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9780324288810

The Financial System And The Economy: Principles Of Money & Banking with Infotrac

by
  • ISBN13:

    9780324288810

  • ISBN10:

    0324288816

  • Edition: 4th
  • Format: Paperback
  • Copyright: 2005-03-07
  • Publisher: South-Western College Pub

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Summary

This text gives students a unique understanding of the dynamic and evolving nature of the financial system and how it is related to the aggregate economy. It emphasizes the effects of structural change, globalization, financial innovation, and technology on the financial environment. Its highly applied, roots-in-reality approach incorporates numerous real-world applications and Internet features to demonstrate the relevance of topics. The text is written in an informal, conversational style, avoiding complex models and high-level math, making it perfect for the typical business major who may or may not have a strong economics background.

Table of Contents

Part 1 Introduction
Introduction and Overview
3(20)
What This Book Is About
4(1)
Economic and Financial Analysis of an Ever-Changing System
4(2)
Finance in Our Daily Lives
6(2)
Introducing the Financial System
8(2)
More on Financial Intermediaries
10(1)
Depository Institutions and Other Types of Intermediaries
11(1)
The Federal Reserve System
12(2)
The Role of Policy: Changing Views
14(9)
Principles of Money
23(18)
Conceptualization: A Key Building Block
24(1)
Defining Money
24(1)
The Monetary Aggregates and Domestic Nonfinancial Debt
25(1)
A Closer Look: Money, Exchange, and Economic Development
26(2)
The Monetary Aggregates
28(2)
A Closer Look: Money and Other Financial Claims
30(1)
Domestic Nonfinancial Debt
31(1)
The Economy and the Aggregates
31(2)
The Ongoing Evolution of the Payments System: The Role of Computer and Telecommunications Technologies
33(1)
Looking Back: Staying Ahead of the Counterfeiter
34(1)
A Closer Look: Forget Your Checkbook
35(1)
Looking Out: Computer and Telecommunications technologies and the International Financial System
36(5)
The Role of Money and Credit
41(22)
The Trees versus the Forest
42(1)
The Circular Flow of Income and Expenditures in a Simplified Economy
42(3)
The Demand for and Supply of Money
44(1)
The Demand for Money
44(1)
Cracking the Code: Graphical Analysis
45(6)
The Supply of Money
46(3)
Money and Interest Rates
49(2)
How Credit Matters: A First Approximation
51(1)
A Closer Look: Recent Innovations in Credit Extension
52(1)
Money, Credit, and the Economy
53(2)
Are Money and Credit All That Matter?
54(1)
Cracking the Code: Calculating the Inflation Rate
55(1)
Looking Back: A Brief history of U.S. Currency
56(7)
Money and Credit Flows: First Fiddle or Second Fiddle
57(6)
The Overseer: The Federal Reserve System
63(24)
Unraveling the Fed's Mystique
64(1)
Organizational Structure of the System
64(2)
Federal Reserve Banks
65(1)
A Closer Look: The Board of Governors
66(3)
Federal Open Market Committee (FOMC)
68(1)
The Fed's Functions
69(3)
Formulation and Implementation of Monetary Policy
69(1)
Supervision and Regulation of the Financial System
70(1)
Facilitation of the Payments Mechanism
71(1)
Operation as Fiscal Agent for the Government
72(1)
The Fed's Major Policy Tools
72(3)
Open Market Operations
73(1)
The Discount Rate and Discount Rate Policy
73(1)
Reserve Requirements
74(1)
Who Does What within the Fed
75(1)
Looking Out: The Eurosystem: Europe's Central Bank
76(2)
The Federal Reserve System: An independent Watchdog, Convenient Scapegoat, or Cunning Political Animal?
77(1)
Looking Back: Early Attempts at Establishing a Central Bank
78(2)
Looking Out: Central Bank Independence and Macroeconomic Performance
80(7)
Financial Markets, Instruments, and Market Makers
87(20)
Game Talk
88(1)
Introducing Financial Markets
88(2)
Major Financial Market Instruments
90(3)
Money Market Instruments
91(1)
U.S. Treasury Bills
92(1)
Negotiable Certificates of Deposit (CDs)
92(1)
Commercial Paper
92(1)
Cracking the Code: Treasury Bills
93(3)
