ECON302: Money, Banking, And Financial Markets « Saylor.org – Free Online Courses Built by Professors

Money, Banking, And Financial Markets

Purpose of Course show close

This course is designed to provide you with a thorough understanding of the importance of money, banking, and financial markets of a developed economy. Money, financial institutions, and financial markets have emerged as instruments of payments for the services of factors of production, such as labor and capital. The use of money facilitates business in a market by acting as a common medium of exchange. Of course, as that market expands and develops on a national and international level, the importance of money, banking, and other financial markets expands to accommodate innumerable exchanges. This course will allow you to examine not only the origins and nature of money, but also the institutions and markets that have evolved to enable the exchange of goods and services worldwide. It will provide you with the opportunity to examine the instruments and strategies assisting production, distribution, and consumption. Also, this course will help you develop an appreciation for important concepts in economics, from interest rates and central banking to stocks, bonds, and foreign exchange.

Course Information show close

Welcome to ECON302. Below, please find general information on the course and its requirements.

Course Designer: Samuel K. Andoh

Primary Resources: This course is composed of a range of different free, online materials. However, it makes primary use of the following materials:

Frederic Mishkin’s The Economics of Money, Banking, and Financial Markets
Articles from various sources available on the internet

Requirements for Completion: In order to complete this course, you should have completed principles of microeconomics (ECON101) and principles of macroeconomics (ECON102). These pre-requisites lay the foundation for understanding the advanced material in ECON302.

You have to work through each unit of this course and all of its assigned materials. In order to pass this course, you have to complete the final exam and earn a 70% or higher. Your score on the exam will be tabulated as soon as you finish it. If you do not pass the exam, you may take it again.

Note that you will only receive an official grade on your final exam. However, in order to adequately prepare for it, you will need to work through the assignments and all the reading material in the course.

Time Commitment: This course should take you a total of approximately 90 hours to complete. Each unit includes a time advisory that lists the amount of time you are expected to spend on each subunit. These should help you plan your time accordingly. It may be useful to take a look at these time advisories and to determine how much time you have over the next few weeks to complete each unit and set goals for yourself.

Tips/Suggestions: It is important to pay close attention to the new terminologies you encounter in this course and every other course. You may think you know what money, income or finance is, but as used by economists, these words have technical meanings. Spend the time to study the new vocabulary and it will pay handsome dividends.

As you read, take careful notes on a separate sheet of paper. Mark down any important equations, formulas, and definitions that stand out to you. These notes will be useful to review as you study for your final exam.

Learning Outcomes show close

Upon successful completion of this course, the student will be able to:

Identify the implications, risks, and opportunities of global markets.
Acquire and demonstrate analytical and problem solving skills within money, banking, and financial market disciplines.
Assess how monetary activities affect an economy.
Describe the structure of financial markets, the factors that shape them, and how they are regulated.
Explain the nature and functions of money.
Explain the role of financial markets in the economy.
Assess the responses of the economy to both monetary and fiscal policy.
Explain the basic purposes of the monetary and financial systems.
Identify the markets for stocks, bonds, derivatives, and currencies.
Explain the roles of banks and other financial intermediaries.
Analyze how the Fed affects the economy.
Identify how current money is traded for future money.
Explain the concept “time value of money”.
Discuss how one party to the transaction can make a decision at a later time that will affect subsequent transfers of money.
Explain how information about the future can reduce the uncertainty associated with future monetary value.
Assess how a financial crisis happens and how policy makers should respond.

Course Requirements show close

In order to take this course you must:

√ Have access to a computer.

√ Have continuous broadband Internet access.

√ Have the ability/permission to install plug-ins or software (e.g., Adobe Reader or Flash).

√ Have the ability to download and save files and documents to a computer.

√ Have the ability to open Microsoft files and documents (.doc, .ppt, .xls, etc.).

√ Be competent in the English language.

√ Have read the Saylor Student Handbook.

Preliminary Information

Money and Banking, v. 1.0

You will be prompted to read sections of this book throughout the course. You may choose to download the text in full now and skip to the appropriate section as prompted by the resource boxes below, or you can simply download the specific sections of the text assigned as you progress through each resource box below.

Reading: Money and Banking, v. 1.0 (PDF)

Terms of Use: The text was adapted by The Saylor Foundation under a CreativeCommons-Attribution-NonCommercial-ShareAlike 3.0 License without attribution as requested by the work's original creator or licensee.

Unit Outline show close

2 Financial Markets
2.1 Understanding Interest Rates
2.1.1 Measuring Interest Rates
2.1.2 Distinction Between Interest Rates and Returns
2.1.3 Distinction Between Real and Nominal Interest Rates
2.2 The Behavior of Interest Rates
2.2.1 Determinants of Asset Demand
2.2.2 Supply and Demand in the Bond Market
2.2.3 Changes in Equilibrium Interest Rates
2.2.4 Supply and Demand in the Market for Money: Liquidity Preference Framework
2.2.5 Changes in Equilibrium Interest Rates Due to Liquidity Preference Framework
2.3 The Risk and Term Structure of Interest Rates
2.3.1 Risk Structure of Interest Rates
2.3.2 Term Structure of Interest Rates (Yield Curves)
2.4 The Stock Market, the Theory of Rational Expectations, and the Efficient Market Hypothesis
2.4.1 Computing the Price of Common Stock
2.4.2 The Theory of Rational Expectations
2.4.3 The Efficient Market Hypothesis

3 Financial Institutions
3.1 An Economic Analysis of Financial Structures
3.1.1 Financial Structures around the World
3.1.2 Transaction Costs
3.1.3 Asymmetric Information: Adverse Selection and Moral Hazard
3.1.4 The Lemons Problem: How Adverse Selection Influences Financial Structure
3.2 Banking and the Management of Financial Institutions
3.2.1 The Bank Balance Sheets
3.2.2 Basic Banking
3.2.3 Basic Principles of Bank Management
3.2.4 Managing Credit Risk
3.2.5 Managing Interest-Rate Risk
3.2.6 Off-Balance Sheet Activities
3.3 Banking Industry: Structure and Competition
3.3.1 Historical Development of the Banking System
3.3.2 Financial Innovation and the Evolution of the Banking Industry
3.3.3 Structure of the U.S. Commercial Banking Industry
3.3.4 Bank Consolidation and Nationwide Banking
3.3.5 Separation of the Banking and Other Financial Services Industries
3.3.6 Thrift Industry: Regulation and Structure
3.3.7 International Banking
3.4 Economic Analysis of Banking Regulation
3.4.1 Asymmetric Information and Banking Regulation
3.4.2 International Banking Regulation
3.4.3 1980s U.S. Banking Crisis: Why?
3.4.4 Political Economy of the Savings and Loan Crisis
3.4.5 Savings and Loan Bailout
3.4.6 Federal Deposit Insurance Corporation Improvement Act of 1991
3.4.7 Banking Crises throughout the World
3.5 Non-Bank Finance
3.5.1 Insurance
3.5.2 Pension Funds
3.5.3 Finance Companies
3.5.4 Mutual Funds
3.5.5 Government Financial Intermediation
3.5.6 Securities Market Operations
3.6 Financial Derivatives
3.6.1 Hedging
3.6.2 Interest-Rate Forward Contracts
3.6.3 Financial Futures Contracts and Markets
3.6.4 Options
3.6.5 Interest-Rate Swaps

4 Central Banking
4.1 Structure of the Central Banks and the Federal Reserve System
4.1.1 Origins of the Federal Reserve System
4.1.2 Formal Structure of the Federal Reserve System
4.1.3 The FOMC Meeting
4.1.4 Informal Structure of the Federal Reserve System
4.1.5 Structure and Independent of Foreign Central Banks
4.1.6 Explaining Central Bank Behavior
4.2 Multiple Deposit Creation and the Money Supply Process
4.2.1 Four Players in the Money Supply Process
4.2.2 The Fed’s Balance Sheet
4.2.3 Control of the Monetary Base
4.2.4 Multiple Deposit Creation
4.3 Determination of the Money Supply
4.3.1 The Money Supply Model and the Money Multiplier
4.3.2 Factors That Determine the Money Multiplier
4.3.3 Additional Factors That Determine the Money Supply
4.4 Tools of Monetary Policy
4.4.1 The Market for Reserves and the Federal Funds Rate
4.4.2 Open Market Operations
4.4.3 Discount Policy
4.4.4 Reserve Requirements
4.5 Conduct of Monetary Policy: Goals and Targets
4.5.1 Goals of Monetary Policy
4.5.2 Central Bank Strategies: The Use of Targets
4.5.3 Choosing the Targets
4.5.4 Fed Policy Procedures
4.5.5 The Taylor Rule, NAIRU, and the Philips Curve

5 Foreign Exchange
5.1 The Foreign Exchange Market
5.1.1 Exchange Rates in the Long Run
5.1.2 Exchange Rates in the Short Run
5.1.3 Explaining Changes in Exchange Rates
5.2 The International Financial System
5.2.1 Intervention in the Foreign Exchange Market
5.2.2 Balance of Payments
5.2.3 Evolution of the International Financial System
5.2.4 Capital Controls
5.2.5 The Role of the IMF (International Monetary Fund)
5.2.6 International Considerations and Monetary Policy
5.3 Monetary Policy Strategy: The International Experience
5.3.1 The Role of a Nominal Anchor
5.3.2 Exchange Rate Targeting
5.3.3 Monetary Targeting
5.3.4 Inflation Targeting
5.3.5 Monetary Policy with an Implicit Nominal Anchor

6 Monetary Theory
6.1 The Demand for Money
6.1.1 The Quantity Theory of Money
6.1.2 Is Velocity a Constant?
6.1.3 Keynes Liquidity Preference Theory
6.1.4 Friedman’s Monetary Quantity Theory of Money
6.1.5 Distinguishing Between the Friedman and Keynesian Theories
6.2 The Keynesian Framework and the ISLM Model
6.2.1 Determining of Aggregate Output
6.2.2 The ISLM Model
6.2.3 ISLM Approach to Aggregate Output and Interest Rates
6.3 Monetary and Fiscal Policy in the ISLM Model
6.3.1 Factors that Cause the IS Curve to Shift
6.3.2 Factors that Cause the LM Curve to Shift
6.3.3 Changes in Equilibrium Level of the Interest Rate and Aggregate Output
6.3.4 Effectiveness of Monetary Versus Fiscal Policy
6.4 Aggregate Demand and Supply Analysis
6.4.1 Three Views of Aggregate Demand (Monetarist, Keynesian, and Crowding-Out)
6.4.2 Aggregate Supply and Shifts in the Curve
6.4.3 Equilibrium in Aggregate Supply and Aggregate Demand
6.5 Transmission Mechanisms of Monetary Policy: The Evidence
6.5.1 Framework for Evaluating Empirical Evidence
6.5.2 Early Evidence on the Importance of Money (Keynesian)
6.5.3 Early Evidence on the Importance of Money (Monetarist)
6.5.4 Transmission Mechanisms for Monetary Policy
6.6 Money and Inflation 6.6 Money and Inflation
6.6.1 Money and Inflation: Historical Evidence
6.6.2 The Meaning of Inflation
6.6.3 Views of Inflation (Monetarist, Keynesian, Others)
6.6.4 Origins of Inflationary Monetary Policy
6.6.5 Activist/Non-Activist Policy Debate
6.7 Rational Expectations: Implications for Policy
6.7.1 Lucas Critique of Policy Evaluation
6.7.2 New Classical Macroeconomic Model
6.7.3 New Keynesian Model
6.7.4 Comparison of the Two New Models with the Traditional Model
6.7.5 Impact of Rational Expectations Revolution

7 Final Exam

Expand All Resources Collapse All Resources

Unit 1: Money and Banking

Money and banking institutions are extremely important to the modern economy. The flow of funds (literally trillions of dollars) is indispensable to the production and distribution of all goods and services, both nationally and internationally. They have a profound influence on all facets of our daily lives. This unit will lay the foundation for an understanding of the most important aspects of money and banking by introducing you to financial markets, the banking system, and other financial systems, as well as providing you with a comprehensive discussion of money and its various functions.

