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

by Burton, Maureen

• ISBN13: 9780324288810
• ISBN10: 0324288816
• Edition: 4th
• Format: Paperback
• Copyright: 2005-03-07
• Publisher: South-Western College Pub

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