Tiền tệ, ngân hàng và thị trường tài chính bản 10 Mishkin The economics of money, banking and financial market 10th edition Tiền tệ, ngân hàng và thị trường tài chính bản 10 Mishkin The economics of money, banking and financial market 10th edition Tiền tệ, ngân hàng và thị trường tài chính bản 10 Mishkin The economics of money, banking and financial market 10th edition Tiền tệ, ngân hàng và thị trường tài chính bản 10 Mishkin The economics of money, banking and financial market 10th edition
T h e E c o no m i c s o f Money, Banking, and Financial Markets The Pearson Series in Economics Abel/Bernanke/Croushore Macroeconomics* Hartwick/Olewiler The Economics of Natural Resource Use O’Sullivan/Sheffrin/Perez Economics: Principles, Applications and Tools* Bade/Parkin Foundations of Economics* Heilbroner/Milberg The Making of the Economic Society Parkin Economics* Berck/Helfand The Economics of the Environment Heyne/Boettke/Prychitko The Economic Way of Thinking Bierman/Fernandez Game Theory with Economic Applications Hoffman/Averett Women and the Economy: Family, Work, and Pay Perloff Microeconomics* Microeconomics: Theory and Applications with Calculus* Blanchard Macroeconomics* Holt Markets, Games and Strategic Behavior Blau/Ferber/Winkler The Economics of Women, Men and Work Hubbard/O’Brien Economics* Money, Banking, and the Financial System* Boardman/Greenberg/Vining/Weimer Cost-Benefit Analysis Boyer Principles of Transportation Economics Branson Macroeconomic Theory and Policy Brock/Adams The Structure of American Industry Bruce Public Finance and the American Economy Hubbard/O’Brien/Rafferty Macroeconomics* Hughes/Cain American Economic History Husted/Melvin International Economics Jehle/Reny Advanced Microeconomic Theory Perman/Common/McGilvray/Ma Natural Resources and Environmental Economics Phelps Health Economics Pindyck/Rubinfeld Microeconomics* Riddell/Shackelford/Stamos/Schneider Economics: A Tool for Critically Understanding Society Ritter/Silber/Udell Principles of Money, Banking & Financial Markets* Johnson-Lans A Health Economics Primer Roberts The Choice: A Fable of Free Trade and Protection Keat/Young Managerial Economics Rohlf Introduction to Economic Reasoning Klein Mathematical Methods for Economics Ruffin/Gregory Principles of Economics Krugman/Obstfeld/Melitz International Economics: Theory & Policy* Sargent Rational Expectations and Inflation Laidler The Demand for Money Sawyer/Sprinkle International Economics Cooter/Ulen Law & Economics Leeds/von Allmen The Economics of Sports Scherer Industry Structure, Strategy, and Public Policy Downs An Economic Theory of Democracy Leeds/von Allmen/Schiming Economics* Ehrenberg/Smith Modern Labor Economics Lipsey/Ragan/Storer Economics* Schiller The Economics of Poverty and Discrimination Ekelund/Ressler/Tollison Economics* Lynn Economic Development: Theory and Practice for a Divided World Carlton/Perloff Modern Industrial Organization Case/Fair/Oster Principles of Economics* Caves/Frankel/Jones World Trade and Payments: An Introduction Chapman Environmental Economics: Theory, Application, and Policy Farnham Economics for Managers Folland/Goodman/Stano The Economics of Health and Health Care Fort Sports Economics Froyen Macroeconomics Fusfeld The Age of the Economist Gerber International Economics* Gordon Macroeconomics* Greene Econometric Analysis Gregory Essentials of Economics Gregory/Stuart Russian and Soviet Economic Performance and Structure *denotes MyEconLab titles Miller Economics Today* Understanding Modern Economics Miller/Benjamin The Economics of Macro Issues Miller/Benjamin/North The Economics of Public Issues Mills/Hamilton Urban Economics Mishkin The Economics of Money, Banking, and Financial Markets* The Economics of Money, Banking, and Financial Markets, Business School Edition* Macroeconomics: Policy and Practice* Sherman Market Regulation Silberberg Principles of Microeconomics Stock/Watson Introduction to Econometrics Introduction to Econometrics, Brief Edition Studenmund Using Econometrics: A Practical Guide Tietenberg/Lewis Environmental and Natural Resource Economics Environmental Economics and Policy Todaro/Smith Economic Development Waldman Microeconomics Waldman/Jensen Industrial Organization: Theory and Practice Murray Econometrics: A Modern Introduction Weil Economic Growth Nafziger The Economics of Developing Countries Williamson Macroeconomics Visit www.myeconlab.com to learn more The Economics of Money, Banking, and Financial Markets Te n t h E d i t i o n Frederic S Mishkin Columbia University Boston Columbus Indianapolis New York San Francisco Upper Saddle River Amsterdam Cape Town Dubai London Madrid Milan Munich Paris Montreal Toronto Delhi Mexico City Sao Paulo Sydney Hong Kong Seoul Singapore Taipei Tokyo Editorial Director: Sally Yagan Editor in Chief: Donna Battista Acquisitions Editor: Noel Kamm Seibert Editorial Project Manager: Carolyn Terbush Editorial Assistant: Emily Brodeur VP/Director of Marketing: Patrice Jones Director of Marketing: Maggie Moylan Executive Marketing Manager: Lori DeShazo Marketing Assistant: Kim Lovato Senior Managing Editor: Nancy H Fenton Senior Production Project Manager: Kathryn Dinovo Permissions Project Supervisor: Michael Joyce Senior Manufacturing Buyer: Carol Melville Cover Designer: Jonathan Boylan Text Designer: Cenveo Publisher Services/Nesbitt Graphics, Inc Media Director: Susan Schoenberg Senior Media Producer: Melissa Honig Content Lead, MyEconLab: Noel Lotz Supplements Editors: Alison Eusden and Kathryn Dinovo Full-Service Project Management/Composition: Cenveo Publisher Services/Nesbitt Graphics, Inc Printer/Binder: R R Donnelley/Willard Cover Printer: Lehigh-Phoenix Color/Hagerstown Text Font: ITC Berkeley Oldstyle Std Cover Art: Federal Reserve Seal, Nomad_Soul/Shutterstock; Wall Street Bull, © emin kuliyev/Shutterstock.com; Euro Banknotes, © vinz89/Shutterstock.com; Rubik’s Cube, © Icefields/Dreamstime.com Credits and acknowledgments borrowed from other sources and reproduced, with permission, in this textbook appear on the appropriate page within text or on page C-1 Microsoft® and Windows® are registered trademarks of the Microsoft Corporation in the U.S.A and other countries Screen shots and icons reprinted with permission from the Microsoft Corporation This book is not sponsored or endorsed by or affiliated with the Microsoft Corporation Copyright © 2013, 2010, 2007 by Frederic S Mishkin All rights reserved Manufactured in the United States of America This publication is protected by Copyright, and permission should be obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise To obtain permission(s) to use material from this work, please submit a written request to Pearson Education, Inc., Permissions Department, One Lake Street, Upper Saddle River, New Jersey 07458, or you may fax your request to 201-236-3290 Many of the designations by manufacturers and sellers to distinguish their products are claimed as trademarks Where those designations appear in this book, and the publisher was aware of a trademark claim, the designations have been printed in initial caps or all caps Library of Congress Cataloging-in-Publication Data Mishkin, Frederic S The economics of money, banking & financial markets / Frederic S Mishkin – 10th ed.