Bankers' Acceptances
93(2)
Repurchase Agreements
95(1)
Federal (Fed) Funds
95(1)
Eurodollars
95(1)
Capital Market Instruments
96(1)
Stocks
96(1)
Mortgages
97(1)
Corporate Bonds
97(2)
U.S. Government Securities
98(1)
U.S. Government Agency Securities
98(1)
State and Local Government Bonds (Municipals)
98(1)
A Closer Look: Following the Financial News
99(1)
The Role of Market Makers
100(7)
Why Market Makers Make Markets
101(1)
Market Making and Liquidity
101(2)
Substitutability, Market Making, and Market Integration
103(4)
Part 2 Financial Prices
107(94)
Interest Rates and Bond Prices
109(24)
The Present versus the Future
110(1)
The Time Value of Money
110(1)
Compounding and Discounting
111(5)
Compounding: Future Values
111(1)
Discounting: Present Values
112(1)
Interest Rates, Bond Prices, and Present Values
113(2)
Fluctuations in Interest Rates and Managing a Bond Portfolio
115(1)
The Determinants of Interest Rates
116(5)
Changes in the Demand for Loanable Funds
118(1)
Changes in the Supply of Funds
119(2)
A Closer Look: Interest Rates: Which Theory Is Correct? Reconciling Stocks and Flows
121(12)
Inflation and Interest Rates
122(3)
The Cyclical Movement of Interest Rates
125(8)
The Structure of Interest Rates
133(26)
From One Interest Rate to Many
134(1)
The Role of Term to Maturity in Interest Rate Differentials
134(2)
The Yield Curve
134(2)
The Expectations Theory
136(5)
Determining interest Rate Expectations
141(3)
Tying the Determinants of Expectations to the Changing Shape and Level of Yield Curves
142(2)
Some Necessary Modifications to the Expectations Theory
144(2)
A Closer Look: The Segmented Market Hypothesis
146(1)
The Role of Credit Risk and Taxes in Interest Rate Differentials
147(12)
Credit Risk
147(1)
Taxability
148(11)
Market Efficiency
159(16)
``Stock Prices Rise Over 28 Percent While Bond Prices Rise Over 9 Percent''
158(1)
How Expected Rates of Return Affect the Prices of Stocks and Bonds
159(1)
A Closer Look: The Benefits of Diversification
160(8)
Bonds
161(3)
The Formation of Price Expectations
164(2)
The Efficient markets Hypothesis: Rational Expectations Applied to Financial Markets
166(2)
A Closer Look: Implications of the Efficient Markets Hypothesis
168(7)
How Exchange Rates Are Determined
175(26)
The More Things Change, the More Things Stay the Same
176(1)
Defining Exchange Rates
176(1)
Cracking the Code: How Movements in the Exchange Rate Affect the Dollar Price of Foreign Goods
177(1)
Determining Exchange Rates
178(1)
Cracking the Code: Finding the Yen/Euro Exchange Rate
179(1)
The Demand for Dollars in the Foreign Exchange Market
179(2)
Cracking the Code: The cost of an IBM Computer in Japan
181(1)
The Supply of Dollars in the Foreign Exchange Market
181(2)
Cracking the Code: The Foreign Exchange Market
183(1)
Changes in Supply and Demand and How They Affect the Exchange Rate
184(3)
Exchange Rates in the Long Run: The Theory of purchasing power Parity
187(1)
A Closer Look: The Big Mac Index and Purchasing Power Parity
188(2)
Choosing Among Domestic and Foreign Financial instruments: The Theory of Interest Rate Parity
190(1)
Defining the Balance of Payments and Its Influence on the Exchange Rate, the Financial System, and the U.S. Economy
191(2)
The Current Account
192(1)
The Capital Account
193(1)
The Balance of Payments and the Exchange Rate
193(1)
Looking Back: The Causes and Consequences of Dollar Exchange Rate Movements Since 1980
194(7)
Part 3 Financial Institutions
201(154)
An Introduction to Financial Intermediaries and Risk
203(26)
Are All Financial Intermediaries More or Less Alike?
204(1)
Common Characteristics
204(1)
A Closer Look: FIs as Firms
205(2)
Types of Risks Faced by All FIs
207(3)
Credit or Default Risk
208(1)
Interest Rate Risk
208(1)
Liquidity Risk
209(1)
Exchange Rate Risk
209(1)
A Guide to FIs and Their Balance Sheets
210(10)
Deposit-Type FIs
210(1)
Commercial Banks
211(2)
Savings Associations
213(2)
Credit Unions
215(1)
Contractual-Type FIs
216(2)
Investment-Type FIs
218(1)
Finance Company-Type FIs
219(1)
Pulling Things Together
220(9)