Time Advisory show close

Learning Outcomes show close

1.1 Why Study Financial Markets?

Note: The concept of financial Markets is critical to understanding how the financial system channels funds from savers to investor and its role in economic growth. With the understanding of financial markets, you will make sense of the financial activities that are so widely reported in the media. For example, why do different financial markets exist? How do they operate? How are they interrelated? The bond market is also known as the debt, credit, or fixed income market. The bond market is sensitive to interest rates, because interest rates are the price paid for bonds. The stock market is one of the most important sources for companies to raise money. The foreign exchange market allows businesses to convert one currency to another currency. The importance of foreign exchange markets has grown with increased global economic activity, trade, and investment, as well as with technology that makes real-time exchange of information and trading possible.

Reading: Slide Finder’s version of Frederic S. Mishkin’s “Chapter 1: Why Study Money, Banking, and Financial Markets?” Lecture Notes
Link: Slide Finder’s version of Frederic S. Mishkin’s “Chapter 1: Why Study Money, Banking, and Financial Markets?” Lecture Notes (Microsoft PowerPoint)

Instructions: When you click on the link above, you will be directed to a webpage that lists 20 slides. In the "Details" box to the right of the screen, just above the sharing options, there is an arrow button which you may click to download the presentation. To cover the topics in sections 1.1.1-1.1.3, please read slides 1-9.

Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.
See a broken link? Please let us know!
Reading: Money and Banking: “Chapter 2, Section 4: Financial Markets”
Link: Money and Banking: “Chapter 2, Section 4: Financial Markets” (PDF)

Instructions: When you click on the link above, you will be directed to Chapter 2, Section 4 “Financial Markets” of an e-book Money and Banking. Please read Chapter 2, Section 4 in its entirety to cover the topics in sections 1.1.1-1.1.3.
Note on the Text: Section 4 of the Quadrini reading explains the ways in which financial markets and instruments can be grouped.

Terms of Use: “The text was adapted by The Saylor Foundation under a Creative Commons-Attribution-NonCommercial-ShareAlike 3.0 License without attribution as requested by the works original creator or licensee”
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Web Media: YouTube: McGraw-Hill Irwin’s “Finance Video Series”: “Financial Markets”
Link: McGraw-Hill Irwin’s “Finance Video Series”: “Financial Markets”(YouTube)

Instructions: When you click on the link above, you will be directed to McGraw-Hill Irwin’s “Finance Video Series”: “Financial Markets” on YouTube. For subunits 1.1.1-1.1.3, please view the brief video (6:20 minutes) linked above in its entirety.

Note on the Media: This video will give you a quick overview of financial markets.

Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.
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1.1.1 The Bond Market and Interest Rate

1.1.2 The Stock Market

1.1.3 The Foreign Exchange Market

1.2 Why Study Banking and Financial Institutions?

Note: The financial system is the system that allows the transfer of money between savers and borrowers. It comprises financial institutions, markets, instruments, services, practices, and transactions. A financial institution is an institution that provides financial services for its clients or members, for example banks, insurance companies, and investment firms. The health of the economy is closely related to the soundness of its banking system. The borrowing, lending, and related activities of banks facilitate the process of production, distribution, exchange, and consumption of wealth. Financial innovation refers to the creating and marketing of new types of securities.

Reading: Slide Finder’s version of Frederic S. Mishkin’s “Chapter 1: Why Study Money, Banking, and Financial Markets?” Lecture Notes
Link: Slide Finder’s version of Frederic S. Mishkin’s “Chapter 1: Why Study Money, Banking, and Financial Markets?”Lecture Notes (Microsoft PowerPoint)

Instructions: When you click on the link above, you will be directed to a webpage that lists 20 slides. In the "Details" box to the right of the screen, just above the sharing options, there is an arrow button which you may click to download the presentation. For sections 1.2.1-1.2.3, please read only slide 10.

Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.
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Reading: Money and Banking: “Chapter 2, Section 5: Financial Intermediaries”
Link: Money and Banking: “Chapter 2 Section 5: Financial Intermediaries” (PDF)

Instructions: When you click on the link above, you will be directed to Chapter 2, Section 5 “Financial Intermediaries” of the e-book Money and Banking. Please read Chapter 2, Section 5 in its entirety to cover the material in sections 1.2.1-1.2.3.

Note on the Text: This section of Money and Banking explains ways in which financial intermediaries can be classified.

Terms of Use: The text was adapted by The Saylor Foundation under a Creative Commons-Attribution-NonCommercial-ShareAlike 3.0 License without attribution as requested by the work's original creator or licensee.
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Lecture: Yale University: Professor Robert J. Shiller’s “Lecture 13: Banking: Successes and Failures”
Link: Yale University: Professor Robert J. Shiller’s “Lecture 13: Banking: Successes and Failures” (YouTube) and transcript (PDF)

Also available in:
iTunes U
Quicktime (Low bandwidth/slow connection)
MP3 format
Transcript (HTML)

Instructions: When you click on the link above, you will be directed to Professor Robert J. Shiller’s lecture 13 “Banking: Successes and Failures.” Please watch this video lecture in its entirety to cover the topics in sections 1.2.1-1.2.3. You may download the video lecture using Flash or QuickTime. You may also want to use the audio version (mp3) or view the transcript (html.

Note on the Media: Lecturer, Robert J. Shiller, is the Arthur M. Okun Professor of Economics at Yale University. This video lecture was created for his Financial Markets course.

Terms of Use: Robert Shiller, Financial Markets (Yale University: Open Yale Courses), http://oyc.yale.edu (Accessed March 2, 2011). License: Creative Commons BY-NC-SA 3.0. The original version can be found here.
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1.2.1 Structure of the Financial System

1.2.2 Banks and Other Financial Institutions

1.2.3 Financial Innovation

1.3 Why Study Money and Monetary Policy?

Note: The business cycle refers to economy-wide fluctuations in production or economic activities over several months or years. Money is one of the factors that cause business cycles. Monetary inflation is a rise in the general level of prices of goods and services, which is caused by a sustained increase in the money supply of a country. Generally speaking, a higher real interest rate reduces the broad money supply. Fiscal policy is the use of government expenditure and revenue collection to influence the economy. Monetary policy is the use of the supply of money by the monetary authority of a country to affect the economy.

Reading: Slide Finder’s version of Frederic S. Mishkin’s “Chapter 1: Why Study Money, Banking, and Financial Markets?” Lecture Notes
Link: Slide Finder’s version of Frederic S. Mishkin’s “Chapter 1: Why Study Money, Banking, and Financial Markets?”Lecture Notes (Microsoft PowerPoint)

Instructions: When you click on the link above, you will be directed to a webpage that lists 20 slides. In the "Details" box to the right of the screen, just above the sharing options, there is an arrow button which you may click to download the presentation. Please read slides 11-23 for information that addresses sections 1.3.1-1.3.4 of this course.

Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.
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Reading: Money and Banking: “Chapter 3, Section 1: Of Love, Money, and Transactional Efficiency”
Link: Money and Banking: “Chapter 3, Section 1: Of Love, Money, and Transactional Efficiency” (PDF)

Instructions: When you click on the link above, you will be directed to Chapter 3, Section 1 “Of Love, Money, and Transactional Efficiency” of an on-line book Money and Banking. Please read Chapter 3, Section 1 in its entirety to cover the topics in sections 1.3.1-1.3.4.

Terms of Use: The text was adapted by The Saylor Foundation under a CreativeCommons-Attribution-NonCommercial-ShareAlike 3.0 License without attribution as requested by the work's original creator or licensee.
See a broken link? Please let us know!
Lecture: Yale University: Professor Robert J. Shiller’s “Lecture 16: The Evolution and Perfection of Monetary Policy”
Link: Yale University: Professor Robert J. Shiller’s “Lecture 16: The Evolution and Perfection of Monetary Policy” (transcript PDF)

Also available in:
iTunes U
Quicktime (Low bandwidth/slow connection)
MP3 format
Transcript (HTML)

Instructions: When you click on the link above, you will be directed to Robert J. Shiller’s lecture 16 “The Evolution and Perfection of Monetary Policy.” To download this video, you will need to click on the Flash icon or the QuickTime icon in the lower right corner of the webpage. Please watch the video in its entirety for information on the topics covered in sections 1.3.1-1.3.4. You may also choose to listen to the audio version (mp3) or to read the transcript (html format).

Note on the Media: Lecturer, Robert J. Shiller, is the Arthur M. Okun Professor of Economics at Yale University. This video lecture was created for his Financial Markets course.

Terms of Use: Robert Shiller, Financial Markets (Yale University: Open Yale Courses), http://oyc.yale.edu (Accessed March 2, 2011). License: Creative Commons BY-NC-SA 3.0. The original version can be found here.
See a broken link? Please let us know!

1.3.1 Money and Business Cycle

1.3.2 Money and Inflation

1.3.3 Money and Interest Rates

1.3.4 Fiscal Policy and Monetary Policy

Assessment: Pearson Education: Frederic S. Mishkin’s Multiple Choice Quiz on “Chapter 1: Why Study Money, Banking, and Financial Markets?”
Link: Pearson Education: Frederic S. Mishkin’s Multiple Choice Quiz on “Chapter 1: Why Study Money, Banking, and Financial Markets?” (HTML)

Instructions: This quiz will assess the material you learned about in sections 1.1-1.3. When you click on the link above, you will be directed to Frederic S. Mishkin’s Multiple Choice Quiz on “Chapter 1: Why Study Money, Banking, and Financial Markets?” from his book The Economics of Money, Banking, and Financial Markets. After you finish the 15 questions of the quiz, please click “Submit Answers for Grading” to see your results for the quiz.

Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.
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1.4 Overview of the Financial System

Note: The financial system is a critical element in a well-functioning economy. Financial markets (bond and stock markets) and financial intermediaries (banks, insurance companies, and pension funds) move funds from lender-savers to borrower-spenders. The diversity of both lenders and borrowers is responsible for the enormous array of different financial instruments. Financial markets move these funds directly from lender-savers to borrower-spenders, while financial intermediaries accomplish this function indirectly.

Reading: Slide Finder’s version of Frederic S. Mishkin’s “Chapter 2: An Overview of the Financial System” Lecture Notes
Link: Slide Finder’s version of Frederic S. Mishkin’s “Chapter 2: An Overview of the Financial System” Lecture Notes (Microsoft PowerPoint)

Instructions: When you click on the link above, you will be directed to a webpage that lists 20 slides. In the "Details" box to the right of the screen, just above the sharing options, there is an arrow button which you may click to download the presentation. Please review all of the slides for Chapter 2 to cover the material in sections 1.4.1-1.4.4.

Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.
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Reading: Money and Banking: “Chapter 2, Section 2: Financial Systems”
Link: Money and Banking: “Chapter 2, Section 2: Financial Systems” (PDF)

Instructions: Please note this reading covers material in sections 1.4.1-1.4.4. When you click on the second link above, you will be directed to Chapter 2, Section 2 “Financial Systems” of the e-book Money and Banking. Please read Chapter 2, Section 2 in its entirety.

Terms of Use: The text was adapted by The Saylor Foundation under a CreativeCommons-Attribution-NonCommercial-ShareAlike 3.0 License without attribution as requested by the work's original creator or licensee.
See a broken link? Please let us know!
Web Media: YouTube: thetonkin’s post of John Clarke’s and Bryan Dawe’s “How Does the Financial System Work?” Discussion
Link: thetonkin’s post of John Clarke’s and Bryan Dawe’s “How Does the Financial System Work?”Discussion (YouTube)

Instructions: When you click on the link above, you will be directed to the video “How Does the Financial System Work.” Please watch this short (2:42 minutes) video in its entirety to learn about the material outlined in sections 1.4.1-1.4.4.

Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.
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1.4.1 Function of Financial Markets

1.4.2 Structure of Financial Markets

1.4.3 Internationalization of Financial Markets

1.4.4 Function of Financial Intermediaries (and Transaction Costs)

Assessment: Pearson Education: Frederic S. Mishkin’s “Chapter 2: An Overview of the Financial System”: “Multiple Choice Quiz”
Link: Pearson Education: Frederic S. Mishkin’s “Chapter 2: An Overview of the Financial System”: “Multiple Choice Quiz” (HTML)

Instructions: Please note this assessment covers the material you have learned about in sections 1.4.1-1.4.4. Please complete this Multiple Choice Quiz on Mishkin’s “Chapter 2: An Overview of the Financial System.” After you finish the 15 questions of the quiz, please click “Submit Answers for Grading” to redirect to the answer key.

Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.
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1.5 What Is Money?

Note: Money has always been important to the economy, because it promotes economic efficiency. In this subunit, we develop a current definition of money by addressing the functions of money and by learning about the different forms of money through history. We have come to understand money as a social invention that serves to facilitate trade, and because of that, money has an important role to play in allowing and promoting economic growth. In this subunit, we deal with a problem that has received increased attention among economists since the mid-1970s: just what is money or the money supply? This topic allows us to consider the importance of money, discovering why it evolves in all but the most primitive societies.

Reading: Slide Finder’s version of Frederic S. Mishkin’s “Chapter 3: What Is Money?” Lecture Notes
Link: Slide Finder’s version of Frederic S. Mishkin’s “Chapter 3: What Is Money?” Lecture Notes (Microsoft PowerPoint)

Instructions: Please note these lecture notes address the material outlined in sections 1.5.1-1.5.3. When you click on the link above, you will be directed to a webpage that lists 8 slides. In the "Details" box to the right of the screen, just above the sharing options, there is an arrow button which you may click to download the presentation. Please read all slides for Chapter 3.

Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.
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Reading: Money and Banking: “Chapter 3: Money”
Link: Money and Banking: “Chapter 3: Money” (PDF)

Instructions: When you click on the link above, you will be directed to Chapter 3 “Money” of an on-line book Money and Banking. Please read Chapter 3 in its entirety for information on the topics covered in sections 1.5.1-1.5.3.

Terms of Use: The text was adapted by The Saylor Foundation under a CreativeCommons-Attribution-NonCommercial-ShareAlike 3.0 License without attribution as requested by the work's original creator or licensee.
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Web Media: YouTube: Chris Martenson’s “Crash Course: Chapter 6—What Is Money?”
Link: Chris Martenson’s “Crash Course: Chapter 6— What is Money?”(YouTube)

Instructions: Please note that this video covers the material in sections 1.5.1-1.5.3. When you click on the link above, you will be directed to Chris Martenson’s “Chapter 6: What is Money?” on YouTube. Please watch this video (6:16 minutes) in its entirety.

Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.
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Assessment: Pearson Education: Frederic S. Mishkin’s “Chapter 3: What Is Money?”: “Multiple Choice Quiz”
Link: Pearson Education: Frederic S. Mishkin’s “Chapter 3: What Is Money?”: “Multiple Choice Quiz” (HTML)

Instructions: Please note this quiz assesses what you have learned in sections 1.5.1-1.5.3. When you click on the link above, you will be directed to Frederic S. Mishkin’s “Chapter 3: What Is Money?” multiple choice quiz. After you finish the 15 questions of the quiz, please click “Submit Answers for Grading” to check your answers against the answer key.

Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.
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1.5.1 Meaning of Money

1.5.2 Functions of Money

1.5.3 Evolution of the Payment System

Unit 2: Financial Markets

The loanable funds market is the broad marketplace that coordinates the borrowing and lending decisions of different business firms and households. It consists of commercial banks, savings and loans, stocks and bonds, and insurance companies. Loanable funds are supplied as households and firms save money rather than spend it on their own consumption. The amount of funds supplied at any given time is a function of the fund price, or interest rate. However, in financial markets, there are two types of interest rates: “nominal interest rates,” which overstate the real cost of borrowing during an inflationary period, and real interest rates, which are adjusted for inflation (or changes in prices). Real interest rates indicate the real cost to the borrower (and the yield to the lender) in terms of goods and services. This unit will focus on the capital market, which consists of various marketplaces in which investments (such as stocks and bonds) are bought and sold.

Time Advisory show close

Learning Outcomes show close

2.1 Understanding Interest Rates

Note: Interest rates are among the most important variables in the economy. This subunit explains how interest rates are measured and shows that the interest rate on a bond is not always an accurate measure of how good of an investment it will be. The most accurate measure of interest rates is yield to maturity. The concept of yield to maturity reveals that bond prices and interest rates are negatively related, and the longer the maturity of the bond, the greater the change in the price of the bond from a given change in the interest rate will be. Interest rates are important, because they affect how much people and firms wish to save or borrow. The terms defined in this subunit will be employed throughout the book.

Reading: Pearson Education Canada’s version of Frederic S. Mishkin’s “Chapter 4: Understanding Interest Rates” Lecture Notes
Link: Pearson Education Canada's version of Frederic S. Mishkin’s “Chapter 4: Understanding Interest Rates” Lecture Notes (Microsoft PowerPoint)

Instructions: When you click on the link above, you will be directed to a webpage that lists links to lecture notes on specific chapters from Mishkin's The Economics of Money, Banking, and Financial Markets. Click on the "Chapter 4" link to download the presentation. Please review all of the slides for Chapter 4 to cover the topics in sections 2.1.1-2.1.3.

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Reading: Money and Banking: “Chapter 4: Interest Rates”
Link: Money and Banking: “Chapter 4: Interest Rates” (PDF)

Instructions: Please note this reading addresses the material in sections 2.1.1-2.1.3. When you click on the link above, you will be directed to Chapter 4 “Interest Rates” of an e-book Money and Bankingi. Please read Chapter 4 in its entirety.

Terms of Use: The text was adapted by The Saylor Foundation under a Creative Commons-Attribution-NonCommercial-ShareAlike 3.0 License without attribution as requested by the work's original creator or licensee.
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Web Media: Youtube: Professor Campbell Harvey's “Understanding Interest Rates, Part I”
Link: Professor Campbell Harvey's “Understanding Interest Rates, Part I” (YouTube)

Instructions: Please note this video covers the topics in sections 2.1.1-2.1.3. When you click on the link above, you will be directed to Professor Campbell Harvey's course video lecture on “Understanding Interest Rates.” Please watch the video (9:24 minutes) in its entirety.

Note on the Media: The lecturer in this video, Professor Campbell Harvey, teaches Global Financial Management at Duke University.

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Assessment: Pearson Education: Frederic S. Mishkin’s “Chapter 4: Understanding Interest Rates”: “Multiple Choice Quiz”
Link: Pearson Education: Frederic S. Mishkin’s “Chapter 4: Understanding Interest Rates”: “Multiple Choice Quiz” (HTML)

Instructions: This quiz will assess what you have learned in subunits 2.1.1-2.1.3. When you click on the link above, you will be directed to Frederic S. Mishkin’s “Chapter 4: Understanding Interest Rates” multiple choice quiz. After you finish the 15 questions of the quiz, please click “Submit Answers for Grading” to check your answers against the answer key.

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2.1.1 Measuring Interest Rates

2.1.2 Distinction Between Interest Rates and Returns

2.1.3 Distinction Between Real and Nominal Interest Rates

2.2 The Behavior of Interest Rates

Note: This subunit examines how interest rates are determined and the factors that influence their behavior. The supply and demand analysis developed here explains why interest rates have had such substantial fluctuations in recent years. Interest rates fluctuate. In this subunit, we employ both the bond market and the liquidity preference frameworks to see how a variety of shocks affect interest rates. We address how a change in the money supply affects the interest rate, both in the near term while other determinants of the interest rate are held constant, and in the long run when other determinants are allowed to adjust to the change in the money supply.

Reading: Pearson Education Canada’s version of Frederic S. Mishkin’s “Chapter 5: The Behavior of Interest Rates” Lecture Notes
Link: Pearson Education Canada's version of Frederic S. Mishkin’s “Chapter 5: The Behavior of Interest Rates” Lecture Notes (Microsoft PowerPoint)

Instructions: When you click on the link above, you will be directed to a webpage that lists links to lecture notes on specific chapters from Mishkin's The Economics of Money, Banking, and Financial Markets. Click on the "Chapter 5" link to download the presentation. Please read all slides for Chapter 5 for information on the material covered in sections 2.2.1-2.2.5.

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Reading: Money and Banking: “Chapter 5: The Economics of Interest-Rate Fluctuations”
Link: Money and Banking: “Chapter 5: The Economics of Interest-Rate Fluctuations” (PDF)

Instructions: Please note this reading will address topics outlined in 2.2.1-2.2.5. When you click on the link above, you will be directed to Chapter 5 “The Economics of Interest-Rate Fluctuations” of the e-book Money and Banking. Please read Chapter 5 in its entirety.

Terms of Use: The text was adapted by The Saylor Foundation under a Creative Commons-Attribution-NonCommercial-ShareAlike 3.0 License without attribution as requested by the work's original creator or licensee.
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Web Media: Vimeo.com: Marketplace’s “Interest Rates” Video
Link: Vimeo.com: Marketplace’s “Interest Rates”Video (Adobe Flash)

Instructions: When you click on the link above, you will be directed to Marketplace’s Video Shows on “Interest Rates.” Please watch this brief video in its entirety for information on the subjects outlined in sections 2.2.1-2.2.5.

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2.2.1 Determinants of Asset Demand

2.2.2 Supply and Demand in the Bond Market

2.2.3 Changes in Equilibrium Interest Rates

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

2.2.5 Changes in Equilibrium Interest Rates Due to Liquidity Preference Framework

Assessment: for 2.2.1-2.2.5: Pearson Education: Frederic S. Mishkin’s “Chapter 5: The Behavior of Interest Rates”: “Multiple Choice Quiz”
Link: Pearson Education: Frederic S. Mishkin’s “Chapter 5: The Behavior of Interest Rates”: “Multiple Choice Quiz” (HTML)

Instructions: This quiz will assess what you have learned in sections 2.2.1-2.2.5. When you click on the link above, you will be directed to Frederic S. Mishkin’s “Chapter 5: The Behavior of Interest Rates” multiple choice quiz. After you finish the 15 questions of the quiz, please click “Submit Answers for Grading” to check your answers against the answer key.

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2.3 The Risk and Term Structure of Interest Rates

Note: The supply and demand analysis of interest rate behavior in the previous section examined the determination of just one interest rate, even though there are many different interest rates in the economy. This subunit completes the interest rate picture by examining the relationship among interest rates on securities that differ in their riskiness, liquidity, income tax treatment, and term to maturity. There are many different interest rates. Due to differences in risk, liquidity, and tax treatment, bonds with the same term to maturity may have different interest rates. The relationship between these interest rates is known as the risk structure of interest rates. Bonds with different terms to maturity (but that are otherwise the same) also have different interest rates. The relationship between these interest rates is known as the term structure of interest rates.

Reading: Pearson Education Canada's version of Frederic S. Mishkin’s “Chapter 6: The Risk and Term Structure of Interest Rates” Lecture Notes
Link: Pearson Education Canada's version of Frederic S. Mishkin’s “Chapter 6: The Risk and Term Structure of Interest Rates” Lecture Notes (Microsoft PowerPoint)

Instructions: When you click on the link above, you will be directed to a webpage that lists links to lecture notes on specific chapters from Mishkin's The Economics of Money, Banking, and Financial Markets. Click on the "Chapter 6" link to download the presentation. Please read all of the slides for Chapter 6. Please note this slideshow addresses material covered in sections 2.3.1 and 2.3.2.

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Reading: Money and Banking: “Chapter 6: The Economics of Interest-Rate Spreads and Yield Curves”
Link: Money and Banking: “Chapter 6: The Economics of Interest-Rate Spreads and Yield Curves” (PDF)

Instructions: When you click on the link above, you will be directed to Chapter 6 “The Economics of Interest-Rate Spreads and Yield Curve” of the e-book Money and Banking. Please read Chapter 6 in its entirety for information on the material outlined in sections 2.3.1 and 2.3.2.