(and the 3rd ed of the business ed.) p cm Includes bibliographical references and index ISBN 13: 978-0-13-277024-8 (main ed : alk paper) ISBN 10: 0-13-277024-5 (main ed : alk paper) ISBN 13: 978-0-13-274137-8 (business ed : alk paper) ISBN 10: 0-13-274137-7 (business ed : alk paper) Finance Money Banks and banking I Title II Title: The economics of money, banking, and financial markets HG173.M632 2013 332–dc23 2011045340 10 www.pearsonhighered.com ISBN 10: 0-13-277024-5 ISBN 13: 978-0-13-277024-8 www.rasabourse.com To Sally www.rasabourse.com www.rasabourse.com Brief Contents PART Introduction 1 Why Study Money, Banking, and Financial Markets? 2 An Overview of the Financial System 25 What Is Money? 52 PART Financial Markets 65 PART Financial Institutions 161 10 11 12 PART An Economic Analysis of Financial Structure 162 Financial Crises 185 Banking and the Management of Financial Institutions 213 Economic Analysis of Financial Regulation 242 Banking Industry: Structure and Competition 269 Central Banking and the Conduct of Monetary Policy 301 13 14 15 16 PART Understanding Interest Rates 66 The Behavior of Interest Rates 88 The Risk and Term Structure of Interest Rates 118 The Stock Market, the Theory of Rational Expectations, and the Efficient Market Hypothesis 141 Central Banks and the Federal Reserve System 302 The Money Supply Process 325 The Tools of Monetary Policy 355 The Conduct of Monetary Policy: Strategy and Tactics 380 International Finance and Monetary Policy 421 17 The Foreign Exchange Market 422 18 The International Financial System 446 PART Monetary Theory 479 19 20 21 22 23 24 25 Quantity Theory, Inflation, and the Demand for Money 480 The IS Curve 497 The Monetary Policy and Aggregate Demand Curves 515 Aggregate Demand and Supply Analysis 528 Monetary Policy Theory 570 The Role of Expectations in Monetary Policy 589 Transmission Mechanisms of Monetary Policy 608 vii www.rasabourse.com This page intentionally left blank www.rasabourse.com Contents PART Introduction C hapter Why Study Money, Banking, and Financial Markets? Why Study Financial Markets? The Bond Market and Interest Rates The Stock Market Why Study Financial Institutions and Banking? Structure of the Financial System Financial Crises Banks and Other Financial Institutions Financial Innovation Why Study Money and Monetary Policy? Money and Business Cycles Money and Inflation Money and Interest Rates 10 Conduct of Monetary Policy 10 Fiscal Policy and Monetary Policy 11 Why Study International Finance? 12 The Foreign Exchange Market 12 The International Financial System 14 How We Will Study Money, Banking, and Financial Markets 14 Exploring the Web 15 Collecting and Graphing Data 15 Web Exercises 15 Concluding Remarks 16 Summary 17 • Key Terms 18 • Questions 19 • Applied Problems 20 • Web Exercises 20 • Web References 21 App endix to C h apt e r Defining Aggregate Output, Income, the Price Level, and the Inflation Rate 22 Aggregate Output and Income 22 Real Versus Nominal Magnitudes 22 Aggregate Price Level 23 Growth Rates and the Inflation Rate 24 C hapter An Overview of the Financial System 25 Function of Financial Markets 25 Structure of Financial Markets 27 Debt and Equity Markets 27 Primary and Secondary Markets 28 ix www.rasabourse.com as medium of exchange, 53–54 and monetary policy, 7–12 payments system, evolution of, 56–58 smart cards, 57 as store of value, 55 as unit of account, 54–55 Web references, 64 Money aggregates, 59–62, 59t See also M1 monetary aggregate; M2 monetary aggregate defined, 59 measures of, 59t Money center banks, 224 Money demand See Demand for money Money growth average inflation rate compared, 10f and business cycle, 8f inflation and, 485f, 486f interest rates and, 11f, 114f Money market conditions, targeting, 414–415 Money market deposit accounts (MMDAs), 59t, 60 Money Market Investor Funding Facility (MMIFF), 373b Money market mutual funds, 290 development of, 277 as financial innovation, 278–279 as monetary aggregate component, 59t, 60 panic of 2008, 279 primary assets and liabilities of, 42t value of assets, 43t Money markets, 29–30 defined, 29 instruments of, 30–32, 30t See also Certificates of deposit (CDs); Commercial paper; Federal funds; Repurchase agreements; U.S Treasury Bills rates, 31b Money multiplier (m), 342–345 deriving, 342–343 excess reserves ratio and, 344 n.9 intuition behind, 344 Index Money supply, 325–351 See also Money aggregate price level and, 9f control of monetary base and, 327–333 effects of foreign exchange market on, 467–468 exchange rate volatility and, 438 factors determining, 340–341 Federal Reserve’s balance sheet and, 325–327 financial crisis (2007–2009) and, 348–351 foreign exchange interventions and, 446–449 during Great Depression bank panics, 346–348 liquidity preference framework, 108t, 109–111, 109f, 110f monetary base and (1929– 1933), 349f money multiplier and, 342–345 multiple deposit creation, simple model of, 334–340 overview of money supply process, 341–342 participants in money supply process, 325 process, 325, 341–342 rate of growth and interest rates, 111–114, 113f, 114f response to changes, 345 Web references, 354 Monitoring See also Information banks and credit risk management, 229–230 and principal–agent problem, 174 restrictive covenants, 176–177 Moral hazard, 40–41 and choice between debt and equity contracts, 172–175 and debt contracts, 172–175, 176–178 defined, 40, 172 financial institutions and, 166– 167, 172–178 government safety net and, 245 for lenders of last resort, 465 low bank capital