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Hiện nay tài liệu và giáo trình giảng dạy các môn học về tài chính đã được xuất bản khá phong phú và được giảng dạy trong các trường đại học khối ngành kinh tế. Vấn đề trọng tâm và nan giải của việc giảng dạy và học các

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Online Readings to Accompany

The Economics of Money, Banking, and

Financial Markets

Ehrenberg/Smith

Modern Labor Economics

Ekelund/Tollison

Economics: Private Markets

and Public Choice

Krugman/Obstfeld

International Economics:

Theory and Policy

Laidler

The Demand for Money:

Theories, Evidence, and Problems

Economics: A Tool for Critically Understanding Society

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Columbia University

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Executive Development Manager: Sylvia Mallory

Development Editor: Jane Tufts

Production Supervisor: Meredith Gertz

Text Design: Studio Montage

Cover Design: Regina Hagen Kolenda and Studio Montage

Composition: Argosy Publishing

Senior Manufacturing Supervisor: Hugh Crawford

Senior Marketing Manager: Barbara LeBuhn

Cover images: © PhotoDisc

Media Producer: Melissa Honig

Supplements Editor: Diana Theriault

Credits to copyrighted material appear on p C-1, which constitutes a continuation of the copyright page

Library of Congress Cataloguing-in-Publication Data

Mishkin, Frederic S

The economics of money, banking, and financial markets / Frederic S Mishkin.—7th ed

p cm — (The Addison-Wesley series in economics)

Supplemented by a subscription to a companion web site

Includes bibliographical references and index

1 2 3 4 5 6 7 8 9 10—DOW—06050403

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Introduction 1

1 Why Study Money, Banking, and Financial Markets? 3

2 An Overview of the Financial System 23

3 What Is Money? 44

Financial Markets 59 4 Understanding Interest Rates 61

5 The Behavior of Interest Rates 85

6 The Risk and Term Structure of Interest Rates 120

7 The Stock Market, the Theory of Rational Expectations, and the Efficient Market Hypothesis 141

Financial Institutions 167 8 An Economic Analysis of Financial Structure 169

9 Banking and the Management of Financial Institutions 201

10 Banking Industry: Structure and Competition 229

11 Economic Analysis of Banking Regulation 260

12 Nonbank Finance 287

13 Financial Derivatives 309

Central Banking and the Conduct of Monetary Policy 333 14 Structure of Central Banks and the Federal Reserve System 335

15 Multiple Deposit Creation and the Money Supply Process 357

16 Determinants of the Money Supply 374

17 Tools of Monetary Policy 393

18 Conduct of Monetary Policy: Goals and Targets 411

International Finance and Monetary Policy 433 19 The Foreign Exchange Market 435

20 The International Financial System 462

21 Monetary Policy Strategy: The International Experience 487

P A R T V

P A R T I V

P A R T I I I

P A R T I I

P A R T I

vii

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Monetary Theory 515

22 The Demand for Money 517

23 The Keynesian Framework and the ISLM Model 536

24 Monetary and Fiscal Policy in the ISLM Model 561

25 Aggregate Demand and Supply Analysis 582

26 Transmission Mechanisms of Monetary Policy: The Evidence 603

27 Money and Inflation 632

28 Rational Expectations: Implications for Policy 658

P A R T V I

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Introduction 1

CHAPTER 1

WHY STUDY MONEY, BANKING, AND FINANCIAL MARKETS? 3

Preview 3

Why Study Financial Markets? 3

The Bond Market and Interest Rates 3

The Stock Market 5

The Foreign Exchange Market 5

Why Study Banking and Financial Institutions? 7

Structure of the Financial System 7

Banks and Other Financial Institutions 8

Financial Innovation 8

Why Study Money and Monetary Policy? 8

Money and Business Cycles 9

Money and Inflation 10

Money and Interest Rates 12

Conduct of Monetary Policy 12

Fiscal Policy and Monetary Policy 12

How We Will Study Money, Banking, and Financial Markets 13

Exploring the Web 14

Concluding Remarks 17

Summary, Key Terms, Questions and Problems, and Web Exercises 17

Appendix to Chapter 1 Defining Aggregate Output, Income, the Price Level, and the Inflation Rate 20

Aggregate Output and Income 20

Real Versus Nominal Magnitudes 20

Aggregate Price Level 21

Growth Rates and the Inflation Rate 22

P A R T I

ix

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CHAPTER 2

AN OVERVIEW OF THE FINANCIAL SYSTEM 23

Preview 23

Function of Financial Markets 23

Structure of Financial Markets 25

Debt and Equity Markets 25

Primary and Secondary Markets 26

Exchanges and Over-the-Counter Markets 27

Money and Capital Markets 27

Internationalization of Financial Markets 28

International Bond Market, Eurobonds, and Eurocurrencies 28

World Stock Markets 29

Function of Financial Intermediaries 29

Transaction Costs 29

Following the Financial News Foreign Stock Market Indexes 30

Box 1 Global: The Importance of Financial Intermediaries to Securities Markets: An International Comparison 31

Risk Sharing 31

Asymmetric Information: Adverse Selection and Moral Hazard 32

Financial Intermediaries 34

Depository Institutions 34

Contractual Savings Institutions 35

Investment Intermediaries 37

Regulation of the Financial System 37

Increasing Information Available to Investors 39

Ensuring the Soundness of Financial Intermediaries 39

Financial Regulation Abroad 40

Summary, Key Terms, Questions and Problems, and Web Exercises 41

CHAPTER 3 WHAT IS MONEY? 44

Preview 44

Meaning of Money 44

Functions of Money 45

Medium of Exchange 45

Unit of Account 46

Store of Value 47

Evolution of the Payments System 48

Commodity Money 48

Fiat Money 48

Checks 48

Box 1 Global: Birth of the Euro: Will It Benefit Europe? 49

Electronic Payment 50

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Box 2 E-Finance: Why Are Scandinavians So Far Ahead of Americans in

Using Electronic Payments? 50

E-Money 51

Measuring Money 51

The Federal Reserve’s Monetary Aggregates 51

Box 3 E-Finance: Are We Headed for a Cashless Society? 52

Following the Financial News The Monetary Aggregates 54

How Reliable Are the Money Data? 55

Summary, Key Terms, Questions and Problems, and Web Exercises 56

Financial Markets 59 CHAPTER 4 UNDERSTANDING INTEREST RATES 61

Preview 61

Measuring Interest Rates 61

Present Value 61

Four Types of Credit Market Instruments 63

Yield to Maturity 64

Box 1 Global: Negative T-Bill Rates? Japan Shows the Way 69

Other Measures of Interest Rates 69

Current Yield 70

Yield on a Discount Basis 71

Application Reading the Wall Street Journal: The Bond Page 72

Following the Financial News Bond Prices and Interest Rates 73

The Distinction Between Interest Rates and Returns 75

Maturity and the Volatility of Bond Returns: Interest-Rate Risk 78

Box 2 Helping Investors to Select Desired Interest-Rate Risk 79

Summary 79

The Distinction Between Real and Nominal Interest Rates 79

Box 3 With TIPS, Real Interest Rates Have Become Observable in the United States 82