Terms of Use: The text was adapted by The Saylor Foundation under a Creative Commons-Attribution-NonCommercial-ShareAlike 3.0 License without attribution as requested by the work's original creator or licensee.
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Web Media: YouTube: Khan Academy’s “Introduction to the Yield Curve”
Link: YouTube: Khan Academy’s “Introduction to the Yield Curve”

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Instructions: Please note this video covers the topics in sections 2.3.1 and 2.3.2. When you click on the link above, you will be directed to Khanacademy’s video series titled “Introduction to the Yield Curve.” Please watch this video (9:56 minutes) in its entirety.

Terms of Use: This video is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 United States License. This video was created by Salman Khan for the Khan Academy.
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2.3.1 Risk Structure of Interest Rates

2.3.2 Term Structure of Interest Rates (Yield Curves)

Assessment: Pearson Education: Frederic S. Mishkin’s “Chapter 6: The Risk and Term Structure of Interest Rates”: “Multiple Choice Quiz”
Link: Pearson Education: Frederic S. Mishkin’s “Chapter 6: The Risk and Term Structure of Interest Rates”: “Multiple Choice Quiz” (HTML)

Instructions: This quiz will assess what you have learned in sections 2.3.1 and 2.3.2. Please complete Mishkin’s multiple choice quiz on “Chapter 6: The Risk and Term Structure of Interest Rates.” After you finish the 15 questions of the quiz, please click “Submit Answers for Grading” to assess the quiz.

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

Note: This subunit discusses theories that explain changes in the stock market. First, fundamental theories of stock valuation are developed. Second, the theory of rational expectations is introduced, along with the implications of this theory as applied to financial markets, where it is known as the efficient market hypothesis. Recently, expectations theory has received great attention as economists have searched for more adequate explanations of the observed behavior of economic variables, such as unemployment, interest rates, and asset prices. There are a variety of fundamental theories that underlie the valuation of stocks and other securities. These theories require that we understand how expectations affect stock market behavior, because to value a stock, people must form expectations about a firm's future dividends and the rate to discount future values. The theory of rational expectations, when applied to financial markets, implies the efficient market hypothesis. Although the evidence is mixed, the theory of rational expectations is a good place to start analyzing expectations.

Reading: Pearson Education Canada’s version of Frederic S. Mishkin’s “Chapter 7: The Stock Market, the Theory of Rational Expectations, and the Efficient Market Hypothesis” Lecture Notes
Link: Pearson Education Canada’s version of Frederic S. Mishkin’s “Chapter 7: The Stock Market, the Theory of Rational Expectations, and the Efficient Market Hypothesis” Lecture Notes (Microsoft PowerPoint)

Instructions: When you click on the link above, you will be directed to a webpage that lists links to lecture notes on specific chapters from Mishkin's The Economics of Money, Banking, and Financial Markets. Click on the "Chapter 7" link to download the presentation. Please read all of the slides for Chapter 7 to cover the topics outlined in sections 2.4.1-2.4.3.

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Reading: Money and Banking: “Chapter 7: Rational Expectations, Efficient Markets, and the Valuation of Corporate Equities”
Link: Money and Banking: “Chapter 7: Rational Expectations, Efficient Markets, and the Valuation of Corporate Equities” (PDF)

Instructions: Please note this reading covers material addressed in 2.4.1-2.4.3. When you click on the link above, you will be directed to Chapter 7 “Rational Expectations, Efficient Markets, and the Valuation of Corporate Equities” of the e-book Money and Banking. Please read Chapter 7 in its entirety.

Terms of Use: The text was adapted by The Saylor Foundation under a CreativeCommons-Attribution-NonCommercial-ShareAlike 3.0 License without attribution as requested by the work's original creator or licensee.
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Lecture: Yale University: Professor Robert J. Shiller’s “Lecture 6: Efficient Markets vs. Excess Volatility”
Link: Yale University: Professor Robert J. Shiller’s “Lecture 6: Efficient Markets vs. Excess Volatility”

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Instructions: Please note this video lecture addresses topics in sections 2.4.1-2.4.3. When you click on the link above, you will be directed to Professor Robert J. Shiller’s “Efficient Markets vs. Excess Volatility” class lecture for his Financial Markets course. To download this video, you will need to click on the Flash icon or the QuickTime icon in the lower right corner of the webpage. Please watch it in its entirety. You may also choose to listen to the audio version (mp3) or read the transcript (html).

Terms of Use: Robert Shiller, Financial Markets (Yale University: Open Yale Courses), http://oyc.yale.edu (Accessed March 2, 2011). License: Creative Commons BY-NC-SA 3.0. The original version can be found here.
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2.4.1 Computing the Price of Common Stock

2.4.2 The Theory of Rational Expectations

2.4.3 The Efficient Market Hypothesis

Assessment: Pearson Education: Frederic S. Mishkin’s “Chapter 7: The Stock Market, the Theory of Rational Expectations, and the Efficient Market Hypothesis”: “Multiple Choice Quiz”
Link: Pearson Education: Frederic S. Mishkin’s “Chapter 7: The Stock Market, the Theory of Rational Expectations, and the Efficient Market Hypothesis”: “Multiple Choice Quiz” (HTML)

Instructions: This quiz will assess what you have learned in sections 2.4.1-2.4.3. When you click on the link above, you will be directed to Frederic S. Mishkin’s “Chapter 7: The Stock Market, the Theory of Rational Expectations, and the Efficient Market Hypothesis” multiple choice quiz. After you finish the 15 questions of the quiz, please click “Submit Answers for Grading” to check your answers.

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Unit 3: Financial Institutions

Among the many challenges in any exchange economy are transaction costs, or the time, effort, and other resources necessary to search out, negotiate, and conduct exchanges of goods and services. Money and the financial institutions that have evolved around money enable people to gain from complex exchanges by providing a common denominator into which all goods and services can be converted. As economies grow and expand, they give rise to a wide variety of institutions that function as the fuel that propels the economic mechanism. Over time, special institutions with the primary function of guaranteeing that money and other financial assets flow throughout the entire economy have developed.

This unit will study financial institutions and their effects on the overall economy. It will also introduce financial intermediaries and the role they play in solving the problem of asymmetric information, where one party has insufficient information about another party involved in a transaction, which hinders accurate decision-making.

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Learning Outcomes show close

3.1 An Economic Analysis of Financial Structures

Note: The financial structure is designed to promote economic efficiency. When events reduce the economic efficiency of financial institutions, a financial crisis may occur, which has severe consequences for the economy. Lending is risky. Borrowers with ill intentions may choose to skip town and fail to leave a forwarding address, and even those with honest intentions may undertake actions that increase the probability that they will be unable to meet their payment obligations. Given these hazards, individuals may be understandably reluctant to lend. Although lending is risky for the lender, the channeling of funds from individuals with savings to others with productive investment opportunities is essential for economic growth. Channeling funds from savers to investors is beneficial to the economy and the parties to the exchange, but only if investors have incentives to honor their promises and pay back the borrowed funds.

Reading: Pearson Education Canada’s version of Frederic S. Mishkin’s “Chapter 8: An Economic Analysis of Financial Structure” Lecture Notes
Link: Pearson Education Canada’s version of Frederic S. Mishkin’s “Chapter 8: An Economic Analysis of Financial Structure” Lecture Notes (Microsoft PowerPoint)

Instructions: When you click on the link above, you will be directed to a webpage that lists links to lecture notes on specific chapters from Mishkin's The Economics of Money, Banking, and Financial Markets. Click on the "Chapter 8" link to download the presentation. Please read all of the slides for Chapter 8 for information on the subjects outlined in sections 3.1.1-3.1.4.

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Reading: Money and Banking: “Chapter 8: Financial Structure, Transaction Costs, and Asymmetric Information”
Link: Money and Banking: “Chapter 8: Financial Structure, Transaction Costs, and Asymmetric Information” (PDF)

Instructions: Please note this reading covers topics in sections 3.1.1-3.1.4. When you click on the link above, you will be directed to Chapter 8 “Financial Structure, Transaction Costs, and Asymmetric Information” of the e-book Money and Banking. Please read Chapter 8 in its entirety.

Terms of Use: The text was adapted by The Saylor Foundation under a Creative Commons-Attribution-NonCommercial-ShareAlike 3.0 License without attribution as requested by the work's original creator or licensee.
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Lecture: Yale University: Ben Polak’s “Lecture 23: Asymmetric Information: Silence, Signaling, and Suffering Education”
Link: Yale University: Ben Polak’s “Lecture 23: Asymmetric Information: Silence, Signaling, and Suffering Education”

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Instructions: Please note this video lecture covers topics in sections 3.1.1-3.1.4. When you click on the link above, you will be directed to Ben Polak’s lecture 23 of his course lectures. To download this video, you will need to click on the Flash icon or the QuickTime icon in the lower right corner of the webpage. Please watch this video in its entirety. You may choose to listen to the audio version (mp3) or read the transcript (html format).

Note on the Media: Lecturer Ben Polak is Professor of Economics and Management at Yale University. This lecture was designed for his Game Theory course.

Terms of Use: Ben Polak, Game Theory (Yale University: Open Yale Courses), http://oyc.yale.edu (Accessed March 2, 2011). License: Creative Commons BY-NC-SA 3.0. The original version can be found here.
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3.1.1 Financial Structures around the World

3.1.2 Transaction Costs

3.1.3 Asymmetric Information: Adverse Selection and Moral Hazard

3.1.4 The Lemons Problem: How Adverse Selection Influences Financial Structure

Assessment: Pearson Education: Frederic S. Mishkin’s “Chapter 8: An Economic Analysis of Financial Structure”: “Multiple Choice Quiz”
Link: Pearson Education: Frederic S. Mishkin’s “Chapter 8: An Economic Analysis of Financial Structure”: “Multiple Choice Quiz” (HTML)

Instructions: This quiz will assess what you have learned in sections 3.1.1-3.1.4. When you click on the link above, you will be directed to Frederic S. Mishkin’s “Chapter 8: An Economic Analysis of Financial Structure” multiple choice quiz. After you finish the 15 questions of the quiz, please click “Submit Answers for Grading” to redirect to the answer key.

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3.2 Banking and the Management of Financial Institutions

Note: Banks are the most important financial intermediaries in the United States. In this subunit, we examine the bank balance sheet and the basic principles of bank management in order to improve our understanding of how banks operate in our economy. We focus on how commercial banks are managed in order to maximize profits. We concentrate on commercial banks, because they are the most important financial intermediaries.

Reading: Pearson Education Canada's version of Frederic S. Mishkin’s “Chapter 9: Banking and the Management of Financial Institutions” Lecture Notes
Link: Pearson Education Canada’s version of Frederic S. Mishkin’s “Chapter 9: Banking and the Management of Financial Institutions” Lecture Notes (Microsoft PowerPoint)

Instructions: When you click on the link above, you will be directed to a webpage that lists links to lecture notes on specific chapters from Mishkin's The Economics of Money, Banking, and Financial Markets. Click on the "Chapter 9" link to download the presentation. Please read all of the slides for Chapter 9 for information on the topics outlined in sections 3.2.1-3.2.6.

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Reading: Money and Banking: “Chapter 9: Bank Management”
Link: Money and Banking: “Chapter 9: Bank Management” (PDF)

Instructions: Please note that this reading covers material for sections 3.2.1-3.2.6. When you click on the link above, you will be directed to Chapter 9 “Bank Management” of the e-book Money and Banking. Please read Chapter 9 in its entirety.

Terms of Use: The text was adapted by The Saylor Foundation under a Creative Commons-Attribution-NonCommercial-ShareAlike 3.0 License without attribution as requested by the work's original creator or licensee.
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Web Media: YouTube: ignousom’s “Banking and Financial Management”
Link: ignousom’s “Banking and Financial Management” (YouTube)

Instructions: Please note that this video lecture covers material for sections 3.2.1-3.2.6. When you click on the link above, you will be directed to a video on “Banking and Financial Management.” Please watch the video (43 minutes) in its entirety.