and, 248 www.rasabourse.com I-23 principal–agent problem, 173–175 solutions, 178t too-big-to-fail policy and, 246 worldwide banking crises and, 261 Morgan Stanley, 271, 292b Mortgage-backed securities as capital market instrument, 33 defined, 33 and Global Financial Crisis of 2007–2009, 192 subprime crisis (2007–2008), 617 Mortgages adjustable-rate, 273 as capital market instrument, 32t, 33 defined, 33 interest rates discussed in the media, 33b Movements along supply or demand curve, 94 MP curve See Monetary policy (MP) curve mpc (marginal propensity to consume), 499, 502 n.3 Multiple deposit creation, 334–340 banking system and, 335–338, 337t critique of model for, 339–340 defined, 334 formula for, 338 by single bank, 334–335 Municipal bonds as capital market instruments, 32t, 34 Muth, John See Rational expectations theory Mutual funds primary assets and liabilities of, 42t value of assets, 43t Mutual savings banks, 42, 293 primary assets and liabilities of, 42t shares, 42 value of assets, 43t NAIRU (nonaccelerating inflation rate of unemployment), 405 I-24 Index NASDAQ, 28 Composite index, 37b National Association of Securities Dealers Automated Quotation System See NASDAQ National Bank Act of 1863, 271 National banks, 271 examining body, 250 Federal Reserve System and, 306–307 National Central Banks (NCBs), 319 National Credit Union Administration (NCUA), 46t, 293 National Credit Union Share Insurance Fund (NCUSIF), 47, 293 NationsBank, 288 Nationwide banking, 288, 289–290 Natural rate of output, 383, 533 Natural rate of unemployment, 382, 533 Negative aggregate demand shocks, 596, 597f Negative aggregate supply shocks, credibility and, 598–599, 598f Negative supply shocks, 549f, 550–552, 554 Negotiable bank certificates of deposit See Certificates of deposit (CDs) Net export function, 502 Net exports, 501–502, 528, 531t, 532 in aggregate demand, 498 autonomous, 502, 510, 511t exchange rate effects on, 610 real interest rates and, 501 Net stable funding ratio (NSFR), 257 Net worth definitions, 172 “lemons problem” and, 172 and moral hazard in debt contracts, 176 Netherlands, government bailout in, 200b New York Stock Exchange (NYSE), 28, 307b New Zealand, inflation targeting in, 386, 387f NINJA loan, 254b Nixon, Richard, political business cycle and, 593b No-doc loan, 254b Nominal anchor credible, benefits of, 595–596 implicit, U.S monetary policy with, 391–393 pegging exchange rate to, 603– 604 See also Exchange-rate targeting price stability and, 381 Nominal GDP, 22 Nominal interest rates, 83f behavior of See Interest rates, behavior of cash flow transmission mechanism and, 614 defined, 81 interest-rate transmission mechanism and, 609 monetary policy and, 515–516, 617 real interest rates distinguished, 81–82 Taylor principle and, 516–517 value of U.S dollar and, 438– 439, 439f Nonaccelerating inflation rate of unemployment (NAIRU), 405 Nonactivists, 580b and monetary policy theory, 578 rules, for conducting monetary policy, 592 Nonbank public, open market purchase from, 328–330 Nonborrowed monetary base (MBn), 333, 340, 341t Nonborrowed reserves, targeting on, 401–402, 401f, 416–417 Nonconventional monetary policy tools in economic revival, 618 during Global Financial Crisis, 371–375 Nontransaction deposits and bank balance sheet, 214f, 215 www.rasabourse.com NOW accounts, required reserves, 369, 369 n.6 NYSE See New York Stock Exchange Obama, Barack, administration of, 508 Obama Fiscal Stimulus Package, 508–509, 580b Observability, policy instrument criterion, 403 Off-balance-sheet activities, 235– 238, 247–248, 282 defined, 235 Office of the Comptroller of the Currency, 46–47, 46t, 250, 251, 271, 306 Office of Thrift Supervision (OTS), 46t, 293 Official reserve transactions balance, 451 Offshore deposits, 295, 295 n.2 Oil prices negative supply shocks (1973, 1979, 2007), 599 in 1990s, 608 Okun, Arthur, 568 See also Okun’s law Okun’s law, 568–569, 568f, 568 n.7 On-site examinations, financial institutions, 250 One-period valuation model, 142–143 Open market operations, 304f, 306, 328–331, 364–366 advantages of, 370 defensive, 364 defined, 328 dynamic, 364 effects on federal funds rate, 358–360, 359f of European Central Bank, 376 in 1920s, 412 purchase from bank, 328 purchase from the nonbank public, 328–330 sale, 330–331 trading desk management, 365b Open market purchase, 328 Open market sale, 328, 330–331 Operating instrument See Policy instrument, choosing Opportunity cost, 105 “The Optimal Degree of Commitment to an Intermediary Monetary Target” (Rogoff), 604 n.6 Optimal forecast, 147 Organization for Economic Cooperation and Development (OECD), 248 Organized exchanges See Exchanges and exchange markets Originate-to-distribute model and Global Financial Crisis of 2007–2009, 192–193 Output fluctuations in, inflation targeting and, 390 natural rate of, 383, 533 potential, 383, 533 Output gap, 404–405, 534–535, 537t, 538–540, 539f, 568, 568 n.7 Output stability financial stability and, 395 as monetary policy goal, 382–383 Over-the-counter (OTC) markets, 29 foreign exchange market organized as, 425 Overnight cash rate, 375–376 Overregulation, danger of, 266 Overvaluing of currency, 455 Par value See Face value Paul, Ron, 312 Payment technology, 489 Payments system defined, 56 evolution of, 56–58 Payoff method, FDIC, 243 PCE (personal consumption expenditures) deflator, 23, 529b Pension funds, 44 and capital market instruments, 30 Index primary assets and liabilities of, 42t value of assets, 43t “Perfect storm,” Global Financial Crisis of 2007–2009 as, 479 Permanent supply shocks, 550– 552, 551f, 552 n.5 monetary policy theory, response to, 573–574, 574f, 575f Perpetuity bonds See Consol bonds Persistent output gap, 538–540, 539f Personal consumption expenditures (PCE) deflator, 23, 529b Phelps, Edmund, 563–566 Philippines, speculative attacks and, 462 Phillips, A W., 562 See also Phillips curve Phillips curve, 404–405, 562–567 See also Short-run aggregate supply curve 1950–1969, 564f 1960s, 562, 563b 1970–2010, 564f adaptive expectations, 566–567 after 1960s, 566 Friedman-Phelps analysis, 563–566 long-run, 565f modern, 566–567 rational expectations, 567 n.5 short-run, 565f Physical capital, bank balance sheet, 214f Pigou, A C., 482 n.2 Planned expenditure, and aggregate demand, 497–498 Planned investment spending, 528 in aggregate demand, 498 business expectations and, 500 real interest rates and, 500 types of, 