Commercial Banking Structure, Regulation, and Performance
229(26)
The Biggest Intermediary in Town
230(1)
The Banking Regulatory Structure
231(1)
Looking Back: The Origins of the Dual Banking System
232(3)
The Structure of the Commercial Banking System
235(3)
Bank Holding Companies and Financial Holding Companies
238(4)
Ongoing Changes in the Structure of the Banking Industry
242(2)
A Closer Look: Megamergers of the Past Decade
244(1)
The Evolution of International Banking
245(1)
Bank Management: Managing Risk and Profits
246(2)
Bank Performance
248(7)
Financial Innovation
255(26)
The Road from There to Here
256(1)
Major Causes of Financial Innovation
256(1)
The Analytical Foundations of Financial Innovation
257(4)
Early Financial Innovations
261(1)
A Closer Look: The Development of the Eurodollar Market
262(3)
Innovations in the Payments System
265(1)
Looking Forward: The Electronic Purse: An Innovation in the Making
266(1)
Derivatives and Other Recent Innovations
267(4)
Forward, Futures, and Options Agreements
267(1)
Swap Agreements
267(3)
Securitization
270(1)
Looking Back: Securitization of Small Business Loans
271(1)
Looking Forward: The Financial System of the Future
272(1)
Other Characteristics of the Financial System
272(9)
Financial Instability and Strains on the Financial System
281(24)
Money is the Thing You Forget With
282(1)
Financial Intermediation, Risk, and Financial Crises
283(4)
The Problem of Moral Hazard in Financial Intermediation
287(3)
A Closer Look: The Bailout of Long-Term Capital Management
290(1)
Other Areas of Concern
291(1)
Growth of the Financial System and the Proliferation of Financial Claims
291(1)
A Closer Look: The Savings and Loan Debacle
292(3)
Off-Balance-Sheet Activities
294(1)
Derivatives
294(1)
A Closer Look: The Implicit Fannie Mae and Freddie Mac Guarantee
295(2)
The Eurodollar and Eurobond Markets
296(1)
A Closer Look: The Collapse of a California County and a British Bank
297(2)
Looking Out: The Japanese Bubble Economy of the 1980s
299(6)
Regulation of the Banking System and the Financial Services Industry
305(24)
The Role of Regulation
306(1)
The How and Why of Financial Services Regulation
307(1)
A Closer Look: Regulators in the Financial Services Industry
308(2)
Depository Institutions Deregulation and Monetary Control Act of 1980 and Garn-St. Germain Act of 1982: Deregulation in the Early 1980s
310(2)
Basel Accord---The Introduction of International Capital Standards
312(1)
Looking Out: Basel Committee Announces 25 Core Principles for Effective Bank Supervision
312(1)
A Closer Look: Bank Capital Standards under the Basel Accord (Basel I)
313(2)
Financial Institutions reform, Recovery, and Enforcement Act of 1989---Reregulation in Response to Financial Crisis (Bailing Out the Thrifts)
315(1)
Federal Deposit Insurance Corporation Improvement Act of 1991---Tightening Up Deposit Insurance
316(2)
Community Reinvestment Act---Outlawing Discriminatory Lending Practices
318(1)
Interstate Banking and Branching Efficiency Act of 1994---The Dawn of Nationwide Branching?
319(1)
The Gramm-Leach-Bliley Act of 1999---The Final Demise of Glass-Steagall
319(1)
Major Provisions of the Gramm-Leach-Bliley Act
319(1)
Looking Back: A Time Line of Banking Legislation
320(1)
Other Possible Areas of Reform
321(8)
Securities Firms, Mutual Funds, and Financial Conglomerates
329(26)
The Boiler Room
330(1)
Securities Firms
331(3)
Investment Banks: The Primary Market
331(1)
Responsibilities for New Offerings
331(3)
Brokers and Dealers: The Secondary Market
334(2)
Types of Orders
334(1)
Margin Loans
335(1)
Brokerage Fees
335(1)
A Closer Look: Online Trading
336(1)
Investment Companies
337(2)
Open-End and Closed-End Companies
337(1)
Load and No-Load Companies
338(1)
Growth of Investment Funds
338(1)
Hedge Funds
339(2)
Cracking the Code: Investment Companies
341(2)
Real Estate Investment Trusts
343(1)
Government-Sponsored Enterprises
344(3)
The GSE Housing Market
345(1)
The GSE Farm Loan Market
346(1)
The GSE Student Loan Market
346(1)
Other GSEs
346(1)
The Growth of Financial Conglomerates