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3.2.1 The Bank Balance Sheets

3.2.2 Basic Banking

3.2.3 Basic Principles of Bank Management

3.2.4 Managing Credit Risk

3.2.5 Managing Interest-Rate Risk

3.2.6 Off-Balance Sheet Activities

Assessment: Pearson Education: Frederic S. Mishkin’s “Chapter 9: Banking and the Management of Financial Institutions”: “Multiple Choice Quiz”
Link: Pearson Education: Frederic S. Mishkin’s “Chapter 9: Banking and the Management of Financial Institutions”: “Multiple Choice Quiz” (HTML)

Instructions: This quiz will assess the material covered in sections 3.2.1-3.2.6. When you click on the link above, you will be directed to Frederic S. Mishkin’s multiple choice quiz on Chapter 9. After you finish the 15 questions of the quiz, please click “Submit Answers for Grading” to redirect to the answer key.

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3.3 Banking Industry: Structure and Competition

Note: Banks are financial intermediaries in business to earn profits. Compared to other countries, the United States has many more small banks. In this subunit, we see why there are so many banks in the United States, and we address the competitiveness, efficiency, and soundness of the banking system. This section begins with a brief introduction to the history of banking in the U.S. It then examines how financial innovations have increased the competitive environment in banking, fundamentally changing this industry. The section then describes the commercial banking industry and goes on to look at the thrift industry in the United States. Lastly, we examine the forces behind the growth in international banking with special emphasis on developments that have affected us in the United States.

Reading: Pearson Education Canada’s version of Frederic S. Mishkin’s “Chapter 10: Banking Industry: Structure and Competition” Lecture Notes
Link: Pearson Education Canada’s version of Frederic S. Mishkin’s “Chapter 10: Banking Industry: Structure and Competition” Lecture Notes (Microsoft PowerPoint)

Instructions: When you click on the link above, you will be directed to a webpage that lists links to lecture notes on specific chapters from Mishkin's The Economics of Money, Banking, and Financial Markets. Click on the "Chapter 10" link to download the presentation. Please read all of the slides for Chapter 10 for information on the topics outlined in sections 3.3.1-3.3.7.

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Reading: Money and Banking: “Chapter 10: Innovation and Structure in Banking and Finance”
Link: Money and Banking: “Chapter 10: Innovation and Structure in Banking and Finance” (PDF)

Instructions: Please note this reading covers sections 3.3.1-3.3.7. When you click on the link above, you will be directed to Chapter 10 “Innovation and Structure in Banking and Finance” of the e-book Money and Banking. Please read Chapter 10 in its entirety.

Terms of Use: The text was adapted by The Saylor Foundation under a Creative Commons-Attribution-NonCommercial-ShareAlike 3.0 License without attribution as requested by the work's original creator or licensee.

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Web Media: Dailymotion: Income Central’s “Banking Industry: A Look at the Past and the Future”
Link: Dailymotion: Income Central’s “Banking Industry: A Look at the Past and the Future” (Adobe Flash)

Instructions: Please note this video addresses the topics in sections 3.3.1-3.3.7. When you click on the link above, you will be directed to Income Central’s video lecture titled “Banking Industry: A Look at the Past and the Future,” hosted by dailymotion.com. Please watch the video (9:45 minutes) in its entirety.

Note on the Media: This video was originally created by IncomeCentral.com as an educational tool to train bankers.

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3.3.1 Historical Development of the Banking System

3.3.2 Financial Innovation and the Evolution of the Banking Industry

3.3.3 Structure of the U.S. Commercial Banking Industry

3.3.4 Bank Consolidation and Nationwide Banking

3.3.5 Separation of the Banking and Other Financial Services Industries

3.3.6 Thrift Industry: Regulation and Structure

3.3.7 International Banking

Assessment: Pearson Education: Frederic S. Mishkin’s “Chapter 10: Banking Industry: Structure and Competition”: “Multiple Choice Quiz”
Link: Pearson Education: Frederic S. Mishkin’s “Chapter 10: Banking Industry: Structure and Competition”: “Multiple Choice Quiz” (HTML)

Instructions: Please note this quiz will assess what you have learned in sections 3.3.1-3.3.7. When you click on the link above, you will be directed to Frederic S. Mishkin’s “Chapter 10: Banking Industry: Structure and Competition” multiple choice quiz. After you finish the 15 questions of the quiz, please click “Submit Answers for Grading” to assess how you did on the quiz.

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3.4 Economic Analysis of Banking Regulation

Note: In this subunit, we use economic analysis to show why financial institutions and banks are so heavily regulated. Banking regulation, however, is not always successful. Banking crises cause regulators to reform existing regulations. This section develops an economic analysis of how banking regulation affects the behavior of banking institutions. This analysis explains why banking is among the most heavily regulated sectors of the economy, why the banking crisis occurred in the 1980s, and whether recent banking legislation or other proposed reforms are likely to ensure that future financial crises can be avoided.

Reading: Pearson Education Canada's version of Frederic http://www.saylor.org/site/wp-admin/profile.phpS. Mishkin’s “Chapter 11: Economic Analysis of Banking Regulation” Lecture Notes
Link: Pearson Education Canada’s version of Frederic S. Mishkin’s “Chapter 11: Economic Analysis of Banking Regulation” Lecture Notes (Microsoft PowerPoint)

Instructions: When you click on the link above, you will be directed to a webpage that lists links to lecture notes on specific chapters from Mishkin's The Economics of Money, Banking, and Financial Markets. Click on the "Chapter 11" link to download the presentation. Please read all of the slides for Chapter 11 for information that covers sections 3.4.1-3.4.7.

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Reading: Money and Banking: “Chapter 11: The Economics of Financial Regulation”
Link: Money and Banking: “Chapter 11: The Economics of Financial Regulation” (PDF)

Instructions: Please note this reading addresses the topics in sections 3.4.1-3.4.7. When you click on the link above, you will be directed to Chapter 11 “The Economics of Financial Regulation” of the e-book Money and Banking. Please read Chapter 11 in its entirety.

Terms of Use: The text was adapted by The Saylor Foundation under a Creative Commons-Attribution-NonCommercial-ShareAlike 3.0 License without attribution as requested by the work's original creator or licensee.
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Lecture: Yale University: Professor Robert J. Shiller’s “Lecture 8: Human Foibles, Fraud, Manipulation, and Regulation”
Link: Yale University: Professor Robert J. Shiller’s “Lecture 8: Human Foibles, Fraud, Manipulation, and Regulation”

Also available in:
iTunes U
Quicktime (Low bandwidth/slow connection)
MP3 format
Transcript (HTML)

Instructions: Please note this video lecture will address the subjects covered in sections 3.4.1-3.4.7. When you click on the link above, you will be directed to Professor Robert J. Shiller’s “Lecture 8: Human Foibles, Fraud, Manipulation, and Regulation.” To download this video, you will need to click on the Flash icon or the QuickTime icon in the lower right corner of the webpage. Please watch it in its entirety. You may also choose to listen to the audio version (mp3) or read the transcript (html format).

Note on the Lecture: Lecturer, Robert J. Shiller, is Arthur M. Okun Professor of Economics at Yale University. This lecture was intended for his Financial Markets course.

Terms of Use: Robert Shiller, Financial Markets (Yale University: Open Yale Courses), http://oyc.yale.edu (Accessed March 2, 2011). License: Creative Commons BY-NC-SA 3.0. The original version can be found here.
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3.4.1 Asymmetric Information and Banking Regulation

3.4.2 International Banking Regulation

3.4.3 1980s U.S. Banking Crisis: Why?

3.4.4 Political Economy of the Savings and Loan Crisis

3.4.5 Savings and Loan Bailout

3.4.6 Federal Deposit Insurance Corporation Improvement Act of 1991

3.4.7 Banking Crises throughout the World

Assessment: Pearson Education: Frederic S. Mishkin’s “Chapter 11: Economic Analysis of Banking Regulation”: “Multiple Choice Quiz”
Link: Pearson Education: Frederic S. Mishkin’s “Chapter 11: Economic Analysis of Banking Regulation”: “Multiple Choice Quiz” (HTML)

Instructions: This quiz will assess what you have learned in subunits 3.4.1-3.4.7. When you click on the link above, you will be directed to Frederic S. Mishkin’s “Chapter 11: Economic Analysis of Banking Regulation” multiple choice quiz. After you finish the 15 questions of the quiz, please click “Submit Answers for Grading” to check your answers.

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3.5 Non-Bank Finance

Note: The distinction between bank and non-bank financial institutions, such as insurance, pension funds, finance companies, and mutual funds, is blurry. This subunit addresses how non-bank financial institutions operate, how they are regulated, and recent trends in non-bank finance. This section will introduce you to a wide array of non-bank financial institutions. Not long ago this group of institutions was more appropriately studied in a course on financial institutions and of little importance to students of money and banking. Recent financial innovation, however, has erased many of the barriers that once separated banks and non-bank financial institutions, obscuring the distinction between courses in financial institutions and money and banking. For this reason, a brief overview of the types and activities of these institutions will provide you with a better understanding of the functioning and structure of financial markets.

Reading: Pearson Education Canada’s version of Frederic S. Mishkin’s “Chapter 12: Non-Bank Finance” Lecture Notes
Link: Pearson Education Canada’s version of Frederic S. Mishkin’s “Chapter 12: Non-Bank Finance” Lecture Notes (Microsoft PowerPoint)

Instructions: When you click on the link above, you will be directed to a webpage that lists links to lecture notes on specific chapters from Mishkin's The Economics of Money, Banking, and Financial Markets. Click on the "Chapter 12" link to download the presentation. Please read all of the slides for Chapter 12 for information that covers sections 3.5.1-3.5.6.

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Reading: Google Book’s version of Anjali Kumar’s, ed., The Regulation of Non-Bank Financial Institutions: The United States, the European Union, and Other Countries: “Part 1: Non-Bank Financial Institutions in the Financial Sector”
Link: Google Book’s version of Anjali Kumar’s, ed., The Regulation of Non-Bank Financial Institutions: The United States, the European Union, and Other Countries: “Part 1: Non-Bank Financial Institutions in the Financial Sector” (Google Book)

Instructions: This reading will cover the topics outlined in sections 3.5.1-3.5.6. Please read “Part 1: Non-Bank Financial Institutions in the Financial Sector” (pp. 1-18) in its entirety.

Note on the Text: This text is hosted on Google Book’s website. The book was edited by Anjali Kumar with contributions from Terry Chuppe and Paula Perttunen.

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Lecture: Yale University: Professor Robert J. Shiller’s “Lecture 5: Insurance: The Archetypal Risk Management Institution”
Link: Yale University: Professor Robert J. Shiller’s “Lecture 5: Insurance: The Archetypal Risk Management Institution”

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Instructions: Please note this video lecture will address the topics in sections 3.5.1-3.5.6. When you click on the link above, you will be directed to Professor Robert J. Shiller’s “Lecture 5: Insurance: The Archetypal Risk Management Institution.”

Terms of Use: Robert Shiller, Financial Markets (Yale University: Open Yale Courses), http://oyc.yale.edu (Accessed March 2, 2011). License: Creative Commons BY-NC-SA 3.0. The original version can be found here.
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3.5.1 Insurance

3.5.2 Pension Funds

3.5.3 Finance Companies

3.5.4 Mutual Funds

3.5.5 Government Financial Intermediation

3.5.6 Securities Market Operations

Assessment: Pearson Education: Frederic S. Mishkin’s “Chapter 12: Non-Bank Finance”: “Multiple Choice Quiz”
Link: Pearson Education: Frederic S. Mishkin’s Multiple Choice Quiz on “Chapter 12: Non-Bank Finance”: “Multiple Choice Quiz” (HTML)

Instructions: This quiz will assess what you have learned in sections 3.5.1-3.5.6. When you click on the link above, you will be directed to Frederic S. Mishkin’s “Chapter 12: Non-bank Finance” multiple choice quiz. After you finish the 15 questions of the quiz, please click “Submit Answers for Grading” to check your answers against the answer key.

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3.6 Financial Derivatives

Note: Due to the increase in interest rate volatility in the 1980s and 1990s, financial innovation has generated financial derivatives to reduce risks faced by financial institutions. Financial derivatives are instruments that have payoffs that are linked to previously issued securities, such as forward contracts, financial futures, options, and swaps. Beginning in the 1970s and continuing into the 1980s and 1990s, interest rates and foreign exchange rates became more volatile, increasing the risk to financial institutions. To combat this, managers of financial institutions have demanded financial instruments to better manage risk. These instruments, called financial derivatives, have become an important source of profits for financial institutions, particularly larger banks. In this subunit, we investigate the use of forward contracts, financial futures, options, and swaps to reduce risk.