499–500 Plaza Agreement (1987), 469 Policy, monetary See Monetary policy Policy instrument, choosing, 400–402 criteria for, 402–403 Policy Targets Agreement, 386 www.rasabourse.com I-25 Policy trilemma, 456, 457f Political business cycle, 315, 593 and Richard Nixon, 593b Portfolio balance effect, 450 n.2 Portfolio choice theory, 90, 490–491 Portfolio of assets, 39 Portfolio theory, 88 money demand, 490–491 Positive aggregate demand shocks, 596, 597f Positive supply shocks, 552, 553f Potential output, 383, 533 Pound, British exchange rate on (1990–2011), 423f foreign exchange crisis (1992) and, 460–461, 460f PPP See Theory of purchasing power parity (PPP) Precautionary motive, money demand, 489 Predictability, policy instrument criterion, 403 Preferred habitat theory, 132–134 compared with expectations theory, 133f defined, 132–134 Prescott, Edward, 589 n.2 Present discounted value See Present value Present value, 66–69 definitions, 66–67 President, U.S., Federal Reserve System and, 313 Price level See also Aggregate price level unanticipated, as monetary transmission mechanism, 615, 618–619 Price level changes, liquidity preference framework, 108t, 109, 109f Price-level effect, 107, 108t, 111 Price shocks, 535, 537t, 538, 538f Price stability, 320 exchange-rate targeting and, 469 financial stability and, 395 mandates for, 384–385 as monetary policy goal, 380– 383, 385 I-26 Index Price stability (continued) monetary transmission mechanisms and, 618–619 nominal anchor role in, 381 time-inconsistency problem in, 381–382 Price stickiness, 535 Prices, 54–55 Primary credit, 366, 366 n.4 Primary Dealer Credit Facility (PDCF), 373b Primary dealers, open market operations, 364 Primary markets, 28–29 See also Investment banks Prime rates, 31b Principal, 67 Principal–agent problem, 237b equity contracts, 173–175, 175 n.3 and Global Financial Crisis of 2007–2009, 192–193 solutions, 178t Printing money, 487 Private production, “lemons problem” and, 168–169 Procyclical monetary policy, 414–415 Producer price index (PPI), 529b Productivity, foreign exchange rates and, 428–429 Profits decline in, banks’ responses to, 282–283 financial innovation and, 272 Protectionism, 469 Prudential supervision See Financial (prudential) supervision Public Company Accounting Oversight Board (PCAOB), 252 Public interest view, bureaucratic behavior, 317 Purchase and assumption method, FDIC, 243–244 Purchases, government, 528, 530, 531t Purchasing Power of Money (Fisher), 480–481 Purchasing power parity (PPP) theory of, 426–427 United States/United Kingdom (1973–2011), 427f QE2 (Quantitative Easing 2), 372 Quantitative easing, 372, 374 Quantitative Easing (QE2), 372 Quantity theory of money, 480–484 defined, 482 demand for money, 482 equation of exchange, 480–482 and inflation, 483–484 price level and, 483 velocity of money and, 480–482 Quotas, 428 Rate of capital gain, 78 Rate of inflation See Inflation rate Rate of return See Returns Ratings, bonds, 120–123, 121t Rational expectations theory, 146– 156, 567 n.5, 591 See also Efficient market hypothesis defined, 147 formal statement of, 148 implications of, 149 monetary policy and, 589–590 rationale behind, 148–149 revolution, in monetary policy, 589–590 Reagan, Ronald, administration of, 313 budget deficits, 603 Real bills doctrine, 411 Real business cycle theory, 550–552 Real estate loans bank balance sheet, 214f commercial, 282 Real exchange rate, 426 Real GDP, 23 Real interest rates, 83f and aggregate output relationship See IS curve calculating, 82 defined, 81 easing of monetary policy and, 609 federal funds rate and, 515–516 www.rasabourse.com interest-rate transmission mechanism and, 609 long-term vs short-term, 609, 618 nominal interest rates distinguished, 81–82 planned investment spending and, 500 Taylor principle and, 516–517 Real money balances, 489 Real terms, defined, 82 Recessions of 1980, 608 of 1981–1982, 608 of 2007–2009 See Global Financial Crisis of 2007–2009 defined, global See Global Financial Crisis of 2007–2009 subprime mortgage crisis and See Subprime mortgage crisis (2007–2008) Recognition lag, 579 Rediscounting, 411 Redlining, 254 Refinancing operations, 376 Regulation See Financial regulation; specific topics and legislation Regulation B, 253 Regulation K, 296 Regulation Q, 47, 278, 281 Regulation Z, 253, 254b Regulatory arbitrage, 248 Reinhart, Carmen, 393 Reinhart, Vincent, 393 Reinvestment risk, 80 n.5 Relative price levels, foreign exchange rates and, 428 Repos See Repurchase agreements Repurchase agreements, 364, 366 defined, 31–32 Global Financial Crisis of 2007– 2009, 196 Required reserve ratio (rr), 327, 340, 341t defined, 216 money multiplier and, 345 n.10 Required reserves, 327 as bank asset, 216 demand curve for reserves and, 356 Reserve Bank of New Zealand Act of 1989, 386 Reserve currency, 453 Reserve Primary Fund, 279b Reserve requirements, 216, 304f See also Required reserve ratio (rr) on checkable deposits, 369, 369 n.6 European Central Bank and, 376 federal funds rate and, 361, 361f as Federal Reserve policy tool, in 1930s, 413–414 financial innovation and, 278 Reserves and bank balance sheet, 214f, 216 banks, 216–217 effects of federal funds rate, 361–362, 361f, 362f international, 446, 452, 457–458 liquidity management and, 220–223 open market operations and, 328–331 supply and demand in market for, 361–362, 361f, 362f t-accounts and, 217–220 Residential housing prices and Global Financial Crisis of 2007–2009, 194, 194f Residential mortgages See Mortgages Residual claimants, 28, 141 Resolution authority under DoddFrank bill, 264 Restrictive covenants banks and credit risk management, 230 defined, 165 monitoring and enforcement of, 176–177 Return on assets (ROA), 226 Return on equity (ROE), 226 Returns coupon-rate bonds, 79t definitions, 77 distinguished from interest rates, 77–81, 79t Index expected, domestic and foreign assets compared, 443–445 Revaluation of currency, 456 Reverse repo, 366 Reverse transactions, 376 Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, 246, 259t, 288 Rigidity inflation targeting and, 389–390 of rules for conducting monetary policy, 593 Risk See also Credit risk; Interestrate risk banks and banking, 229–238 defined, 38–39, 89 as determinant of asset demand, 89–90, 90t inflation hedges, 491 interest rates, 80–81 and money demand, 491 shifts in demand for bonds, 96t, 97 systemic regulation, under Dodd-Frank bill, 264 Risk