Summary, Key Terms, Questions and Problems, and Web Exercises 82

CHAPTER 5 THE BEHAVIOR OF INTEREST RATES 85

Preview 85

Determinants of Asset Demand 85

Wealth 86

P A R T I I

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Expected Returns 86

Risk 87

Liquidity 87

Theory of Asset Demand 87

Supply and Demand in the Bond Market 87

Demand Curve 88

Supply Curve 90

Market Equilibrium 90

Supply and Demand Analysis 91

Loanable Funds Framework 91

Changes in Equilibrium Interest Rates 93

Shifts in the Demand for Bonds 93

Shifts in the Supply of Bonds 97

Application Changes in the Equilibrium Interest Rate Due to Expected Inflation or Business Cycle Expansions 99

Changes in Expected Inflation: The Fisher Effect 99

Business Cycle Expansion 100

Application Explaining Low Japanese Interest Rates 103

Application Reading the Wall Street Journal “Credit Markets” Column 103

Following the Financial News The “Credit Markets” Column 104

Supply and Demand in the Market for Money: The Liquidity Preference Framework 105

Changes in Equilibrium Interest Rates in the Liquidity Reference Framework 107

Shifts in the Demand for Money 107

Shifts in the Supply of Money 108

Application Changes in the Equilibrium Interest Rate Due to Changes in Income, the Price Level, or the Money Supply 108

Changes in Income 108

Changes in the Price Level 108

Changes in the Money Supply 109

Following the Financial News Forecasting Interest Rates 111

Application Money and Interest Rates 112

Does a Higher Rate of Growth of the Money Supply Lower Interest Rates? 114

Summary, Key Terms, Questions and Problems, and Web Exercises 117

CHAPTER 6 THE RISK AND TERM STRUCTURE OF INTEREST RATES 120

Preview 120

Risk Structure of Interest Rates 120

Default Risk 120

Application The Enron Bankruptcy and the Baa-Aaa Spread 124

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Liquidity 125

Income Tax Considerations 125

Summary 127

Application Effects of the Bush Tax Cut on Bond Interest Rates 127

Term Structure of Interest Rates 127

Following the Financial News Yield Curves 128

Expectations Theory 129

Segmented Markets Theory 132

Liquidity Premium and Preferred Habitat Theories 133

Evidence on the Term Structure 136

Summary 137

Application Interpreting Yield Curves, 1980–2003 137

Summary, Key Terms, Questions and Problems, and Web Exercises 138

CHAPTER 7 THE STOCK MARKET, THE THEORY OF RATIONAL EXPECTATIONS, AND THE EFFICIENT MARKET HYPOTHESIS 141

Preview 141

Computing the Price of Common Stock 141

The One-Period Valuation Model 142

The Generalized Dividend Valuation Model 143

The Gordon Growth Model 143

How the Market Sets Security Prices 144

Application Monetary Policy and Stock Prices 146

Application The September 11 Terrorist Attacks, the Enron Scandal, and the Stock Market 146

The Theory of Rational Expectations 147

Formal Statement of the Theory 148

Rationale Behind the Theory 149

Implications of the Theory 149

The Efficient Markets Hypothesis: Rational Expectations in Financial Markets 150

Rationale Behind the Hypothesis 151

Stronger Version of the Efficient Market Hypothesis 152

Evidence on the Efficient Market Hypothesis 153

Evidence in Favor of Market Efficiency 153

Application Should Foreign Exchange Rates Follow a Random Walk? 155

Evidence Against Market Efficiency 156

Overview of the Evidence on the Efficient Market Hypothesis 158

Application Practical Guide to Investing in the Stock Market 158

How Valuable Are Published Reports by Investment Advisers? 158

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Following the Financial News Stock Prices 159

Box 1 Should You Hire an Ape as Your Investment Adviser? 160

Should You Be Skeptical of Hot Tips? 160

Do Stock Prices Always Rise When There Is Good News? 161

Efficient Market Prescription for the Investor 161

Evidence on Rational Expectations in Other Markets 162

Application What Do the Black Monday Crash of 1987 and the Tech Crash of 2000 Tell Us About Rational Expectations and Efficient Markets? 163

Summary, Key Terms, Questions and Problems, and Web Exercises 164

Financial Institutions 167 CHAPTER 8 AN ECONOMIC ANALYSIS OF FINANCIAL STRUCTURE 169

Preview 169

Basic Puzzles About Financial Structure Throughout the World 169

Transaction Costs 173

How Transaction Costs Influence Financial Structure 173

How Financial Intermediaries Reduce Transaction Costs 173

Asymmetric Information: Adverse Selection and Moral Hazard 174

The Lemons Problem: How Adverse Selection Influences Financial Structure 175

Lemons in the Stock and Bond Markets 175

Tools to Help Solve Adverse Selection Problems 176

Box 1 The Enron Implosion and the Arthur Andersen Conviction 178

How Moral Hazard Affects the Choice Between Debt and Equity Contracts 180

Moral Hazard in Equity Contracts: The Principal–Agent Problem 181

Tools to Help Solve the Principal–Agent Problem 182

Box 2 E-Finance: Venture Capitalists and the High-Tech Sector 183

How Moral Hazard Influences Financial Structure in Debt Markets 184

Tools to Help Solve Moral Hazard in Debt Contracts 184

Summary 186

Application Financial Development and Economic Growth 187

Financial Crises and Aggregate Economic Activity 189

Factors Causing Financial Crises 189

Application Financial Crises in the United States 191

Box 3 Case Study of a Financial Crisis: The Great Depression 194

Application Financial Crises in Emerging-Market Countries: Mexico, 1994–1995; East Asia, 1997–1998; and Argentina, 2001–2002 194

Summary, Key Terms, Questions and Problems, and Web Exercises 199

P A R T I I I

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CHAPTER 9

BANKING AND THE MANAGEMENT OF FINANCIAL INSTITUTIONS 201

Preview 201

The Bank Balance Sheet 201

Liabilities 201

Assets 204

Basic Banking 205

General Principles of Bank Management 208

Liquidity Management and the Role of Reserves 208

Asset Management 211

Liability Management 212

Capital Adequacy Management 213

Application Strategies for Managing Bank Capital 215

Application Did the Capital Crunch Cause a Credit Crunch in the Early 1990s? 216

Managing Credit Risk 217

Screening and Monitoring 217

Long-Term Customer Relationships 218

Loan Commitments 219

Collateral and Compensating Balances 219

Credit Rationing 220

Managing Interest-Rate Risk 220

Gap and Duration Analysis 221

Application Strategies for Managing Interest-Rate Risk 222

Off-Balance-Sheet Activities 223

Loan Sales 223

Generation of Fee Income 223

Trading Activities and Risk Management Techniques 224

Box 1 Global: Barings, Daiwa, Sumitomo, and Allied Irish: Rogue Traders and the Principal–Agent Problem 225

Summary, Key Terms, Questions and Problems, and Web Exercises 226

CHAPTER 10 BANKING INDUSTRY: STRUCTURE AND COMPETITION 229

Preview 229

Historical Development of the Banking System 229

Multiple Regulatory Agencies 231

Financial Innovation and the Evolution of the Banking Industry 232

Responses to Changes in Demand Conditions: Interest Rate Volatility 233

Responses to Changes in Supply Conditions: Information Technology 234

Box 1 E-Finance: Will “Clicks” Dominate “Bricks” in the Banking Industry? 236

Avoidance of Existing Regulations 237

Financial Innovation and the Decline of Traditional Banking 239

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Structure of the U.S Commercial Banking Industry 243