Reading: Pearson Education Canada’s version of Frederic S. Mishkin’s “Chapter 13: Financial Derivatives” Lecture Notes
Link: Pearson Education Canada’s version of Frederic S. Mishkin’s “Chapter 13: Financial Derivatives” Lecture Notes (Microsoft PowerPoint)

Instructions: When you click on the link above, you will be directed to a webpage that lists links to lecture notes on specific chapters from Mishkin's The Economics of Money, Banking, and Financial Markets. Click on the "Chapter " link to download the presentation. Please read all of the slides for Chapter 13 for information that covers sections 3.6.1-3.6.5.

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Reading: Money and Banking: “Chapter 12: The Financial Crisis of 2007–2008”
Link: Money and Banking: “Chapter 12: The Financial Crisis of 2007–2008” (PDF)

Instructions: When you click on the link above, you will be directed to Chapter 12 “The Financial Crisis of 2007–2008” of the on-line book Money and Banking. Please read Chapter 12 in its entirety for information on the subjects in sections 3.6.1-3.6.5.

Terms of Use: The text was adapted by The Saylor Foundation under a Creative Commons-Attribution-NonCommercial-ShareAlike 3.0 License without attribution as requested by the work's original creator or licensee.
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Lecture: Yale University: Professor Robert J. Shiller’s “Lecture 2: The Universal Principle of Risk Management: Pooling and the Hedging of Risks”
Link: Yale University: Professor Robert J. Shiller’s “Lecture 2: The Universal Principle of Risk Management: Pooling and the Hedging of Risks”

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Instructions: Please note this video lecture addresses the topics in sections 3.6.1-3.6.5. When you click on the link above, you will be directed to Professor Robert J. Shiller’s “Lecture 2: The Universal Principle of Risk Management: Pooling and the Hedging of Risks.” To download this video, you will need to click on the Flash icon or the QuickTime icon in the lower right corner of the webpage. Please watch it in its entirety. You may also choose to listen to the audio version (mp3) or read the transcript (html format).

Note on the Media: Lecturer, Robert J. Shiller, is the Arthur M. Okun Professor of Economics at Yale University. This lecture is intended for his Financial Markets course.

Terms of Use: Robert Shiller, Financial Markets (Yale University: Open Yale Courses), http://oyc.yale.edu (Accessed March 2, 2011). License: Creative Commons BY-NC-SA 3.0. The original version can be found here.
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3.6.1 Hedging

3.6.2 Interest-Rate Forward Contracts

3.6.3 Financial Futures Contracts and Markets

3.6.4 Options

3.6.5 Interest-Rate Swaps

Assessment: Pearson Education: Frederic S. Mishkin’s “Chapter 13: Financial Derivatives”: “Multiple Choice Quiz”
Link: Pearson Education: Frederic S. Mishkin’s “Chapter 13: Financial Derivatives”: “Multiple Choice Quiz” (HTML)

Instructions: This quiz will assess what you have learned in sections 3.6.1-3.6.5. When you click on the link above, you will be directed to Frederic S. Mishkin’s multiple choice quiz on “Chapter 13: Financial Derivatives.” After you finish the 15 questions of the quiz, please click “Submit Answers for Grading” to redirect to the answer key.

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Unit 4: Central Banking

A central bank is commonly known as a lender of last resort, or as a “bankers’ bank.” Most developing countries have a central bank that controls the credit system. These central banks exercise control by setting short-term interest rates (that is, the rates at which loans of last resort are made). Central banks may also control the money supply by requiring participating banks to keep a percentage of their holdings in reserve. Typically, central banks issue bank notes (in the United States, the Treasury creates the currency), act as the government’s bank, accept deposits, and make loans to commercial banks. The United States’ central bank, known as the Federal Reserve System, was established in 1913 by an act of Congress; unlike most other central banks, the Federal Reserve is privately owned by banks in each of its twelve districts. Far from being above reproach, however, some economists (among them Milton Friedman, John Kenneth Galbraith, and Ben Bernanke) have argued that the policies of the Federal Reserve were largely responsible for bringing about the Great Depression of 1929. This unit will review the structure and origins of central banks, as well as the various instruments at its disposal.

The recession of 2009 has its roots in the malfunctions of the financial institutions of several major economies. The use of derivatives and other financial products, the question of asymmetric information, and the role of banks (especially central banks) make this a timely topic. Unfortunately, at the time of this course’s development, there are few textbook descriptions of its causes, the extent of its damage, or the proposals developed for its ultimate resolution. Nevertheless, this unit will prove critical to a thorough understanding of the current controversies.

Time Advisory show close

Learning Outcomes show close

4.1 Structure of the Central Banks and the Federal Reserve System

Note: Until the creation of the European Central Bank, one could say that the Federal Reserve System had the most unusual structure of any central bank. This subunit describes the unique structure of the Federal Reserve System and its evolution since 1913. Although the Federal Reserve has been granted a high degree of independence, a clearer understanding of its decisions requires that one acknowledge the political and bureaucratic forces influencing its behavior. This section describes the institutional structure of the Federal Reserve, the European Central Bank and other foreign central banks. Knowing the institutional structure of a central bank will help you to understand who controls the central bank, what motivates its behavior, and who holds the reigns of power within the central bank. A key feature of the institutional structure of a central bank is the degree to which it is independent of political pressures from government officials outside of the central bank. This section examines the advantages and disadvantages of central bank independence.

Reading: Pearson Education Canada's version of Frederic S. Mishkin’s “Chapter 14: Structure of the Central Banks and the Federal Reserve System” Lecture Notes
Link: Pearson Education Canada’s version of Frederic S. Mishkin’s “Chapter 14: Structure of the Central Banks and the Federal Reserve System” Lecture Notes (Microsoft PowerPoint)

Instructions: When you click on the link above, you will be directed to a webpage that lists links to lecture notes on specific chapters from Mishkin's The Economics of Money, Banking, and Financial Markets. Click on the "Chapter 14 " link to download the presentation. Please read all of the slides for Chapter 14 for information that covers sections 4.1.1-4.1.6.

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Reading: Money and Banking: “Chapter 13: Central Bank Form and Function”
Link: Money and Banking: “Chapter 13: Central Bank Form and Function” (PDF)

Instructions: Please note this reading will address the topics in sections 4.1.1-4.1.6. When you click on the link above, you will be directed to Chapter 13 “Central Bank Form and Function” of the on-line book Money and Banking. Please read Chapter 13 in its entirety.

Terms of Use: The text was adapted by The Saylor Foundation under a Creative Commons-Attribution-NonCommercial-ShareAlike 3.0 License without attribution as requested by the work's original creator or licensee.
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Web Media: YouTube: The Ludwig von Mises Institute’s “Money, Banking, and the Federal Reserve”
Link: YouTube: The Ludwig von Mises Institute’s “Money, Banking, and the Federal Reserve”

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Instructions: Please note this video contains information relevant to sections 4.1.1-4.1.6. When you click on the link above, you will be directed to the video “Money, Banking, and the Federal Reserve” posted on YouTube by misesmedia. Please watch the video (42:09 minutes) in its entirety.

Note on the Media: This video, rich in the history of American economics and featuring several famous economists, clearly describes the role of the Federal Reserve. However, this film is not without its criticisms of the importance of curbing America’s central bank. This video was created by Ludwig von Mises Institute based on the Austrian School pedagogy of economics and libertarian political and social theory.

Terms of Use: The video above is licensed under a Creative Commons Attribution 3.0 United States License. It is attributed to the Ludwig von Mises Institute. The original version can be found here http://www.youtube.com/watch?v=Qe5c7ik4srU.
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Reading: The Federal Reserve Board's "Chapter 1: Overview of the Federal Reserve System: Background and Structure"
Link: The Federal Reserve Board's "Chapter 1: Overview of the Federal Reserve System: Background and Structure" (PDF)

Instructions: Please read this entire chapter from The Federal Reserve System: Purposes and Functions.

Terms of Use: This material is in the Public Domain.
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4.1.1 Origins of the Federal Reserve System

4.1.2 Formal Structure of the Federal Reserve System

4.1.3 The FOMC Meeting

4.1.4 Informal Structure of the Federal Reserve System

4.1.5 Structure and Independent of Foreign Central Banks

4.1.6 Explaining Central Bank Behavior

Assessment: Pearson Education: Frederic S. Mishkin’s “Chapter 15: Structure of the Central Banks and the Federal Reserve System”: “Multiple Choice Quiz”
Link: Pearson Education: Frederic S. Mishkin’s “Chapter 15: Structure of the Central Banks and the Federal Reserve System”: “Multiple Choice Quiz” (HTML)

Instructions: This quiz will assess what you have learned in subunits 4.1.1-4.1.6. When you click on the link above, you will be directed to Frederic S. Mishkin’s “Chapter 15: Structure of the Central Banks and the Federal Reserve System” multiple choice quiz. After you finish the 15 questions of the quiz, please click “Submit Answers for Grading” to assess your quiz.

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4.2 Multiple Deposit Creation and the Money Supply Process

Note: This subunit describes the money supply process. Bank deposits are by far the largest component of the money supply. The focus of this section is on how banks create deposits and how deposit creation affects the money supply. Movements in the money supply influence us all by affecting the health of the economy; thus, it is important to understand how the money supply is determined. Because deposits at banks (and other depository institutions) comprise the largest component of the money supply, understanding how these deposits are created is the first step in understanding the money supply process.

Reading: Pearson Education Canada's version of Frederic S. Mishkin’s Lecture Notes on “Chapter 15: Multiple Deposit Creation and the Money Supply Process”
Link: Pearson Education Canada’s version of Frederic S. Mishkin’s Lecture Notes on “Chapter 15: Multiple Deposit Creation and the Money Supply Process ” (Microsoft PowerPoint)

Instructions: When you click on the link above, you will be directed to a webpage that lists links to lecture notes on specific chapters from Mishkin's The Economics of Money, Banking, and Financial Markets. Click on the "Chapter 15" link to download the presentation. Please read all of the slides for Chapter 16 for information that covers sections 4.2.1-4.2.4.

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Reading: Money and Banking: “Chapter 14: The Money Supply Process”
Link: Money and Banking: “Chapter 14: The Money Supply Process” (PDF)

Instructions: Please note this reading will address the subjects in sections 4.2.1-4.2.4. When you click on the link above, you will be directed to Chapter 14 “The Money Supply Process” of an on-line book Money and Banking. Please read Chapter 14 in its entirety.

Terms of Use: The text was adapted by The Saylor Foundation under a Creative Commons-Attribution-NonCommercial-ShareAlike 3.0 License without attribution as requested by the work's original creator or licensee.
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Web Media: Google Videos: Paul Grignon’s “Money As Debt”
Link: Google Videos: Paul? Grignon’s “Money As Debt” (Adobe Flash)

Instructions: When you click on the link above, you will be directed to Paul? Grignon Video Sessions on “Money As Debt”. Please watch this video (47:10 minutes) in its entirety to learn about the topics covered in sections 4.2.1-4.2.4.

Note on the Media: This video, narrated by Paul Grignon, will explain the creation and distribution of money, providing historical context of how different types of currency were used in trade, as well as how money used to be financed by silver and gold but is now financed by debt. This video was originally produced by Moonfire Studio and is now hosted on the Google Videos website.

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Lecture: The Khan Academy's "Money and Banking 3: Fractional Reserve Banking"
Link: The Khan Academy's "Money and Banking 3: Fractional Reserve Banking" (Khan Academy).

Intructions: Please watch the entire video lecture (11:48).

Terms of Use: This video is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 United States License. This video was created by Salman Khan for the Khan Academy.
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Lecture: The Khan Academy's "Money and Banking 4: Money Multiplier and the Money Supply"
Link: The Khan Academy's "Money and Banking 4: Money Multiplier and the Money Supply" (YouTube).