aversion, 89 Risk management, assessment of, 251–252 Risk premium, 119 Risk sharing and indirect finance, 38–39 Risk structure of interest rates, 118–126 Risky assets, 247 Rogoff, Kenneth, 604, 604 n.6 Rohatyn, Felix, 368b Roosevelt, Franklin Delano, 412 Rs (supply curve of reserves), 357 Russia, financial crisis, 206 n.4 S & P 500 See Standard and Poor’s (S&P) 500 index Samuelson, Paul, 396 Sarbanes-Oxley Act of 2002, 252, 259t Sargent, Thomas, 589, 603 Savings accounts, 52 Savings and loan associations (S&Ls), 42, 259–261, 292–293 bailout of (1989), 261 www.rasabourse.com I-27 primary assets and liabilities of, 42t shares, 42 value of assets, 43t Savings deposits defined, 42 as monetary aggregate component, 59t, 60 Schwartz, Anna Jacobson, 592 n.4 on Great Depression bank panics, 346, 412, 413b Seasonal credit, 366–367, 366 n.4 Second Bank of the United States, 270 Secondary credit, 366, 366 n.4 Secondary loan participation See Loan sales Secondary markets, 28–29 See also Foreign exchange market; NASDAQ; New York Stock Exchange Secondary reserves, 216 Secured debt, 164 Securities See also Bonds; Investment banks; Underwriting securities as bank assets, 216–217 bank balance sheet, 214f behavioral finance, 156–157 defined, and importance as source of external funding, 163–164, 163f liquidity of, 29 mortgage-backed See Mortgagebacked securities Securities Act of 1933, 45, 252, 258t Securities and Exchange Commission (SEC), 45, 46t, 252 Securities brokers and dealers, 28 Securities Exchange Act of 1934, 258t Securities markets, access to, 164 Securitization, 277, 282 defined, 192 Security First Network Bank, 275 Segmented markets theory, 131–132 I-28 Index Self-correcting mechanism, 543 Shadow banking system, 196, 272 See also Financial innovation Shares See Credit unions; Mutual savings banks; Savings and loan associations (S&Ls); Stocks Shell operations, 296 Shifts in supply or demand curve, 94 Shocks, 535 See also Demand shocks; Supply shocks aggregate demand, 543–545 aggregate supply, 547–550 monetary policy theory, response to, 570–578 Short-run aggregate supply curve, 567–569, 568 n.7 deriving, 569, 569 n.8 shifts in, 537–540, 537t, 538f, 539f Short-run equilibrium, 540–543, 541f Short-run exchange rates, 429–430 demand curve for domestic assets, 431 equilibrium in foreign exchange market, 431 expected returns on domestic and foreign assets, 443–445 interest parity condition and, 445 supply curve for domestic assets, 430 Short sales, 157 Short-term debt instruments, 28 See also Commercial paper; Money markets; Repurchase agreements Short-term interest rates, expectations theory and, 130 n.3 Short-Term Liquidity Facility, 467b Simple deposits multiplier, 337 Simple interest rate, 67, 71 Simple loans, 67, 70 yield to maturity, 70–71 Simplified balance sheet, Federal Reserve System, 325–326 Small-denomination time deposits and bank balance sheet, 214f as monetary aggregate component, 59t, 60 Smart cards, 57 Société Générale, 237b Solow, Robert, 396 Soros, George, 461 Sound currency, 470 South Korea financial crisis in, 207b–208b government bailout in, 200b speculative attacks and, 462 Spain, government bailout in, 200b Special drawing rights (SDRs), 459 Speculative attacks on currency, 460, 461 defined, 204 in emerging market countries (1994–2002), 462–463 Speculative motive, money demand, 489 Spending autonomous, IS curve shifts and, 509–510, 511t government See Government purchases investment See Investment spending types of, aggregate demand and, 498 Spot exchange rate, 423 Spot transactions, 423 Stagflation, 549, 549f Standard and Poor’s (S&P) 500 index, 37b Standing lending facility, 366 State banking and insurance commissions, 46t restrictions on entry of financial intermediary, 46t State banks, 271, 306 examining bodies, 250 State-owned banks, 180 Sterilized foreign exchange intervention, 449 portfolio balance effect and, 450 n.2 Stickiness, price, 535 Sticky prices, 516, 609 Stimulus packages under Bush administration, 200 under Obama administration, 200, 580b www.rasabourse.com Stock exchange See Stock market Stock market, 4, 141–146 See also Over-the-counter (OTC) markets; Stock prices adverse selection, 168 bubbles, 155 computing price of common stock, 141–144 crashes, 155–156, 189–190, 190f See also Stock market declines and crashes Great Depression, 189–191, 190f “lemons problem,” 168 Practical guide to investing in the stock market, 152–155 setting prices, 144–146 Web references, 160 Stock market declines and crashes See also Financial crises “Black Monday,” 368b Great Depression and See Great Depression terrorist attacks of September 11, 369b Stock prices, 144–146 Global Financial Crisis of 2007– 2009, 197f investment spending and, 612, 612 n.2 measured by Dow Jones Industrial Average, 5f reactions to announcements, 154 volatility of, Stockholders, defined, 141 Stocks See also Convertible bonds; Dividends; Over-the-counter (OTC) markets; Securities; Stock market as capital market instrument, 32t, 33 definitions, 4, 28, 33, 141 generalized dividend valuation model, 143–144 Global Financial Crisis and, 146 Gordon growth model, 143–144 and importance as source of external funding, 162–163, 163f, 163 n.1 investing in See Investment and investments monetary policy and stock prices, 145–146 one-period valuation model, 142–143 price, computing, 141–144 prices of See Stock prices residual claimants, 141 valuation, 142–143 Stocks of assets, 94 Store of value, money as, 55 Stored-value cards, 57 Strait Times Index, 37b Strauss-Kahn, Dominique, 467b Stress tests, 200 n.3, 252 Structural unemployment, 382, 563 n.4 Structured credit products, 192 Structured investment vehicles (SIVs) See Derivatives Subprime mortgage crisis (2007–2008) See also Global Financial Crisis of 2007–2009 consumer protection regulation and, 254b, 255 “lender of last resort” and, 245 monetary transmission mechanisms and, 617 Subprime mortgages, and Global Financial Crisis of 2007–2009, 192 Sumitomo Corporation, 237b Super-NOW accounts, required reserves on, 369, 369 n.6 Superregional banks, 287 Supervisory Capital Assessment Program (SCAP), 200 n.3 Supply See also Demand excess supply, 93 of money See Money supply shifts in supply of bonds, 98–104, 98t, 99f shifts in supply of money, 107, 108t shocks in See Supply shocks Supply and demand analysis See also Aggregate demand and supply analysis bond market, 94 of fixed exchange rate regime, 