Restrictions on Branching 244

Response to Branching Restrictions 245

Bank Consolidation and Nationwide Banking 245

Box 2 E-Finance: Information Technology and Bank Consolidation 247

The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 248

What Will the Structure of the U.S Banking Industry Look Like in the Future? 248

Box 3 Global: Comparison of Banking Structure in the United States and Abroad 249

Are Bank Consolidation and Nationwide Banking Good Things? 249

Separation of the Banking and Other Financial Service Industries 250

Erosion of Glass-Steagall 250

The Gramm-Leach-Bliley Financial Services Modernization Act of 1999: Repeal of Glass-Steagall 251

Implications for Financial Consolidation 251

Separation of Banking and Other Financial Services Industries Throughout the World 251

Thrift Industry: Regulation and Structure 252

Savings and Loan Associations 252

Mutual Savings Banks 253

Credit Unions 253

International Banking 253

Eurodollar Market 254

Box 4 Global: Ironic Birth of the Eurodollar Market 255

Structure of U.S Banking Overseas 255

Foreign Banks in the United States 256

Summary, Key Terms, Questions and Problems, and Web Exercises 257

CHAPTER 11 ECONOMIC ANALYSIS OF BANKING REGULATION 260

Preview 260

Asymmetric Information and Banking Regulation 260

Government Safety Net: Deposit Insurance and the FDIC 260

Box 1 Global: The Spread of Government Deposit Insurance Throughout the World: Is This a Good Thing? 262

Restrictions on Asset Holdings and Bank Capital Requirements 264

Bank Supervision: Chartering and Examination 265

Box 2 Global: Basel 2: Is It Spinning Out of Control? 265

Assessment of Risk Management 267

Disclosure Requirements 268

Consumer Protection 269

Restrictions on Competition 269

Box 3 E-Finance: Electronic Banking: New Challenges for Bank Regulation 270

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International Banking Regulation 272

Problems in Regulating International Banking 272

Summary 272

The 1980s U.S Banking Crisis: Why? 273

Early Stages of the Crisis 274

Later Stages of the Crisis: Regulatory Forbearance 275

Competitive Equality in Banking Act of 1987 276

Political Economy of the Savings and Loan Crisis 276

The Principal–Agent Problem for Regulators and Politicians 277

Savings and Loan Bailout: The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 278

Federal Deposit Insurance Corporation Improvement Act of 1991 279

Banking Crises Throughout the World 280

Scandinavia 280

Latin America 281

Russia and Eastern Europe 282

Japan 282

East Asia 284

“Déjà Vu All Over Again” 284

Summary, Key Terms, Questions and Problems, and Web Exercises 284

CHAPTER 12 NONBANK FINANCE 287

Preview 287

Insurance 287

Life Insurance 287

Property and Casualty Insurance 288

The Competitive Threat from the Banking Industry 290

Application Insurance Management 290

Screening 291

Risk-Based Premiums 291

Restrictive Provisions 292

Prevention of Fraud 292

Cancellation of Insurance 292

Deductibles 292

Coinsurance 293

Limits on the Amount of Insurance 293

Summary 293

Pension Funds 294

Private Pension Plans 295

Public Pension Plans 295

Box 1 Should Social Security Be Privatized? 296

Finance Companies 296

Mutual Funds 297

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Box 2 E-Finance: Mutual Funds and the Internet 298

Money Market Mutual Funds 299

Hedge Funds 299

Box 3 The Long-Term Capital Management Debacle 300

Government Financial Intermediation 301

Federal Credit Agencies 301

Box 4 Are Fannie Mae and Freddie Mac Getting Too Big for Their Britches? 302

Securities Market Operations 302

Investment Banking 303

Following the Financial News New Securities Issues 304

Securities Brokers and Dealers 304

Organized Exchanges 305

Box 5 The Return of the Financial Supermarket? 305

Box 6 E-Finance: The Internet Comes to Wall Street 306

Summary, Key Terms, Questions and Problems, and Web Exercises 306

CHAPTER 13 FINANCIAL DERIVATIVES 309

Preview 309

Hedging 309

Interest-Rate Forward Contracts 310

Application Hedging with Interest-Rate Forward Contracts 310

Pros and Cons of Forward Contracts 311

Financial Futures Contracts and Markets 311

Following the Financial News Financial Futures 312

Application Hedging with Financial Futures 314

Organization of Trading in Financial Futures Markets 315

The Globalization of Financial Futures Markets 317

Explaining the Success of Futures Markets 317

Application Hedging Foreign Exchange Risk 319

Hedging Foreign Exchange Risk with Forward Contracts 319

Hedging Foreign Exchange Risk with Futures Contracts 320

Options 320

Following the Financial News Futures Options 321

Option Contracts 322

Profits and Losses on Option and Futures Contracts 322

Application Hedging with Futures Options 325

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Factors Affecting the Prices of Option Premiums 326

Summary 327

Interest-Rate Swaps 328

Interest-Rate Swap Contracts 328

Application Hedging with Interest-Rate Swaps 329

Advantages of Interest-Rate Swaps 329

Disadvantages of Interest-Rate Swaps 330

Financial Intermediaries in Interest-Rate Swaps 330

Summary, Key Terms, Questions and Problems, and Web Exercises 330

Central Banking and the Conduct of Monetary Policy 333 CHAPTER 14 STRUCTURE OF CENTRAL BANKS AND THE FEDERAL RESERVE SYSTEM 335

Preview 335

Origins of the Federal Reserve System 335

Box 1 Inside the Fed: The Political Genius of the Founders of the Federal Reserve System 336

Formal Structure of the Federal Reserve System 336

Federal Reserve Banks 337

Box 2 Inside the Fed: The Special Role of the Federal Reserve Bank of New York 339

Member Banks 340

Board of Governors of the Federal Reserve System 340

Federal Open Market Committee (FOMC) 341

Box 3 Inside the Fed: The Role of the Research Staff 342

The FOMC Meeting 343

Box 4 Inside the Fed:Green, Blue, and Beige: What Do These Colors Mean at the Fed? 344

Informal Structure of the Federal Reserve System 344

Box 5 Inside the Fed: The Role of Member Banks in the Federal Reserve System 346

How Independent Is the Fed? 346

Structure and Independence of Foreign Central Banks 349

Bank of Canada 349

Bank of England 349

Bank of Japan 350

European Central Bank 350

The Trend Toward Greater Independence 351

Explaining Central Bank Behavior 351

P A R T I V

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Box 6 Inside the Fed: Federal Reserve Transparency 352