347(1)
A Closer Look: Citigroup
348(1)
Looking Out: the Growth of Global Financial Markets
349(6)
Part 4 Financial Markets
355(112)
The Stock Market
357(30)
Speculative Bubbles and Their Effects on the Economy
358(1)
A Closer Look: How Volatile Asset Prices Affect the Economy
359(1)
The Anatomy of Stocks
360(1)
Cracking the Code: The Stock Market
361(1)
Looking Back: Famous Financial Quotations
362(2)
Stock Offerings
364(1)
The Stock Market
364(4)
The Major Domestic Exchanges
366(2)
Looking Back: Would You Buy a ``Seat'' on the New York Stock Exchange for $400?
368(8)
Other Exchanges
370(1)
The Over-the-Counter Market
371(1)
Stock Market Indexes
372(1)
The Stock Market and Mutual Funds
373(3)
The Valuation of Stocks
376(2)
A Closer Look: Can U.S. Stock Prices in the 1990s Be Justified?
378(9)
The Debt Markets
387(28)
Bonds and Mortgages: The Major Debt Markets
388(1)
The Bond Market
388(1)
A Closer Look: Recent Trends in the Bond Market
389(1)
The Corporate Bond Market
390(1)
The Treasury Note and Bond Markets
391(2)
Cracking the Code: Corporate Bonds
393(1)
Municipal Bonds
394(1)
Government Agency Securities
394(1)
Cracking the Code: Treasury Bonds
395(1)
The Anatomy of Mortgages
396(1)
Looking Out: The International Bond Markets
397(1)
Looking Back: The Evolution of the Mortgage Market
398(3)
The Secondary Mortgage Market and Mortgage-Backed Securities
401(14)
Collateralized Mortgage Obligations (CMOs)
402(1)
Private Mortgage-Backed Securities
402(13)
Forward, Futures, and Options Agreements
415(28)
A Single Solution
416(1)
Forward Transactions
416(3)
Cracking the Code: Foreign Exchange Spot and Forward Rate Quotations
419(2)
Limitations of Forward Agreements
420(1)
Financial Futures
421(1)
A Closer Look: Futures, Exchanges That Trade Financial Futures, Minimum Amounts, and Open Interest
422(3)
Cracking the Code: Futures Prices
425(1)
A Closer Look: LHT Inc. Enters the Futures Market
426(1)
Determining the Futures Price
427(1)
Options
428(1)
A Closer Look: Stock Index Futures and the '87 Crash
429(2)
A Closer Look: Major Options, Exchanges, and Open Interest
431(2)
Put Options
432(1)
Call Options
432(1)
The Option Premium
432(1)
Cracking the Code: Cracking the Code on Options
433(1)
Determining the Option Premium
434(9)
The International Financial System
443(24)
A Dramatic Metamorphosis
444(1)
The International Financial System from 1944 to 1973
445(1)
Looking Out: The Gold Standard
446(2)
The Managed Float Exchange Rate System since 1973
448(2)
Managing Exchange Rate Risk under the Managed Float
449(1)
A Closer Look: The Foreign Exchange Market
450(5)
The Role of the Dollar under the Managed Float
451(4)
Looking Out: The Path to a Single European Currency
455(1)
Major International Financial Organizations
456(2)
The International Monetary Fund (IMF)
456(2)
A Closer Look: The Role of the IMF in the Asian Crisis
458(2)
The World Bank
459(1)
The Bank for International Settlements (BIS)
459(1)
A Framework for International Financial Stability
460(7)
Part 5 Monetary Theory
467(112)
The Fed, Depository Institutions, and the Money
469(30)
Supply Process
469(1)
Where Money Comes From
470(1)
The Fed and Bank Reserves
470(4)
Open Market Operations
470(2)
Discount Loans
472(1)
Other Factors That Change Reserves
473(1)
Loan and Deposit Expansion by the Banking System
474(3)
The Simple Multiplier Model of the Money Supply Process
477(4)
Policy Implications
480(1)
Some Complicating Realities in the Multiplier Model
481(1)
Looking Back: The Evolution of the Money Multiplier
482(3)
Modifying the Multiplier Model
483(2)
Looking Back: The Money Multiplier During the Great Depression
485(14)
The Fed's Control over the Money Supply
486(13)
The Demand for Real Money Balances and Market
499(28)
Equilibrium
499(1)
Where Is All the Money?
500(1)
The Demand for Real Money Balances
500(5)
Household's Demand for Real Money Balances
501(2)
Firms' Demand for Real Money Balances
503(2)
The Interest Rate, Real Income, and Real Money Balances
505(1)
A Closer Look: Keynes's Speculative Demand for Money
506(4)