454–457 Index foreign exchange rate, 429–431 in market for reserves, 355–357 movements along curve, 94 shifts in curve, 94 Supply conditions, financial innovation and, 274–277 Supply curve for domestic assets, 430 for money, 107, 108t of reserves (Rs), 357 Supply shocks, 535 Global Financial Crisis of 2007– 2009 and, 196 n.2 negative supply and demand shocks and Global Financial Crisis, 554, 555f negative supply shocks, 549f, 550–552, 554 permanent, 550–552, 551f, 552 n.5, 573–574, 574f, 575f positive supply shocks, 552, 553f temporary aggregate supply shocks, 575–577, 576f, 577f temporary negative supply shock, 548f Supply side economic policy, economic growth and, 383 Surplus See Budget deficit or surplus Swap lines, 373b Sweden, government bailout in, 200b Sweep accounts, 279–280 Swiss Interbank Clearing (SIC), 594b Swiss National Bank, 594b Systemically important financial institutions (SIFIs), 264 T-accounts, 217–220 defined, 217 Federal Reserve System, 325–326 liquidity management in banks, 220–223 multiple deposit creation and, 334–338, 339 open market operations and, 328–331 www.rasabourse.com I-29 Taiwan, speculative attacks and, 463 Target financing rate, 375 Tariffs, 428 TARP (Troubled Asset Relief Program), 199 Taxes and tax considerations aggregate demand and, 502 aggregate demand curve and, 531t, 532 consumption function and, 498, 498 n.1 fiscal policy and control of government spending and See Fiscal policy international banks as tax havens, 296 IS curve shifts and, 507–508, 509f securities, buying and selling, 155 n.7 Taylor, John, 404, 516, 610, 610 n.1 Taylor principle, 404 autonomous easing contrasted with, 518 monetary policy curve and, 516–517 Taylor rule versus, 516 n.1 Taylor rule, 403–405, 592 for federal funds rate, 406b Taylor principle versus, 517 n.1 “Teal book,” 311b Temporary supply shocks, 548–550 monetary policy theory response to, 575–577, 576f, 577f “Tequila effect,” 462 Term Asset-Backed Securities Loan Facility (TALF), 373b Term Auction Facility (TAF), 371, 373b Term Securities Lending Facility (TSLF), 373b Term structure of interest rates, 118, 134 Terrorist attacks of September 11, 2001, 369b Textbook framework, 14–15 I-30 Index Thailand, financial crisis in (1997), 462 Thatcher, Margaret, 603 Theory of asset demand, bank panics of Great Depression and, 346–348 Theory of bureaucratic behavior, 317 Federal Reserve communication and, 318b Federal Reserve transparency and, 318b Theory of efficient capital markets, 149 Theory of purchasing power parity (PPP), 426–427, 427–428 Theory of rational expectations See Rational expectations theory Thomas Amendment, 413 Thrift institutions (thrifts), 41, 292–294 Tightening of monetary policy, 310 AD curve shifts from, 522, 524f, 525 transmission mechanisms and, 617 Time deposits See also Certificates of deposit (CDs) bank balance sheet, 214f and bank balance sheet, 214f defined, 42 Time-inconsistency problem exchange-rate targeting and, 470 inflation targeting and, 389 price stability and, 381–382 TIPS (Treasury Inflation Protection Securities), 84b, 491 Tobin, James, 490 n.3, 496, 610 Tobin’s q theory, 610, 611f, 612 Too-big-to-fail policy, government safety net and, 245–246 Trade balance, 451 Trade barriers, foreign exchange rates and, 428, 436 Trading Activities Manual, 251 Traditional banking, decline in, 280–283 information technology and, 274–277 in other industrialized countries, 283 in U.S., 281f Transaction costs, 37–38, 55 defined, 37, 55 of financial institutions, 165–166 reduction of, 165–166 Transactions motive, money demand, 489 Transmission, mechanisms of monetary policy See Monetary transmission mechanisms TRAPS (Trading Room Automated Processing System), 364–366 Traveler’s checks, 59, 59t Treasury bills See U.S Treasury Bills Treasury bonds, 315, 315 n.4 Treasury Inflation Protection Securities (TIPS), 84b, 491 Treasury securities, Federal Reserve purchase during Global Financial Crisis, 372 Trichet, Jean-Claude, 320 Troubled Asset Relief Program (TARP), 199 Truth in Lending Act, 253, 254b Turkey, financial crisis, 206 n.4 Ukraine, 467b Uncertainty central bank behavior and, 317, 317 n.5 Federal Reserve’s lack of transparency and, 392 Unconditional commitment, to future policy actions, 375 Undervaluing of currency, 455 Underwriting securities, 28, 45 Unemployment See also Phillips curve; Short-run aggregate supply curve and aggregate output, 529b frictional unemployment, 382, 563 n.4 gap, 564 in Global Financial Crisis (2007– 2009), 497 in Great Depression, 382 inflation and, 585f, 600f www.rasabourse.com natural rate of, 382, 533 Okun’s law, 568–569, 568f, 568 n.7, 569 n.8 rate, defined, structural unemployment, 382, 563 n.4 supply shocks (1970s–1980s) and, 593, 593 n.1 Volcker disinflation, 545, 546f Unemployment gap, 564 Unemployment rate, defined, Unexploited profit opportunities, 151–152 Unit of account, 54–55 United Kingdom central bank of, 321 See also Bank of England exchange rate on British pound (1990–2011), 423f exchange-rate targeting and, 472 foreign exchange market for British pound (1992), 460– 461, 460f and Global Financial Crisis of 2007–2009, 556–557, 556f government bailout in, 200b inflation targeting in, 387f, 388 monetary policy in, 468 purchasing power parity between U.S and (1973–2011), 427f United States banking industry in, 269–297 central bank See Federal Reserve System; Federal Reserve System (the Fed) financial crises in See Global Financial Crisis of 2007–2009; Great Depression; Stock market declines and crashes purchasing power parity between United Kingdom and (1973–2011), 427f Universal banking, 291–292 Unsecured debt, 164 Unsterilized foreign exchange intervention, 448, 449–450, 449f effect on monetary base, 449 n.1 U.S Congress, Federal Reserve System independence and, 312–313, 315–316 U.S dollar adoption as second currency, 474–475 Euro’s challenge to, 454b Global Financial Crisis and, 439–440 relationship to interest rates (1973–2010), 438–439, 439f unsterilized purchase of, 449f value of, 438–439, 439–440, 439f U.S economy central bank in See Federal Reserve System current account deficit (balance of payments), 450–452 monetary policy and health of See Monetary policy U.S financial system See Financial system U.S Government agency securities as capital market instruments, 32t, 34 U.S government bond market, 29 U.S government bonds, yield curves for, 137f U.S Government securities as