Should the Fed Be Independent? 352

The Case for Independence 352

The Case Against Independence 354

Central Bank Independence and Macroeconomic Performance Throughout the World 354

Summary, Key Terms, Questions and Problems, and Web Exercises 355

CHAPTER 15 MULTIPLE DEPOSIT CREATION AND THE MONEY SUPPLY PROCESS 357

Preview 357

Four Players in the Money Supply Process 357

The Fed’s Balance Sheet 358

Liabilities 358

Assets 359

Control of the Monetary Base 359

Federal Reserve Open Market Operations 359

Shifts from Deposits into Currency 363

Box 1 Global: Foreign Exchange Rate Intervention and the Monetary Base 363

Discount Loans 364

Other Factors That Affect the Monetary Base 365

Overview of the Fed’s Ability to Control the Monetary Base 365

Multiple Deposit Creation: A Simple Model 365

Deposit Creation: The Single Bank 366

Deposit Creation: The Banking System 367

Deriving the Formula for Multiple Deposit Creation 370

Critique of the Simple Model 371

Summary, Key Terms, Questions and Problems, and Web Exercises 372

CHAPTER 16 DETERMINANTS OF THE MONEY SUPPLY 374

Preview 374

The Money Supply Model and the Money Multiplier 375

Deriving the Money Multiplier 375

Intuition Behind the Money Multiplier 377

Factors that Determine the Money Multiplier 378

Changes in the Required Reserve Ratio r 378

Changes in the Currency Ratio c 379

Changes in the Excess Reserves Ratio e 379

Additional Factors That Determine the Money Supply 381

Changes in the Nonborrowed Monetary Base MB n 382

Changes in the Discount Loans DL from the Fed 382

Overview of the Money Supply Process 383

Application Explaining Movements in the Money Supply, 1980–2002 384

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Application The Great Depression Bank Panics, 1930–1933 387

Summary, Key Terms, Questions and Problems, and Web Exercises 390

CHAPTER 17 TOOLS OF MONETARY POLICY 393

Preview 393

The Market for Reserves and the Federal Funds Rate 393

Supply and Demand in the Market for Reserves 394

How Changes in the Tools of Monetary Policy Affect the Federal Funds Rate 395

Open Market Operations 398

A Day at the Trading Desk 398

Advantages of Open Market Operations 400

Discount Policy 400

Operation of the Discount Window 401

Lender of Last Resort 402

Advantages and Disadvantages of Discount Policy 403

Reserve Requirements 403

Box 1 Inside the Fed: Discounting to Prevent a Financial Panic: The Black Monday Stock Market Crash of 1987 and the Terrorist Destruction of the World Trade Center in September 2001 404

Advantages and Disadvantages of Reserve Requirement Changes 405

Application Why Have Reserve Requirements Been Declining Worldwide? 406

Application The Channel/Corridor System for Setting Interest Rates in Other Countries 406

Summary, Key Terms, Questions and Problems, and Web Exercises 408

CHAPTER 18 CONDUCT OF MONETARY POLICY: GOALS AND TARGETS 411

Preview 411

Goals of Monetary Policy 411

High Employment 411

Economic Growth 412

Price Stability 412

Box 1 Global: The Growing European Commitment to Price Stability 413

Interest-Rate Stability 413

Stability of Financial Markets 413

Stability in Foreign Exchange Markets 414

Conflict Among Goals 414

Central Bank Strategy: Use of Targets 414

Choosing the Targets 416

Criteria for Choosing Intermediate Targets 418

Criteria for Choosing Operating Targets 419

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Fed Policy Procedures: Historical Perspective 419The Early Years: Discount Policy as the Primary Tool 420 Discovery of Open Market Operations 420 The Great Depression 421

Box 2 Inside the Fed: Bank Panics of 1930–1933: Why Did the Fed Let Them Happen? 421Reserve Requirements as a Policy Tool 422 War Finance and the Pegging of Interest Rates: 1942–1951 422 Targeting Money Market Conditions: The 1950s and 1960s 423 Targeting Monetary Aggregates: The 1970s 424 New Fed Operating Procedures: October 1979–October 1982 425 De-emphasis of Monetary Aggregates: October 1982–Early 1990s 426 Federal Funds Targeting Again: Early 1990s and Beyond 427 International Considerations 427

Box 3 Global: International Policy Coordination: The Plaza Agreement and the Louvre Accord 428The Taylor Rule, NAIRU, and the Philips Curve 428

Box 4 Fed Watching 430Summary, Key Terms, Questions and Problems, and Web Exercises 431

CHAPTER 19

THE FOREIGN EXCHANGE MARKET 435

Preview 435Foreign Exchange Market 435What Are Foreign Exchange Rates? 436

Following the Financial News Foreign Exchange Rates 437Why Are Exchange Rates Important? 438 How Is Foreign Exchange Traded? 438Exchange Rates in the Long Run 439Law of One Price 439 Theory of Purchasing Power Parity 439 Why the Theory of Purchasing Power Parity Cannot Fully Explain Exchange Rates 440 Factors That Affect Rates in the Long Run 441Exchange Rates in the Short Run 443Comparing Expected Returns on Domestic and Foreign Deposits 443 Interest Parity Condition 445 Equilibrium in the Foreign Exchange Market 446Explaining Changes in Exchange Rates 448Shifts in the Expected-Return Schedule for Foreign Deposits 448 Shifts in the Expected-Return Schedule for Domestic Deposits 450

P A R T V

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Application Changes in the Equilibrium Exchange Rate: Two Examples 452

Changes in Interest Rates 452

Changes in the Money Supply 453

Exchange Rate Overshooting 453

Application Why Are Exchange Rates So Volatile? 455

Application The Dollar and Interest Rates, 1973–2002 455

Application The Euro’s First Four Years 457

Application Reading the Wall Street Journal: The “Currency Trading” Column 457

Following the Financial News The “Currency Trading” Column 458

Summary, Key Terms, Questions and Problems, and Web Exercises 459

CHAPTER 20

THE INTERNATIONAL FINANCIAL SYSTEM 462

Preview 462

Intervention in the Foreign Exchange Market 462

Foreign Exchange Intervention and the Money Supply 462

Box 1 Inside the Fed: A Day at the Federal Reserve Bank of New York’s

Foreign Exchange Desk 463

Bretton Woods System 469

Box 2 Global: The Euro’s Challenge to the Dollar 471

Managed Float 473

European Monetary System (EMS) 474

Application The Foreign Exchange Crisis of September 1992 475

Application Recent Foreign Exchange Crises in Emerging Market Countries:

Mexico 1994, East Asia 1997, Brazil 1999, and Argentina 2002 477

Capital Controls 478

Controls on Capital Outflows 478

Controls on Capital Inflows 479

The Role of the IMF 479

Should the IMF Be an International Lender of Last Resort? 480

International Considerations and Monetary Policy 482

Direct Effects of the Foreign Exchange Market on the Money Supply 482

Balance-of-Payments Considerations 483

Exchange Rate Considerations 483

Summary, Key Terms, Questions and Problems, and Web Exercises 484

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CHAPTER 21

MONETARY POLICY STRATEGY: THE INTERNATIONAL EXPERIENCE 487

Preview 487The Role of a Nominal Anchor 487The Time-Consistency Problem 488Exchange-Rate Targeting 489Advantages of Exchange-Rate Targeting 489 Disadvantages of Exchange-Rate Targeting 490 When Is Exchange-Rate Targeting Desirable for Industrialized Countries? 492 When Is Exchange-Rate Targeting Desirable for Emerging Market Countries? 492 Currency Boards 492 Dollarization 493

Box 1 Global: Argentina’s Currency Board 494Monetary Targeting 496Monetary Targeting in Canada, the United Kingdom, Japan, Germany, and Switzerland 496

Box 2 Global: The European Central Bank’s Monetary Policy Strategy 498Advantages of Monetary Targeting 500 Disadvantages of Monetary Targeting 501Inflation Targeting 501Inflation Targeting in New Zealand, Canada, and the United Kingdom 501 Advantages of Inflation Targeting 504 Disadvantages of Inflation Targeting 506 Nominal GDP Targeting 508Monetary Policy with an Implicit Nominal Anchor 509Advantages of the Fed’s Approach 510 Disadvantages of the Fed’s Approach 510Summary, Key Terms, Questions and Problems, and Web Exercises 512