Instructions: Please watch the entire video lecture (11:07).

Terms of Use: This video is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 United States License. This video was created by Salman Khan for the Khan Academy.
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4.2.1 Four Players in the Money Supply Process

4.2.2 The Fed’s Balance Sheet

4.2.3 Control of the Monetary Base

4.2.4 Multiple Deposit Creation

Reading: Pearson Education: Frederic S. Mishkin’s Multiple Choice Quiz on “Chapter 16: Multiple Deposit Creation and the Money Supply Process”
Link: Pearson Education: Frederic S. Mishkin’s Multiple Choice Quiz on “Chapter 16: Multiple Deposit Creation and the Money Supply Process” (HTML)

Instructions: This quiz will assess what you have learned in sections 4.2.1-4.2.4. When you click on the link above, you will be directed to Frederic S. Mishkin’s Multiple Choice Quiz on “Chapter 16: Multiple Deposit Creation and the Money Supply Process”. After you finish the 15 questions of the quiz, please click “Submit Answers for Grading” to make an assessment.

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4.3 Determination of the Money Supply

Note: The section developed a simple model of multiple deposit creation. That model illustrated the process of multiple deposit creation but was lacking in two respects. It assumed that depositors hold no currency and banks hold no excess reserves. This section relaxes those assumptions in order to derive a more realistic money multiplier. After deriving a more realistic money multiplier, this section describes the sources of movement in the monetary base, the money multiplier and the money supply. Throughout this section, money (M) is defined as M1 which is currency plus checkable deposits. This section incorporates depositor and bank behavior into the monetary process, presenting a more realistic model of the money supply process. The analysis is separated into three steps. First, because the Fed's control of the monetary base is more precise than its control over reserves, the model links changes in the money supply to changes in the monetary base. Next, the money multiplier, a ratio that relates the change in the money supply to a given change in the monetary base, is derived. Third, factors determining the money multiplier are examined.

Reading: Pearson Education Canada’s version of Frederic S. Mishkin’s “Chapter 16: Determination of the Money Supply” Lecture Notes
Link: Pearson Education Canada’s version of Frederic S. Mishkin’s “Chapter 16: Determination of the Money Supply” Lecture Notes (Microsoft PowerPoint)

Instructions: When you click on the link above, you will be directed to a webpage that lists links to lecture notes on specific chapters from Mishkin's The Economics of Money, Banking, and Financial Markets. Click on the "Chapter 16" link to download the presentation. Please read all of the slides for Chapter 16 for information that covers sections 4.3.1-4.3.3.

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Reading: Money and Banking: “Chapter 15: The Money Supply and the Money Multiplier”
Link: Money and Banking: “Chapter 15: The Money Supply and the Money Multiplier” (PDF)

Instructions: This reading will address the topics in sections 4.3.1-4.3.3. When you click on the link above, you will be directed to Chapter 15 “The Money Supply and the Money Multiplier” of an on-line book Money and Banking. Please read Chapter 15 in its entirety.

Terms of Use: The text was adapted by The Saylor Foundation under a Creative Commons-Attribution-NonCommercial-ShareAlike 3.0 License without attribution as requested by the work's original creator or licensee.
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Web Media: Bukisa’s version of Khan Academy’s “Learn about Banking 4: Multiplier Effect and the Money Supply”
Link: Bukisa’s version of Khan Academy’s “Learn about Banking 4: Multiplier Effect and the Money Supply” (YouTube)

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Instructions: When you click on the link above, you will be directed to the video titled “Learn about Banking 4: Multiplier Effect and the Money Supply,” which will cover the topics in sections 4.3.1-4.3.3. Please watch this video (11:06 minutes) in its entirety.

Note on the Media: With a conversational tone, the narrator of this video will review definitions of money supply and the multiplier effect. Please note that the video uses a made-up example of money supply for farmers from the previous video in this series; however, the narrator will revisit the example and set up the situation again for this video.

Terms of Use: This work is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 United States License. It is attributed to the Khan Academy and the original version can be found here.
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4.3.1 The Money Supply Model and the Money Multiplier

4.3.2 Factors That Determine the Money Multiplier

4.3.3 Additional Factors That Determine the Money Supply

Assessment: Pearson Education: Frederic S. Mishkin’s Multiple Choice Quiz on “Chapter 17: Determination of the Money Supply”
Link: Pearson Education: Frederic S. Mishkin’s Multiple Choice Quiz on “Chapter 17: Determination of the Money Supply” (HTML)

Instructions: This quiz will assess what you have learned in sections 4.3.1-4.3.3. When you click on the link above, you will be directed to Frederic S. Mishkin’s “Chapter 17: Determination of the Money Supply” multiple choice quiz. After you finish the 15 questions of the quiz, please click “Submit Answers for Grading” to redirect to the answer key.

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4.4 Tools of Monetary Policy

Note: This section examines how the Federal Reserve uses its three policy tools—open market operations, changes in discount lending, and changes in reserve requirements—to manipulate the money supply and interest rates. The Fed uses three tools to manipulate the money supply and interest rates: open market operations, discount lending, and reserve requirements. This subunit looks at how the Fed uses these tools to influence the market for reserves and the federal funds rate. The section ends with a discussion of the tools of monetary policy used by other central banks besides the Federal Reserve.

Reading: Pearson Education Canada’s version of Frederic S. Mishkin’s “Chapter 17: Tools of Monetary Policy” Lecture Notes
Link: Pearson Education Canada’s version of Frederic S. Mishkin’s “Chapter 17: Tools of Monetary Policy” Lecture Notes (Microsoft PowerPoint)

Instructions: When you click on the link above, you will be directed to a webpage that lists links to lecture notes on specific chapters from Mishkin's The Economics of Money, Banking, and Financial Markets. Click on the "Chapter 17" link to download the presentation. Please read all of the slides for Chapter 17 for information that covers sections 4.4.1-4.4.4.

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Reading: Money and Banking: “Chapter 16: Monetary Policy Tools”
Link: Money and Banking: “Chapter 16: Monetary Policy Tools” (PDF)

Instructions: Please note this reading covers sections 4.4.1-4.4.4. When you click on the link above, you will be directed to Chapter 16 “Monetary Policy Tools” of an on-line book Money and Banking. Please read Chapter 16 in its entirety.

Terms of Use: The text was adapted by The Saylor Foundation under a Creative Commons-Attribution-NonCommercial-ShareAlike 3.0 License without attribution as requested by the work's original creator or licensee.
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Lecture: Yale University: Professor Robert J. Shiller’s “Lecture 16: The Evolution and Perfection of Monetary Policy”
Link: Yale University: Professor Robert J. Shiller’s “Lecture 16: The Evolution and Perfection of Monetary Policy”

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Instructions: When you click on the link above, you will be directed to Robert J. Shiller’s lecture 16 “The Evolution and Perfection of Monetary Policy.” To download this video, you will need to click on the Flash icon or the QuickTime icon in the lower right corner of the webpage. Please watch the video in its entirety for information on the topics covered in sections 1.3.1-1.3.4. You may also choose to listen to the audio version (mp3) or to read the transcript (html format).

Note on the Media: Lecturer, Robert J. Shiller, is the Arthur M. Okun Professor of Economics at Yale University. This video lecture was created for his Financial Markets course.

Terms of Use: Robert Shiller, Financial Markets (Yale University: Open Yale Courses), http://oyc.yale.edu (Accessed March 2, 2011). License: Creative Commons BY-NC-SA 3.0. The original version can be found here.
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Lecture: The Khan Academy's "Money and Banking 13: Open-Market Operations"
Link: The Khan Academy's "Money and Banking 13: Open-Market Operations," (YouTube)

Instructions: Please watch the video lecture (13:22).

Terms of Use: This video is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 United States License. This video was created by Salman Khan for the Khan Academy.
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Lecture: The Khan Academy's "Money and Banking 14-15: Federal Funds Rate"
Link: The Khan Academy's "Money and Banking 14: Federal Funds Rate" (YouTube) and "Money and Banking 15: More on the Federal Funds Rate" (YouTube).

Instructions: Please watch both video lectures (23:58).

Terms of Use: This video is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 United States License. This video was created by Salman Khan for the Khan Academy.
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Lecture: The Khan Academy's "Money and Banking: Discount Rate"
Link: The Khan Academy's "Money and Banking: Discount Rate" (YouTube).

Instructions: Please watch the video lecture (13:22).

Terms of Use: This video is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 United States License. This video was created by Salman Khan for the Khan Academy.

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4.4.1 The Market for Reserves and the Federal Funds Rate

4.4.2 Open Market Operations

4.4.3 Discount Policy

4.4.4 Reserve Requirements

Assessment: Pearson Education: Frederic S. Mishkin’s “Chapter 18: Tools of Monetary Policy”: “Multiple Choice Quiz”
Link: Pearson Education: Frederic S. Mishkin’s “Chapter 18: Tools of Monetary Policy”: “Multiple Choice Quiz” (HTML)

Instructions: This quiz will assess what you have learned in subunits 4.4.1-4.4.4. When you click on the link above, you will be directed to Frederic S. Mishkin’s multiple choice quiz on “Chapter 18: Tools of Monetary Policy.” After you finish the 15 questions of the quiz, please click “Submit Answers for Grading” to check your answers.

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4.5 Conduct of Monetary Policy: Goals and Targets

Note: This subunit examines how central banks use the monetary policy tools to achieve their policy goals and objectives. The first part of the section discusses the important goals that central banks attempt to achieve through their conduct of monetary policy and regulatory duties. The general operating strategy employed by central banks to achieve these goals is presented in the second part of the section. The third part ties together the first two parts by examining the Fed’s past policy procedures. This historical perspective provides important insights when it comes to assessing current and future monetary policy actions. The subunit concludes with a brief discussion of the Taylor rule as a guide for setting the federal funds rate.

Reading: Pearson Education Canada’s version of Frederic S. Mishkin’s “Chapter 18: Conduct of Monetary Policy: Goals and Targets" Lecture Notes
Link: Pearson Education Canada’s version of Frederic S. Mishkin’s “Chapter 18: Conduct of Monetary Policy: Goals and Targets" Lecture Notes (Microsoft PowerPoint)

Instructions: When you click on the link above, you will be directed to a webpage that lists links to lecture notes on specific chapters from Mishkin's The Economics of Money, Banking, and Financial Markets. Click on the "Chapter 18" link to download the presentation. Please read all of the slides for Chapter 18 for information that covers sections 4.5.1-4.5.5.

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Reading: Money and Banking: “Chapter 17: Monetary Policy Targets and Goals”
Link: Money and Banking: “Chapter 17: Monetary Policy Targets and Goals” (PDF)

Instructions: When you click on the link above, you will be directed to “Chapter 17: Monetary Policy Targets and Goals” of an on-line book Money and Banking. Please read Chapter 17 in its entirety for information outlined in sections 4.5.1-4.5.5.

Terms of Use: The text was adapted by The Saylor Foundation under a Creative Commons-Attribution-NonCommercial-ShareAlike 3.0 License without attribution as requested by the work's original creator or licensee.

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Reading: Macroeconomics – Theory Through Applications
Link: Macroeconomics – Theory Through Applications (PDF)

Instructions: Read Section 10.3, on pages 273 to 280. Focus on the topic of inflation targeting.

Terms of Use: This text was adapted by The Saylor Foundation under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 License without attribution as requested by the work’s original creator or licensee.
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Reading: The Federal Reserve Board's "Chapter 3: The Implementation of Monetary Policy"
Link: The Federal Reserve Board's "Chapter 3: The Implementation of Monetary Policy" (PDF).

Instructions: Please read this entire chapter from The Federal Reserve System: Purposes and Functions.

Terms of Use: This materical is in the Public Domain.
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Reading: The Federal Reserve Board's "Chapter 2: Monetary Policy and the Economy"
Link: The Federal Reserve Board's "Chapter 2: Monetary Policy and the Economy" (PDF)

Instructions: Please read this entire chapter from The Federal Reserve System: Purposes and Functions.