capital market instruments, 32t, 34 U.S Treasury deposits at Federal Reserve, 332–333 monetary liability (monetary base) of, 326–327 U.S Treasury bills, 30–31, 30t rates, 31b U.S Treasury bonds, interest rates discussed in the media, 33b Valuation of stocks, 142–143 Value-at-risk (VaR) calculations, 252 Vault cash, as bank asset, 216 Index Velocity of money, 480–482, 496 defined, 481 determinants of, 481–482 Venture capital firms, 174 Vietnam War buildup (1964– 1969), 506–507, 508f Virtual bank, 275, 276b Volcker, Paul, 301, 312, 313 n.2, 419, 545, 546f appointment of, 604, 604b monetary policy of, 416–417 Volcker Rule, 264 Wall Street Journal See Following the Financial News Wallace, Neil, 589 n.2 Wealth defined, 52–53, 88 as determinant of asset demand, 89, 90t effects, as monetary transmission mechanism, 611f, 612–613 and money demand, 491 shifts in demand for bonds, 95, 96t Web references, 15 aggregate demand and supply analysis, 561 banking and management of financial institutions, 241 demand for money, 496 efficient market hypothesis, 160 Federal Reserve Board, 16f, 64, 117 financial crises, 212 financial system, 51 Great Depression, 212 gross domestic product, 588 inflation, 117, 588 interest rates, 87, 117, 140 International Monetary Fund, 212 Keynes, John Maynard, 496 “lemons problem,” 184 www.rasabourse.com I-31 monetary aggregates, 64 monetary policy theory, 588 money, 64 money, banking and financial markets, 21 stock market, 160 unemployment, 561 velocity of money, 496 World Bank, 453 deposit insurance research, 244b World stock markets, 36 See also Financial Times Stock Exchange (FTSE) 100-Share Index (London) indexes, 37b World Trade Organization (WTO), 453 World War II, pegging of interest rates (1942–1951), 414 World Wide Web See Web references Worldwide government bailouts, in global financial crisis, 200b Yield curves, 134–136, 135f, 136b defined, 126 interpreting, 136 U.S government bonds, 137f Yield to maturity, 70–77 See also Interest rates coupon bonds, 72–76, 74t curve on See Yield curves defined, 66, 70 discount bonds, 76 fixed-payment loans, 71–72 simple loans, 70–71 Zero-coupon bonds See Discount bonds Zero-lower-bound problem, 371, 393, 395–396 Zimbabwean hyperinflation, 488 This page intentionally left blank www.rasabourse.com Applying Theory to the Real World: Applications and Boxes Applications Simple Present Value, p 68 How Much Is That Jackpot Worth?, p 68 Yield to Maturity on a Simple Loan, p 70 Yield to Maturity and the Yearly Payment on a Fixed-Payment Loan, p 72 Yield to Maturity and the Bond Price for a Coupon Bond, p 73 Perpetuity, p 75 Calculating Real Interest Rates, p 82 Changes in the Interest Rate Due to Expected Inflation: The Fisher Effect, p 100 Changes in the Interest Rate Due to a Business Cycle Expansion, p 101 Explaining Low Japanese Interest Rates, p 103 Changes in the Equilibrium Interest Rate Due to Changes in Income, the Price Level, or the Money Supply, p 107 Money and Interest Rates, p 110 The Global Financial Crisis and the Baa-Treasury Spread, p 122 Effects of the Bush Tax Cut and Its Possible Repeal on Bond Interest Rates, p 125 Interpreting Yield Curves, 1980–2011, p 136 Monetary Policy and Stock Prices, p 145 The Global Financial Crisis and the Stock Market, p 146 Practical Guide to Investing in the Stock Market p 152 What Do Stock Market Crashes Tell Us About the Efficient Market Hypothesis and the Efficiency of Financial Markets?, p 156 Financial Development and Economic Growth, p 179 Is China a Counterexample to the Importance of Financial Development?, p 180 The Mother of All Financial Crises: The Great Depression, p 189 The Global Financial Crisis of 2007–2009, p 192 Financial Crises in Mexico, 1994–1995; East Asia, 1997–1998; and Argentina, 2001–2002, p 205 Strategies for Managing Bank Capital, p 227 How a Capital Crunch Caused a Credit Crunch During the Global Financial Crisis, p 228 Strategies for Managing Interest-Rate Risk, p 235 The Great Depression Bank Panics, 1930–1933, and the Money Supply, p 346 The 2007–2009 Financial Crisis and the Money Supply, p 348 How the Federal Reserve’s Operating Procedures Limit Fluctuations in the Federal Funds Rate, p 362 Effects of Changes in Interest Rates on the Equilibrium Exchange Rate, p 436 Why Are Exchange Rates So Volatile?, p 437 The Dollar and Interest Rates, p 438 The Global Financial Crisis and the Dollar, p 439 How Did China Accumulate over $3 Trillion of International Reserves?, p 457 The Foreign Exchange Crisis of September 1992, p 460 Recent Foreign Exchange Crises in Emerging Market Countries: Mexico 1994, East Asia 1997, Brazil 1999, and Argentina 2002, p 462 Testing the Quantity Theory of Money, p 484 The Zimbabwean Hyperinflation, p 488 The Vietnam War Buildup, 1964–1969, p 506 The Fiscal Stimulus Package of 2009, p 508 Autonomous Monetary Easing at the Onset of the 2007–2009 Financial Crisis, p 518 The Volcker Disinflation, 1980–1986, p 545 Negative Demand Shocks, 2001–2004, p 545 Negative Supply Shocks, 1973–1975 and 1978–1980, p 548 Positive Supply Shocks, 1995–1999, p 552 Negative Supply and Demand Shocks and the 2007–2009 Financial Crisis, p 554 The United Kingdom and the 2007–2009 Financial Crisis, p 556 China and the 2007–2009 Financial Crisis, p 557 Quantitative (Credit) Easing to in Response to the Global Financial Crisis, p 573 The Great Inflation, p 584 The Term Structure of Interest Rates, p 590 A Tale of Three Oil Price Shocks, p 599 Credibility and the Reagan Budget Deficits, p 603 Following the Financial News Boxes Money Market Rates, p 31 Capital Market Interest Rates, p 33 Foreign Stock Market Indexes, p 37 The Monetary Aggregates, p 60 Yield Curves, p 126 Foreign Exchange Rates, p 424 Aggregate Output, Unemployment, and Inflation, p 529 Global Boxes Are U.S Capital Markets Losing Their Edge?, p 35 The Importance of Financial Intermediaries Relative to Securities Markets: An International Comparison, p 38 Negative T-Bill Rates? It Can Happen, p 77 Ireland and the 2007–2009 Financial Crisis, p 198 Worldwide Government Bailouts During the 2007–2009 Financial Crisis, p 200 www.rasabourse.com The Perversion of the Financial Liberalization/Globalization Process: Chaebols and the South Korean Crisis, p 207 Barings, Daiwa, Sumitomo, and Société Générale: Rogue Traders and the Principal–Agent Problem, p 237 The Spread of Government Deposit Insurance Throughout the World: Is This a Good