CHAPTER 22

THE DEMAND FOR MONEY 517

Preview 517Quantity Theory of Money 517Velocity of Money and Equation of Exchange 518 Quantity Theory 519 Quantity Theory of Money Demand 519

Is Velocity a Constant? 520Keynes’s Liquidity Preference Theory 521Transactions Motive 521 Precautionary Motive 522 Speculative Motive 522 Putting the Three Motives Together 523Further Developments in the Keynesian Approach 524Transactions Demand 524

P A R T V I

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Precautionary Demand 527

Speculative Demand 527

Friedman’s Modern Quantity Theory of Money 528

Distinguishing Between the Friedman and Keynesian Theories 530

Empirical Evidence on the Demand for Money 532

Interest Rates and Money Demand 533

Stability of Money Demand 533

Summary, Key Terms, Questions and Problems, and Web Exercises 533

CHAPTER 23

THE KEYNESIAN FRAMEWORK AND THE ISLM MODEL 536

Preview 536

Determination of Aggregate Output 536

Consumer Expenditure and the Consumption Function 538

Investment Spending 539

Box 1 Meaning of the Word Investment 540

Equilibrium and the Keynesian Cross Diagram 540

Expenditure Multiplier 542

Application The Collapse of Investment Spending and the Great Depression 545

Government’s Role 545

Role of International Trade 548

Summary of the Determinants of Aggregate Output 548

The ISLM Model 551

Equilibrium in the Goods Market: The IS Curve 552

Equilibrium in the Market for Money: The LM Curve 555

ISLM Approach to Aggregate Output and Interest Rates 557

Summary, Key Terms, Questions and Problems, and Web Exercises 558

CHAPTER 24

MONETARY AND FISCAL POLICY IN THE ISLM MODEL 561

Preview 561

Factors That Cause the IS Curve to Shift 561

Factors That Cause the LM Curve to Shift 564

Changes in Equilibrium Level of the Interest Rate and Aggregate Output 566

Response to a Change in Monetary Policy 566

Response to a Change in Fiscal Policy 567

Effectiveness of Monetary Versus Fiscal Policy 568

Monetary Policy Versus Fiscal Policy: The Case of Complete Crowding Out 568

Application Targeting Money Supply Versus Interest Rates 571

ISLM Model in the Long Run 575

ISLM Model and the Aggregate Demand Curve 577

Deriving the Aggregate Demand Curve 577

Factors That Cause the Aggregate Demand Curve to Shift 578

Summary, Key Terms, Questions and Problems, and Web Exercises 580

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CHAPTER 25

AGGREGATE DEMAND AND SUPPLY ANALYSIS 582

Preview 582Aggregate Demand 582Monetarist View of Aggregate Demand 582

Following the Financial News Aggregate Output, Unemployment, and the Price Level 583Keynesian View of Aggregate Demand 585 The Crowding-Out Debate 586Aggregate Supply 587Shifts in the Aggregate Supply Curve 588Equilibrium in Aggregate Supply and Demand Analysis 588Equilibrium in the Short Run 589 Equilibrium in the Long Run 589 Shifts in Aggregate Demand 592 Shifts in Aggregate Supply 594 Shifts in the Long-Run Aggregate Supply Curve: Real Business Cycle Theory

and Hysteresis 596 Conclusions 597

Application Explaining Past Business Cycle Episodes 598Vietnam War Buildup, 1964–1970 598 Negative Supply Shocks, 1973–1975 and 1978–1980 598 Favorable Supply Shocks, 1995–1999 599Summary, Key Terms, Questions and Problems, and Web Exercises 600

CHAPTER 26

Preview 603Framework for Evaluating Empirical Evidence 603Structural Model Evidence 604 Reduced-Form Evidence 604 Advantages and Disadvantages of Structural Model Evidence 605 Advantages and Disadvantages of Reduced-Form Evidence 606

Box 1 Perils of Reverse Causation: A Russian Folk Tale 606

Box 2 Perils of Ignoring an Outside Driving Factor: How to Lose a Presidential Election 607Conclusions 607Early Keynesian Evidence on the Importance of Money 607Objections to Early Keynesian Evidence 608Early Monetarist Evidence on the Importance of Money 611Timing Evidence 611 Statistical Evidence 613

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Historical Evidence 615

Overview of the Monetarist Evidence 615

Box 3 Real Business Cycle Theory and the Debate on Money and

Economic Activity 616

Transmission Mechanisms of Monetary Policy 616

Traditional Interest-Rate Channels 617

Other Asset Price Channels 618

Credit View 621

Box 4 Consumers’ Balance Sheets and the Great Depression 624

Why Are Credit Channels Likely to Be Important? 625

Application Corporate Scandals and the Slow Recovery from the

March 2001 Recession 625

Lessons for Monetary Policy 626

Application Applying the Monetary Policy Lessons to Japan 628

Summary, Key Terms, Questions and Problems, and Web Exercises 629

Origins of Inflationary Monetary Policy 638

High Employment Targets and Inflation 639

Budget Deficits and Inflation 643

Application Explaining the Rise in U.S Inflation, 1960–1980 646

Activist/Nonactivist Policy Debate 650

Responses to High Unemployment 650

Activist and Nonactivist Positions 651

Expectations and the Activist/Nonactivist Debate 652

Box 1 Perils of Accommodating Policy: The Terrorism Dilemma 654

Rules Versus Discretion: Conclusions 654

Application Importance of Credibility to Volcker’s Victory over Inflation 655

Summary, Key Terms, Questions and Problems, and Web Exercises 655

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CHAPTER 28

RATIONAL EXPECTATIONS: IMPLICATIONS FOR POLICY 658

Preview 658The Lucas Critique of Policy Evaluation 659Econometric Policy Evaluation 659 Example: The Term Structure of Interest Rates 659New Classical Macroeconomic Model 660Effects of Unanticipated and Anticipated Policy 661

Box 1 Proof of the Policy Ineffectiveness Proposition 663Can an Expansionary Policy Lead to a Decline in Aggregate Output? 663 Implications for Policymakers 664New Keynesian Model 665Effects of Unanticipated and Anticipated Policy 666 Implications for Policymakers 666Comparison of the Two New Models with the Traditional Model 666Short-Run Output and Price Responses 668 Stabilization Policy 670 Anti-inflation Policies 671 Credibility in Fighting Inflation 673

Box 2 Global:Ending the Bolivian Hyperinflation: Case Study of a Successful Anti-inflation Program 674

Application Credibility and the Reagan Budget Deficits 675Impact of the Rational Expectations Revolution 676Summary, Key Terms, Questions and Problems, and Web Exercises 677

GLOSSARY G-1

ANSWERS TO SELECTED QUESTIONS AND PROBLEMS A-1

CREDITS C-1

INDEX I-1

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I have continually strived to improve this textbook with each new edition, and the

Seventh Edition of The Economics of Money, Banking, and Financial Markets is no

exception The text has undergone a major revision, but it retains the basic marks that have made it the best-selling textbook on money and banking in the pastsix editions:

hall-• A unifying, analytic framework that uses a few basic economic principles toorganize students’ thinking about the structure of financial markets, the foreignexchange markets, financial institution management, and the role of monetarypolicy in the economy

