Trading Desk.
      1. Dynamic transactions.
      2. Defensive transactions.
  2. Discount Policy
    1. What it is.
    2. Types of Discount Loans.
    3. The discount rate
    4. Announcement Effects.
  3. Reserve Requirements
  4. Fed Watching: Analyzing the Fed's Policy Moves
Chapter 21:
The Conduct of Monetary Policy

  1. Goals of Monetary Policy
    1. Price Stability
    2. Full Employment
    3. Economic Growth
    4. Financial Stability
    5. Others
  2. Problems in Achieving Monetary Policy Goals
    1. Intermediate Targets
    2. Operating Targets
  3. The Monetary Policy Record
  4. Reevaluating Fed Targeting Policy
Chapter 22
The International Financial System and Monetary Policy

  1. Foreign-Exchange Intervention and the Money Supply
  2. Foreign-Exchange Intervention and the Exchange Rate
  3. Balance of Payments
    1. The Balance-of-payments Accounts
    2. The Current Account
    3. The Capital Account
    4. Official Reserve Assets
    5. The Official Settlements Balance
    6. The Statistical Discrepancy
  4. Exchange Rate Regimes and the International Financial System
Chapter 25:
Aggregate Demand and Aggregate Supply

  1. The Aggregate Demand Curve
    1. Aggregate demand = C + I + G + NX = GDP
  2. The Aggregate Supply Curve
    1. Driving forces
    2. Supply shocks
  3. Equilibrium in Aggregate Demand and Aggregate Supply
  4. Economic Fluctuations in the United States
Chapter 26:
Money and Output in the Short Run

  1. Tracking Money and Output Movements in the Short Run
  2. The Real Business Cycle Model
  3. Money and Output: The New Classical View
  4. Money and Output: The New Keynesian Model
  5. Should Public Policy Try to Stabilize Economic Fluctuations?
  6. Explaining Events of the 1980s and 1990s
Chapter 27:
Information Problems & Channels for Monetary Policy
  1. Information Problems Banks Face in Lending
    1. Getting the Right Information about Consumer Borrowers
    2. Getting the Right Information about Business Borrowers
  2. Monetary Policy Measures to Deal with Recessions, Depressions and Panics
    1. The Great Depression Policy Failures
    2. Monetary Policy During Recessions
    3. Monetary Policy During Panics
  3. The Monetary Policy Channels 
    1. Interest Rate Effects on Investors
    2. Interest Rate Effects on Consumers
    3. How Monetary Policy Affects Availability of Credit
    4. Some Wealth Effects of Monetary Policy
    5. How Monetary Policy Affects the Stock Markets
    6. The Foreign Exchange Effects of Monetary Policy

 
Chapter 28:
Inflation: Causes and Consequences

  1. Explaining Price Level Changes
  2. Costs of Inflation
  3. Inflation and Monetary Policy
    1. Cost-push inflation
    2. Demand-pull inflation
  4. Benefits and Costs of Reducing Inflation
  5. Central Bank Credibility