Thing?, p 244 Where Is the Basel Accord Heading After the Global Financial Crisis?, p 249 International Financial Regulation, p 256 Comparison of Banking Structure in the United States and Abroad, p 289 Ironic Birth of the Eurodollar Market, p 295 Why the Large U.S Current Account Deficit Worries Economists, p 451 The Euro’s Challenge to the Dollar, p 454 The Global Financial Crisis and the IMF, p 467 Argentina’s Currency Board, p 474 The Demise of Monetary Targeting in Switzerland, p 594 Ending the Bolivian Hyperinflation: A Successful Anti-Inflation Program, p 602 Inside the Fed Boxes Was the Fed to Blame for the Housing Price Bubble?, p 195 The Political Genius of the Founders of the Federal Reserve System, p 303 The Special Role of the Federal Reserve Bank of New York, p 307 The Role of the Research Staff, p 309 The FOMC Meeting, p 310 Green, Blue, Teal, and Beige: What Do These Colors Mean at the Fed?, p 311 How Bernanke’s Style Differs from Greenspan’s, p 314 The Evolution of the Fed’s Communication Strategy, p 318 Why Does the Fed Need to Pay Interest on Reserves?, p 357 A Day at the Trading Desk, p 365 Using Discount Policy to Prevent a Financial Panic, p 368 Fed Lending Facilities During the Global Financial Crisis, p 373 Chairman Bernanke and Inflation Targeting, p 394 The Fed’s Use of the Taylor Rule, p 406 Fed Watchers, p 406 Bank Panics of 1930–1933: Why Did the Fed Let Them Happen?, p 413 A Day at the Federal Reserve Bank of New York’s Foreign Exchange Desk, p 447 The Appointment of Paul Volcker, Anti-Inflation Hawk, p 604 FYI Boxes Are We Headed for a Cashless Society?, p 58 Where Are All the U.S Dollars?, p 60 With TIPS, Real Interest Rates Have Become Observable in the United States, p 84 Conflicts of Interest at Credit-Rating Agencies and the Global Financial Crisis, p 122 The Yield Curve as a Forecasting Tool for Inflation and the Business Cycle, p 136 Should You Hire an Ape as Your Investment Adviser?, p 154 The Enron Implosion, p 170 Should We Kill All the Lawyers?, 180 Collateralized Debt Obligations (CDOs), p 193 Mark-to-Market Accounting and the Global Financial Crisis, p 253 The Subprime Mortgage Crisis and Consumer Protection Regulation, p 254 Will “Clicks” Dominate “Bricks” in the Banking Industry?, p 276 Bruce Bent and the Money Market Mutual Fund Panic of 2008, p 279 The Global Financial Crisis and the Demise of Large, Free-Standing Investment Banks, p 292 Meaning of the Word Investment, p 499 Deriving the Aggregate Demand Curve Algebraically, p 520 The Phillips Curve Tradeoff and Macroeconomic Policy in the 1960s, p 564 The Activist/Nonactivist Debate over the Obama Fiscal Stimulus Package, p 580 The Political Business Cycle and Richard Nixon, p 593 www.rasabourse.com MyEconLab Visit www.myeconlab.com for all of the information you need on using MyEconLab Students learn best when they attend lectures and keep up with their reading and assignments… but learning shouldn’t end when class is over MyEconLab Picks Up Where Lectures and Office Hours Leave Off Instructors choose MyEconLab: “MyEconLab offers them a way to practice every week They receive immediate feedback and a feeling of personal attention As a result, my teaching has become more targeted and efficient.” —Kelly Blanchard, Purdue University “Students tell me that offering them MyEconLab is almost like offering them individual tutors.” —Jefferson Edwards, Cypress Fairbanks College “Chapter quizzes offset student procrastination by ensuring they keep on task If a student is having a problem, MyEconLab indicates exactly what they need to study.” —Diana Fortier, Waubonsee Community College Students choose MyEconLab: In a recent study, 87 percent of students who used MyEconLab regularly felt it improved their grade “It was very useful because it had EVERYTHING, from practice exams to exercises to reading Very helpful.” —student, Northern Illinois University “It was very helpful to get instant feedback Sometimes I would get lost reading the book, and these individual problems would help me focus and see if I understood the concepts.” —student, Temple University “I would recommend taking the quizzes on MyEconLab because they give you a true account of whether or not you understand the material.” —student, Montana Tech www.rasabourse.com Guide to Commonly Used Symbols Symbol Term ∆ π πe π t AD AS Bd Bs BR c C C C D D DL e Et Epar (Eet+1 – Et)/Et EM ER f G i id iD iF ior I IS m M change in a variable inflation rate expected inflation inflation target aggregate demand curve aggregate supply curve demand for bonds supply of bonds borrowed reserves currency ratio yearly coupon payment currency consumption expenditure demand curve checkable deposits discount loans excess reserves ratio exchange (spot) rate par (fixed) exchange rate expected appreciation of domestic currency equity multiplier excess reserves for financial frictions government purchases interest rate (yield to maturity) discount rate interest rate on domestic assets interest rate on foreign assets interest rate paid on reserves planned investment spending IS curve money multiplier money supply www.rasabourse.com Symbol Term Md Ms M1 M2 MB MBn MP mpc NBR NX P Ps Pt r r rr R R Re RD RF ROA ROE RR S T V Y Yad YP demand for money supply of money M1 monetary aggregate M2 monetary aggregate monetary base (high-powered money) nonborrowed monetary base monetary policy curve marginal propensity to consume nonborrowed reserves net exports price level stock prices price of a security at time t price shock real interest rate required reserve ratio for checkable deposits reserves return expected return expected return on domestic deposits expected return on foreign deposits return on assets return on equity required reserves supply curve taxes velocity of money aggregate output (national income) aggregate demand potential (natural rate level of) output www.rasabourse.com ... analyzing financial structure in the United States and in the rest of the world Financial Crises At times, the financial system seizes up and produces financial crises, major disruptions in financial. .. An Economic Analysis of Financial Structure 162 Financial Crises 185 Banking and the Management of Financial Institutions 213 Economic Analysis of Financial Regulation ... Institutions and Banking? Structure of the Financial System Financial Crises Banks and Other Financial Institutions Financial Innovation Why Study