• A careful, step-by-step development of models (an approach found in the bestprinciples of economics textbooks), which makes it easier for students to learn

• The complete integration of an international perspective throughout the text

• A thoroughly up-to-date treatment of the latest developments in monetary theory

• Special features called “Following the Financial News” and “Reading the Wall

Street Journal” to encourage reading of a financial newspaper

• An applications-oriented perspective with numerous applications and topic boxes that increase students’ interest by showing them how to apply the-ory to real-world examples

special-What’s New in the Seventh Edition

In addition to the expected updating of all data through the end of 2002 wheneverpossible, there is major new material in every part of the text Indeed, this revision

is one of the most substantial that I have ever done

With the wide swings in the stock prices in recent years, students of money andbanking have become increasingly interested in what drives the stock market As aresult, I have expanded the discussion of this market by describing simple valua-tion methods for stocks and examining recent developments in the stock marketand the link between monetary policy and stock prices I have combined this mate-rial with the discussion of the theory of rational expectations and efficient capitalmarkets to create a new Chapter 7, “The Stock Market, the Theory of RationalExpectations, and the Efficient Market Hypothesis.”

Expanded

Coverage of the

Stock Market

xxix

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In light of continuing changes in financial markets and institutions, I have addedthe following new material to keep the text current:

• Extensive discussion of recent corporate scandals and the collapse of Enron,including their impact on the economy (Chapters 6, 7, 11, and 26)

• Discussion of the role of venture capitalists in the high-tech sector (Chapter 8)

• Examination of how information technology is influencing bank consolidation,and analysis of whether clicks will dominate bricks in the banking industry(Chapter 10)

• New material on the Basel Committee on Bank Supervision and where the BaselAccord is heading (Chapter 11)

• Discussion of the spread of deposit insurance throughout the world (Chapter 11)

• Perspective on the growing concerns about Fannie Mae and Freddie Mac(Chapter 12)

• A new type of special-interest box, the E-Finance box, which relates howchanges in technology have affected the conduct of business in banking andfinancial markets The placement of these boxes throughout the text helps todemonstrate the impact of technology across a broad range of areas in finance

The growing importance of the global economy has encouraged me to add morenew material with an international perspective:

• Extensive discussion of recent developments in Argentina (Chapters 1, 8, 11,

20, and 21)

• Analysis of how central banks set overnight interest rates in other countries(Chapter 17)

• Discussion of how the euro has fared in its first four years (Chapter 19)

• Additional treatment of recent events in the Japanese economy (Chapters 11and 26)

Drawing on my continuing involvement with central banks around the world, Ihave added new material to keep the discussion of monetary theory and policycurrent:

• New boxes on Fed watching and Federal Reserve transparency (Chapters 14and 18)

• Discussion of the changes (implemented in 2003) in the way the Fed ters the discount window (Chapter 17)

adminis-• An updated discussion of the market for reserves and how the dor system for setting interest rates works (Chapter 17)

channel/corri-• Discussion of how the recent corporate scandals have hindered the recovery ofthe economy from the 2001–2002 recession (Chapter 25)

The incredible advances in electronic (computer and telecommunications) nology in recent years have had a major impact on the financial system This SeventhEdition reflects these developments by adding many new features with an electronicfocus

tech-Web Enhancement. The Seventh Edition embraces the exploding world of tion now available over the World Wide Web There are few areas where the Internet

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has been as valuable as in the realm of money, banking, and financial markets Datathat were once difficult and tedious to collect are now readily available To help stu-dents appreciate what they can access online, I have added a number of new features:

1 Web Exercises This edition adds all-new end-of-chapter Web Exercises.

These require that students collect information from online sources or useonline resources to enhance their learning experience The Web Exercises arerelatively quick and easy to complete, while still accomplishing the goal offamiliarizing students with online sources of data

2 Web Sources Much of the data used to create the many tables and charts were

collected from online sources Wherever a Web URL is available, it is exactlyreported as the source The interested student or instructor can use this URL tosee what has happened since the chart or table was created

3 Marginal Web References In addition to listing the sources of data used to

create the charts and graphs, I have also included in the margin URLs to Websites that provide information or data that supplement the text These refer-ences include a brief description of what students will find at the site

Interested students can use these sites to extend their study, and instructors candraw from them to supplement their lecture notes Because the URLs for Websources and references do sometimes change, the Mishkin Companion WebSite at www.aw.com/mishkinwill provide the new URLs when they are needed

E-Finance Boxes. To illustrate how electronic technology has increasingly ated financial markets and institutions, I have included the all-new E-Financeboxes, described earlier, to show the ongoing real-world impact of this remarkabledevelopment

perme-As textbooks go into later editions, they often grow in length Over the years, I haveresisted this tendency, and in this edition have made even greater efforts to stream-line the book Despite the addition of a lot of new material, the book is substantiallyshorter Moreover, at the suggestion of reviewers, I have moved the discussion ofrational expectations and efficient markets earlier in the book, to Chapter 7 I havealso shifted the material on the foreign exchange market and the determination ofexchange rates to Chapter 19 so that it comes immediately before the chapter onthe international financial system, allowing this material to be taught together

The Web site for this book, www.aw.com/mishkin, has allowed me to produce alarge amount of new material for the book without lengthening the text, because wehave placed this material in appendices on the Web site The appendices include:

Chapter 2: Financial Market InstrumentsChapter 4: Measuring Interest-Rate Risk: DurationChapter 5: Models of Asset Pricing

Chapter 5: Applying the Asset Market Approach to a Commodity Market:

The Case of GoldChapter 9: Duration Gap AnalysisChapter 9: Measuring Bank PerformanceChapter 11: Evaluating FDICIA and Other Proposed Reforms of the Bank

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Chapter 15: The Fed’s Balance Sheet and the Monetary BaseChapter 16: The M2 Money Multiplier

Chapter 16: Explaining the Behavior of the Currency RatioChapter 22: A Mathematical Treatment of the Baumol-Tobin and Tobin Mean

Variance ModelChapter 22: Empirical Evidence on the Demand for Money

Chapter 24: Algebra of the ISLM Model

Chapter 25: Aggregate Supply and the Phillips CurveInstructors can either use these appendices in class to supplement the material inthe textbook, or recommend them to students who want to expand their knowledge

of the money and banking field

Flexibility

In using previous editions, adopters, reviewers, and survey respondents have tinually praised this text’s flexibility There are as many ways to teach money, bank-ing, and financial markets as there are instructors To satisfy the diverse needs ofinstructors, the text achieves flexibility as follows:

con-• Core chapters provide the basic analysis used throughout the book, and otherchapters or sections of chapters can be used or omitted according to instructorpreferences For example, Chapter 2 introduces the financial system and basicconcepts such as transaction costs, adverse selection, and moral hazard Aftercovering Chapter 2, the instructor may decide to give more detailed coverage

of financial structure by assigning Chapter 8, or may choose to skip Chapter 8and take any of a number of different paths through the book