Additional Factors Affecting the Demand for Real Money Balances
510(1)
Looking Forward: Will Checks Go the Way of the Dinosaur?
511(1)
Equilibrium in the Market for Real Money Balances
512(4)
A Closer Look: Monetarism
516(1)
A Final Note
517(10)
Financial Aspects of the Household, Business, Government, and Rest-of-the-World Sectors
527(30)
To Spend or Not to Spend
528(1)
Household Behavior from a Financial Perspective
529(2)
Asset Accumulation: Spending and Saving
530(1)
Liability Accumulation: Borrowing
530(1)
How Economic and Financial conditions Influence Household Accumulation of Assets and Liabilities
531(2)
Financial Aspects of the Behavior of Nonfinancial Business Firms
533(5)
The Accumulation of Real Assets by Firms: Capital and Inventories
533(3)
The Accumulation of Liabilities by Firms
536(2)
Financial Aspects of Government Behavior
538(6)
Financial Effects of Government Borrowing
542(2)
The Rest-of-the-World Sector and Its Effect on the Financial System
544(13)
The Effects of International Events on the Interest Rate
545(3)
The Flow of Funds among Sectors
548(9)
Aggregate Demand and Aggregate Supply
557(22)
GDP Up 8 Percent: Does this Indicate and Economy in Good Health?
558(1)
Aggregate Demand
558(5)
The Aggregate Demand curve
559(3)
What Causes Aggregate Demand to Change?
562(1)
Aggregate Supply
563(16)
From the Individual Firm to the Aggregate
565(1)
Short-Run Aggregate Supply
565(1)
Long-Run Aggregate Supply
566(4)
The Relationship between the Short Run and the Long Run: Shifts in Short-Run Aggregate Supply
570(3)
A Closer Look: The Phillips Curve
573(6)
Part 6 Monetary Policy
579(83)
The Challenges of Monetary Policy
581(22)
Can the Business Cycle Be Mitigated?
582(2)
The Goals of Monetary Policy Economic Growth
584(3)
Stabilization of Unemployment, Inflation, and the External Balance
585(2)
Cracking the Code: Measuring Unemployment
587(2)
The Source of Numerical Objectives for Unemployment and Inflation
589(2)
Changes in Aggregate Demand and Policy
591(2)
Demand-Induced Recession
593(2)
Looking Back: How History Has Affected U.S. and German Policy Goals
595(1)
Changes in Aggregate Supply and Policy
596(2)
Looking Forward: Will the Fed Have Less Power to Affect the Economy in the Future
598(5)
The Process of Monetary Policy Formulation
603(22)
Setting the Stage
604(1)
The Policy Process
604(4)
Current Conditions versus Forecasts
605(1)
Assessing the Economic Situation
606(1)
From Assessment to Action
606(1)
From Action to Effect
607(1)
Pitfalls in Policy Making
608(2)
Uncertainty and Lags
608(1)
Data Revisions and Policy Regret
609(1)
Globalization: A Financially and Economically Integrated World Economy
609(1)
Intermediate Targets
610(3)
A Closer Look: The Use of Operating Targets Since 1970
613(4)
The Use of Interest Rates as Intermediate Targets
614(3)
Federal Open Market Committee Decisions
617(1)
A Closer Look: Monetary Rules Versus Discretionary Risk Management
618(7)
Policy Implementation
625(20)
A Morning at the New York Fed
626(1)
The FOMC Policy Directive
627(2)
A Closer Look: Why the Fed Has Become More Open
629(1)
The Reserves Market and Open Market Operations
630(2)
Looking Back: The Fed's Response to the Terrorist Attacks of September 11, 2001: America's Darkest Hour May be the Fed's Finest
632(1)
Looking Forward: E-Money and Monetary Policy
633(1)
How the Demand and Supply of Reserves Are Calculated
634(2)
Trading Desk Market Techniques
636(9)
Outright Transactions in the Market
637(1)
Temporary Transactions
638(7)
Monetary Policy in a Globalized Financial System
645(17)
Monetary Policy and the Globalization of Finance
646(1)
Monetary Policy under Fixed Exchange Rates from 1944 to 1973
646(3)
Monetary Policy under Flexible Exchange Rates since 1974
649(2)
Looking Forward: Dollarization and Currency Boards
651(2)
The Globalization of Monetary Policy
653(1)
Looking Out: Capital Flows and the Mexican Peso Crisis
654(1)
Looking Out: The Eurosystem
655(2)
A Closer Look: Foreign Exchange Market Intervention
657(5)
Glossary 662(15)
Index 677

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