• The text also allows instructors to cover the most important issues in monetary

theory and policy without having to use the ISLM model in Chapters 23 and

24, while more complete treatments of monetary theory make use of the ISLM

chapters

• The internationalization of the text through marked international sections withinchapters, as well as through complete separate chapters on the foreign exchangemarket and the international monetary system, is comprehensive yet flexible.Although many instructors will teach all the international material, others willnot Instructors who want less emphasis on international topics can easily skipChapter 19 on the foreign exchange market and Chapter 20 on the internationalfinancial system and monetary policy The international sections within chaptersare self-contained and can be omitted with little loss of continuity

To illustrate how this book can be used for courses with varying emphases, eral course outlines are suggested for a semester teaching schedule More detailedinformation about how the text can be used flexibly in your course is available inthe Instructor’s Manual

sev-• General Money and Banking Course: Chapters 1–5, 9–11, 14, 17, 18, 25, 27,

with a choice of 6 of the remaining 15 chapters

• General Money and Banking Course with an International Emphasis: Chapters 1–5,

9–11, 14, 17–20, 25, 27 with a choice of 4 of the remaining 13 chapters

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• Financial Markets and Institutions Course: Chapters 1–13, with a choice of 6 of

the remaining 15 chapters

• Monetary Theory and Policy Course: Chapters 1–5, 14, 15, 17, 18, 21, 25–28,

with a choice of 5 of the remaining 14 chapters

Pedagogical Aids

In teaching theory or its applications, a textbook must be a solid motivational tool

To this end, I have incorporated a wide variety of pedagogical features to make thematerial easy to learn:

1 Previews at the beginning of each chapter tell students where the chapter is

heading, why specific topics are important, and how they relate to other topics

in the book

2 Applications, numbering more than 50, demonstrate how the analysis in the

book can be used to explain many important real-world situations A special set

of applications, called “Reading the Wall Street Journal,” shows students how to

read daily columns in this leading financial newspaper

3 “Following the Financial News” boxes introduce students to relevant news

articles and data that are reported daily in the press, and explain how to readthem

4 “Inside the Fed” boxes give students a feel for what is important in the

oper-ation and structure of the Federal Reserve System

5 Global boxes include interesting material with an international focus.

6 E-Finance boxes relate how changes in technology have affected financial

mar-kets or institutions

7 Special-interest boxes highlight dramatic historical episodes, interesting

ideas, and intriguing facts related to the subject matter

8 Study Guides are highlighted statements scattered throughout the text that

provide hints to the student on how to think about or approach a topic

9 Summary tables provide a useful study aid in reviewing material.

10 Key statements are important points set in boldface italic type so that students

can easily find them for later reference

11 Graphs with captions, numbering more than 150, help students clearly

understand the interrelationship of the variables plotted and the principles ofanalysis

12 Summary at the end of each chapter lists the main points covered.

13 Key terms are important words or phrases, boldfaced when they are defined

for the first time and listed by page number at the end of the chapter

14 End-of-chapter questions and problems, numbering more than 400, help

students learn the subject matter by applying economic concepts, including aspecial class of problems that students find particularly relevant, under theheading “Using Economic Analysis to Predict the Future.”

15 Web Exercises encourage students to collect information from online sources

or use online resources to enhance their learning experience

16 Web sources report the Web URL source of the data used to create the many

tables and charts

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17 Marginal Web references point the student to Web sites that provide

infor-mation or data that supplement the text material

18 Glossary at the back of the book provides definitions of all the key terms.

19 Answers section at the back of the book provides solutions to half of the

ques-tions and problems (marked by *)

An Easier Way to Teach Money, Banking, and Financial Markets

The demands for good teaching have increased dramatically in recent years Tomeet these demands, I have provided the instructor with supplementary materials,unlike those available with any competing text, that should make teaching thiscourse substantially easier

This book comes with not only full-color Microsoft PowerPoint electronictransparencies of all the figures and tables but also full-color overhead transparen-cies Furthermore, the Instructor’s Manual contains transparency masters of the lec-ture notes, perforated so that they can be easily detached for use in class

The lecture notes are comprehensive and outline all the major points covered

in the text They have been class-tested successfully—they are in fact the notes that

I use in class—and they should help other instructors prepare their lectures as theyhave helped me Some instructors might use these lecture notes as their own classnotes and prefer to teach with a blackboard But for those who prefer to teach withvisual aids, the PowerPoint presentation and the full-color transparencies of the fig-ures and tables afford the flexibility to take this approach

I am also aware that many instructors want to make variations in their lecturesthat depart somewhat from material covered in the text For their convenience, theentire set of lecture notes has been put on the Instructor’s Resource CD-ROM usingMicrosoft Word Instructors can modify the lecture notes as they see fit for their ownuse, for class handouts, or for transparencies to be used with an overhead projector.The Instructor’s Resource CD-ROM also offers the entire contents of theInstructor’s Manual, which includes chapter outlines, overviews, and teaching tips;answers to the end-of-chapter problems that are not included in the text Using thishandy feature, instructors can prepare student handouts such as solutions to prob-lem sets made up of end-of-chapter problems, the outline of the lecture that day, oressay discussion questions for homework I have used handouts of this type in myteaching and have found them to be very effective Instructors have my permissionand are encouraged to photocopy all of the materials on the CD-ROM and use them

as they see fit in class

Supplements Program to Accompany the Seventh Edition

The Economics of Money, Banking, and Financial Markets, Seventh Edition, includes

the most comprehensive program of supplements of any money, banking, andfinancial markets textbook These items are available to qualified domestic adopters,but in some cases may not be available to international adopters

1 Instructor’s Resource Manual, a print supplement prepared by me and

offer-ing conventional elements such as sample course outlines, chapter outlines, and

For the Professor

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answers to questions and problems in the text In addition, the manual contains

my Lecture Notes, numbering more than 300, in transparency master format;

these notes comprehensively outline the major points covered in the textbook

2 Instructor’s Resource CD-ROM, which conveniently holds the MS Word files

to the Instructor’s Manual, the Computerized Test Bank, and the MS PowerPointLecture Presentation

3 Full-Color Transparencies, numbering more than 150, for all of the figures,

tables, and summary tables

4 PowerPoint Electronic Lecture Presentation, numbering more than 300

images, which include all the book’s figures and tables in full color, plus the ture notes Available on the Instructor’s Resource CD-ROM

lec-5 Printed Test Bank by James Butkiewicz of the University of Delaware,

compris-ing more than 4,500 multiple-choice and essay test items, many with graphs

6 Computerized Test Bank, allowing the instructor to produce exams efficiently.

This product consists of the multiple-choice and essay questions in the printedTest Bank and offers editing capabilities It is available in Macintosh and Windowsversions on the Instructor’s Resource CD-ROM

1 Study Guide and Workbook, prepared by Erick Eschker of Humboldt State

University, John McArthur of Wofford College, and me, which includes ter synopses and completions, exercises, self-tests, and answers to the exercisesand self-tests

chap-2 Readings in Money, Banking, and Financial Markets, edited by James W.

Eaton of Bridgewater College and me, updated annually, with over half the cles new each year to enable instructors to keep the content of their course cur-rent throughout the life of an edition of the text The readings are availablewithin MyEconLab (see next section)

arti-Course Management with MyEconLab

Every student who buys a new textbook receives a prepaid subscription to

MyEconLab New to the Seventh Edition of The Economics of Money, Banking, and

Financial Markets, MyEconLab delivers rich online content and innovative learning

tools to your classroom Instructors who use MyEconLab gain access to powerfulcommunication and assessment tools, and their students receive access to the addi-tional learning resources described next

MyEconLab delivers the content and tools your students need to succeed withinAddison-Wesley’s innovative CourseCompass system Students whose instructorsuse MyEconLab gain access to a variety of resources:

• The complete textbook online, in PDF format, with animated graphs that helpstudents master the key concepts

• MathXL for Economics—a powerful tutorial to refresh students on the basics

of creating and interpreting graphs; solving applied problems using graphs; culating ratios and percentages; performing calculations; calculating average,median, and mode; and finding areas

cal-• Research Navigator™—a one-stop research tool, with extensive help on the entireresearch process, including evaluating sources, drafting, and documentation, as

Students and

MyEconLab

For the Student

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well as access to a variety of scholarly journals and publications, a complete

year of search for full-text articles from the New York Times, and a “Best of the

Web” Link Library of peer-reviewed Web sites

• eThemes of the Times—thematically related articles from the New York Times,

accompanied by critical-thinking questions

• Readings on Money, Banking, and Financial Markets—edited by James W Eaton

of Bridgewater College and me and updated annually, with a focus on articlesfrom Federal Reserve publications and economics and finance journals

• Additional study resources such as self-testing quizzes for each chapter, aweekly current events feature, online glossary term flashcards, and additionalarticles and supplemental materials

The Student Access Kit that arrives bundled with all new books walks studentsstep-by-step through the registration process

With MyEconLab, instructors can customize existing content and add their own.They can manage, create, and assign tests to students, choosing from our Test Bank,

or upload tests they’ve written themselves MyEconLab also includes advancedtracking features that record students’ usage and performance and a Gradebook fea-

ture to see students’ test results Please refer to the Instructor Quick Start Guide or

contact your Addison-Wesley sales representative to set up MyEconLab for yourcourse

Acknowledgments

As always in so large a project, there are many people to thank My gratitude goes

to Victoria Warneck, economics editor at Addison Wesley; Sylvia Mallory, ExecutiveDevelopment Manager; and Jane Tufts, the best development editor in the business

I also have been assisted by comments from my colleagues at Columbia and from

my students

In addition, I have been guided by the thoughtful commentary of outsidereviewers and correspondents, especially Jim Eaton Their feedback has made this

a better book In particular, I thank the following:

Burton Abrams, University of DelawareFrancis W Ahking, University of ConnecticutMohammed Akacem, Metropolitan State College of DenverHarjit K Arora, Le Moyne College

Stacie Beck, University of DelawareGerry Bialka, University of North FloridaDaniel K Biederman, University of North DakotaJohn Bishop, East Carolina University

Daniel Blake, California State University, NorthridgeRobert Boatler, Texas Christian University

Henning Bohn, University of California, Santa BarbaraMichael W Brandl, University of Texas at AustinOscar T Brookins, Northeastern UniversityWilliam Walter Brown, California State University, Northridge

Instructors and

MyEconLab

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James L Butkiewicz, University of Delaware

Colleen M Callahan, Lehigh University

Ray Canterbery, Florida State University

Sergio Castello, University of Mobile

Jen-Chi Cheng, Wichita State University

Patrick Crowley, Middlebury College

Sarah E Culver, University of Alabama, Birmingham

Maria Davis, San Antonio College

Ranjit S Dighe, State University of New York, Oswego

Richard Douglas, Bowling Green University

Donald H Dutkowsky, Syracuse University

Richard Eichhorn, Colorado State University

Paul Emberton, Southwest Texas State University

Erick Eschker, Humboldt State University

Robert Eyler, Sonoma State University

L S Fan, Colorado State University

Sasan Fayazmanesh, California State University, Fresno

Dennis Fixler, George Washington University

Gary Fleming, Roanoke College

Grant D Forsyth, Eastern Washington University

James Gale, Michigan Technological University

Stuart M Glosser, University of Wisconsin, Whitewater

Fred C Graham, American University

Jo Anna Gray, University of Oregon

David Gulley, Bentley College

Daniel Haak, Stanford University

Larbi Hammami, McGill University

Bassan Harik, Western Michigan University

J C Hartline, Rutgers University

Scott E Hein, Texas Tech University

Robert Stanley Herren, North Dakota State University

Jane Himarios, University of Texas, Arlington

Dar-Yeh Hwang, National Taiwan University

Jayvanth Ishwaran, Stephen F Austin State University

Jonatan Jelen, Queens College and City College of CUNY

U Jin Jhun, State University of New York, Oswego

Frederick L Joutz, George Washington University

Bryce Kanago, University of Northern Iowa

Magda Kandil, International Monetary Fund

George G Kaufman, Loyola University Chicago

Richard H Keehn, University of Wisconsin, Parkside

Elizabeth Sawyer Kelly, University of Wisconsin, Madison

Jim Lee, Fort Hays State University

Robert Leeson, University of Western Ontario

Tony Lima, California State University, Hayward

Bernard Malamud, University of Nevada, Las Vegas

Marvin Margolis, Millersville University

Stephen McCafferty, Ohio State University

James McCown, Ohio State University

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Cheryl McGaughey, Angelo State University

W Douglas McMillin, Louisiana State UniversityWilliam Merrill, Iowa State University

Carrie Meyer, George Mason UniversityStephen M Miller, University of ConnecticutMasoud Moghaddam, Saint Cloud State UniversityThomas S Mondschean, DePaul UniversityClair Morris, U.S Naval Academy

Jon Nadenichek, California State University, NorthridgeJohn Nader, Grand Valley State University

Leonce Ndikumana, University of Massachusetts, AmherstRay Nelson, Brigham Young University

Inder P Nijhawan, Fayetteville State UniversityNick Noble, Miami University of Ohio

Dennis O’Toole, Virginia Commonwealth UniversityMark J Perry, University of Michigan, Flint

Chung Pham, University of New MexicoMarvin M Phaup, George Washington UniversityGanga P Ramdas, Lincoln University

Ronald A Ratti, University of Missouri, ColumbiaHans Rau, Ball State University

Prosper Raynold, Miami UniversityJavier Reyes, Texas A&M UniversityJack Russ, San Diego State UniversityRobert S Rycroft, Mary Washington CollegeLynn Schneider, Auburn University, MontgomeryWalter Schwarm, Colorado State UniversityHarinder Singh, Grand Valley State UniversityLarry Taylor, Lehigh University

Leigh Tesfatsion, Iowa State UniversityFrederick D Thum, University of Texas, AustinRobert Tokle, Idaho State University

C Van Marrewijk, Erasmus UniversityChristopher J Waller, Indiana UniversityMaurice Weinrobe, Clark UniversityJames R Wible, University of New HampshirePhilip R Wiest, George Mason UniversityWilliam Wilkes, Athens State UniversityThomas Williams, William Paterson UniversityLaura Wolff, Southern Illinois University, EdwardsvilleRobert Wright, University of Virginia

Ben T Yu, California State University, Northridge

Ky H Yuhn, Florida Atlantic UniversityJeffrey Zimmerman, Methodist CollegeFinally, I want to thank my wife, Sally; my son, Matthew; and my daughter,Laura, who provide me with a warm and happy environment that enables me to do

my work, and my father, Sydney, now deceased, who a long time ago put me on thepath that led to this book

Frederic S Mishkin

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P a r t I

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