Terms of Use: This materical is in the Public Domain.
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4.5.1 Goals of Monetary Policy

4.5.2 Central Bank Strategies: The Use of Targets

4.5.3 Choosing the Targets

4.5.4 Fed Policy Procedures

4.5.5 The Taylor Rule, NAIRU, and the Philips Curve

Assessment: Pearson Education: Frederic S. Mishkin’s “Chapter 19: What Should Central Banks Do? Monetary Policy Goals, Strategy, and Tactics”: “Multiple Choice Quiz”
Link: Pearson Education: Frederic S. Mishkin’s “Chapter 19: What Should Central Banks Do? Monetary Policy Goals, Strategy, and Tactics”: “Multiple Choice Quiz” (HTML)

Instructions: This quiz will assess what you have learned in sections 4.5.1-4.5.5. When you click on the link above, you will be directed to Frederic S. Mishkin’s multiple choice quiz on “Chapter 19: What Should Central Banks Do? Monetary Policy Goals, Strategy, and Tactics.” After you finish the 15 questions of the quiz, please click “Submit Answers for Grading” to redirect to the answer key.

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Unit 5: Foreign Exchange

Foreign exchange markets are marketplaces in which the currencies of different countries are bought and sold. Market transactions transfer the currency of one country into that of another and thereby settle accounts. Within foreign exchange markets, currencies are bought either “spot” or “forward.” In a spot market, currencies are bought immediately and exchange rates (for example, 1 dollar to 78 Euros) are managed by the governments. In forward markets, currencies are bought and sold for future transactions. Forward rates are largely determined by the market’s expectations for currency appreciation or depreciation at a future date.

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5.1 The Foreign Exchange Market

Note: Exchange rate movements are extremely important to our economy. This section develops a modern analysis of exchange rate determination that explains both recent behavior in the foreign exchange market, and why exchange rates are so volatile from day to day.

Reading: Pearson Education Canada’s version of Frederic S. Mishkin’s “Chapter 19: The Foreign Exchange Market” Lecture Notes
Link: Pearson Education Canada’s version of Frederic S. Mishkin’s “Chapter 19: The Foreign Exchange Market” Lecture Notes (Microsoft PowerPoint)

Instructions: When you click on the link above, you will be directed to a webpage that lists links to lecture notes on specific chapters from Mishkin's The Economics of Money, Banking, and Financial Markets. Click on the "Chapter 19" link to download the presentation. Please read all of the slides for Chapter 19 for information that covers sections 5.1.1-5.1.3.

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The Saylor Foundation does not yet have materials for this portion of the course. If you are interested in contributing your content to fill this gap or aware of a resource that could be used here, please submit it here.
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Reading: Money and Banking: “Chapter 18: Foreign Exchange”
Link: Money and Banking: “Chapter 18: Foreign Exchange” (PDF)

Instructions: Please note this reading provides information for sections 5.1.1-5.1.3. When you click on the link above, you will be directed to “Chapter 18: Foreign Exchange” of an on-line book Money and Banking. Please read Chapter 18 in its entirety.

Terms of Use: The text was adapted by The Saylor Foundation under a Creative Commons-Attribution-NonCommercial-ShareAlike 3.0 License without attribution as requested by the work's original creator or licensee.
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Web Media: Vimeo.com: Stephen Kinsella’s “Chapter 13: Exchange Rates, Forwards, and Futures” Video Lecture
Link: Vimeo.com: Stephen Kinsella’s “Chapter 13: Exchange Rates, Forwards, and Futures”Video Lecture (Adobe Flash)

Instructions: Please note this video covers the topics outlined in sections 5.1.1-5.1.3. When you click on the link above, you will be directed to Stephen Kinsella’s video lectures titled “Chapter 13: Exchange Rates, Forwards, and Futures.” Please watch the video (8:18 minutes) in its entirety.

Note on the Media: Lecturer, Stephen Kinsella, teaches economics at the University of Limerick.

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5.1.1 Exchange Rates in the Long Run

5.1.2 Exchange Rates in the Short Run

5.1.3 Explaining Changes in Exchange Rates

Assessment: Pearson Education: Frederic S. Mishkin’s “Chapter 20: The Foreign Exchange Market”: “Multiple Choice Quiz”
Link: Pearson Education: Frederic S. Mishkin’s “Chapter 20: The Foreign Exchange Market”: “Multiple Choice Quiz” (HTML)

Instructions: This quiz will assess what you have learned in sections 5.1.1-5.1.3. When you click on the link above, you will be directed to Frederic S. Mishkin’s multiple choice quiz on “Chapter 20: The Foreign Exchange Market.” After you finish the 15 questions of the quiz, please click “Submit Answers for Grading” to check your answers.

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5.2 The International Financial System

Note: The growing interdependence of the United States with other economies of the world means that our monetary policy is influenced by international financial transactions. This section examines the international financial system and explores how it affects the way our monetary policy is conducted. Also, this section looks at the structure of the international financial system and how that structure affects monetary policy. Finally, we will look at the evolution of the international financial system during the past half century.

Reading: Pearson Education Canada’s version of Frederic S. Mishkin’s “Chapter 20: The International Financial System” Lecture Notes
Link: Pearson Education Canada’s version of Frederic S. Mishkin’s “Chapter 20: The International Financial System” Lecture Notes (Microsoft Powerpoint)

Instructions: When you click on the link above, you will be directed to a webpage that lists links to lecture notes on specific chapters from Mishkin's The Economics of Money, Banking, and Financial Markets. Click on the "Chapter 20" link to download the presentation. Please read all of the slides for Chapter 20 for information that covers sections 5.2.1-5.2.6.

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Reading: Money and Banking: “Chapter 19: International Monetary Regimes”
Link: Money and Banking: “Chapter 19: International Monetary Regimes” (PDF)

Instructions: This reading covers the topics for sections 5.2.1-5.2.6. When you click on the link above, you will be directed to “Chapter 19: International Monetary Regimes” of an on-line book Money and Banking. Please read Chapter 19 in its entirety.

Terms of Use: The text was adapted by The Saylor Foundation under a Creative Commons-Attribution-NonCommercial-ShareAlike 3.0 License without attribution as requested by the work's original creator or licensee.
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Web Media: Vimeo.com: Joachim K. Rennstich’s “International Financial System” Video Lecture
Link: Vimeo.com: Joachim K. Rennstich’s “International Financial System”Video Lecture (Adobe Flash)

Instructions: This video addresses the subjects in subunits 5.2.1-5.2.6. When you click on the link above, you will be directed to Joachim K. Rennstich’s video lecture on “International Financial System”. Please watch the video (approximately 1 hour and 11 minutes) in its entirety.

Note on the Media: Lecturer, Joachim K. Rennstich, is an Assistant Professor for the Political Science Department at Fordham University.

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5.2.1 Intervention in the Foreign Exchange Market

5.2.2 Balance of Payments

5.2.3 Evolution of the International Financial System

5.2.4 Capital Controls

5.2.5 The Role of the IMF (International Monetary Fund)

5.2.6 International Considerations and Monetary Policy

Assessment: Pearson Education: Frederic S. Mishkin’s “Chapter 21: The International Financial System”: “Multiple Choice Quiz”
Link: Pearson Education: Frederic S. Mishkin’s “Chapter 21: The International Financial System”: “Multiple Choice Quiz” (HTML)

Instructions: This quiz will assess what you have learned in sections 5.2.1-5.2.6. When you click on the link above, you will be directed to Frederic S. Mishkin’s multiple choice quiz on “Chapter 21: The International Financial System.” After you finish the 15 questions of the quiz, please click “Submit Answers for Grading” to redirect to the answer key.

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5.3 Monetary Policy Strategy: The International Experience

Note: In this section, students discover that central banks in countries other than the United States have had remarkable success in conducting monetary policy, bringing inflation down to low levels, and promoting stable financial environments that promote general economic health.

Reading: Eastern Mennonite University’s version of Frederic S. Mishkin’s “Chapter 20: Monetary Policy Strategy: The International Experience” Lecture Notes
Link: Eastern Mennonite University’s version of Frederic S. Mishkin’s “Chapter 20: Monetary Policy Strategy: The International Experience”Lecture Notes (Microsoft PowerPoint)

Instructions: Please note these lecture slides will cover sections 5.3.1-5.3.5. When you click on the link above, you will be directed to a course webpage for Eastern Mennonite University. At the bottom of the webpage is a list of Frederic S. Mishkin’s lecture notes. Please click on the PPT icon for Chapter 20 to download the entire lecture notes as a PPT file, and then please read Chapter 20 in its entirety.

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Reading: Pearson Education Canada’s version of Frederic S. Mishkin’s Economics of Money, Banking, and Financial Markets: “Chapter 21: Monetary Policy Strategy: The International Experience”
Link: Pearson Education Canada’s version of Frederic S. Mishkin’s Economics of Money, Banking, and Financial Markets: “Chapter 21: Monetary Policy Strategy: The International Experience” (PDF)

Instructions: When you click on the link above, you will be directed to a webpage that lists links to lecture notes on specific chapters from Mishkin's The Economics of Money, Banking, and Financial Markets. Click on the "Chapter 21" link to download the presentation. Please read all of the slides for Chapter 21 for information that covers sections 5.3.1-5.3.5.

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Web Media: YouTube: European Central Bank’s “2of 3 Monetary Policy Strategy”
Link: European Central Bank’s “2 of 3 Monetary Policy Strategy” (YouTube)

Instructions: This video will address the topics in sections 5.3.1-5.3.5. When you click on the link above, you will be directed to European Central Bank’s “2of 3 Monetary Policy Strategy” video hosted on YouTube. Please watch the video (5:06 minutes) in its entirety.

Note on the Media: This video addresses the European Central Bank’s (ECB) goal of maintaining price stability.

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5.3.1 The Role of a Nominal Anchor

5.3.2 Exchange Rate Targeting

5.3.3 Monetary Targeting

5.3.4 Inflation Targeting

5.3.5 Monetary Policy with an Implicit Nominal Anchor

Note: A nominal anchor is a variable used to establish a price level (for example, the inflation rate, an exchange rate, or the money supply) as a target for achieving a goal, such as price stability. For example, if a monetary authority sets a nominal anchor of 0.13 percent inflation, it then uses its various tools and strategies to achieve that target.

Assessment: Pearson Education: Frederic S. Mishkin’s “Chapter 21: Monetary Policy Strategy: The International Experience”: “Multiple Choice Quiz”
Link: Pearson Education: Frederic S. Mishkin’s “Chapter 21: Monetary Policy Strategy: The International Experience”: “Multiple Choice Quiz” (HTML)

Instructions: This quiz will assess what you have learned in subunits 5.3.1-5.3.5. When you click on the link above, you will be directed to Frederic S. Mishkin’s multiple choice quiz on “Chapter 21: Monetary Policy Strategy: The International Experience.” After you finish the 15 questions of the quiz, please click “Submit Answers for Grading” to check your answers.

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Unit 6: Monetary Theory

Monetary theory is the study of the effect of money on the economy. Over time, various theories have evolved to explain the demand for money. These include the classical theories of Irving Fisher, Alfred Marshall, and A. C. Pigou; the Keynesian theories of the mid-twentieth century; and, finally, the modern quantity theory associated with Milton Friedman. The extent to which the demand for money is affected by interest rates is one of the central questions in monetary theory; accordingly, it will be addressed in this unit.

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6.1 The Demand for Money

Note: This subunit discusses the major developments in the theory of the demand for money in chronological order. These developments have attempted to explain the reasons people hold money and to what extent the quantity of money demanded is affected by changes in interest rates.

Reading: Pearson Education Canada’s version of Frederic S. Mishkin’s “Chapter 22: The Demand for Money” Lecture Notes
Link: Pearson Education Canada’s version of Frederic S. Mishkin’s “Chapter 22: The Demand for Money” Lecture Notes (Microsoft Powerpoint)

Instructions: When you click on the link above, you will be directed to a webpage that lists links to lecture notes on specific chapters from Mishkin's The Economics of Money, Banking, and Financial Markets. Click on the "Chapter 22" link to download the presentation. Please read all of the slides for Chapter 22 for information that covers sections 6.1.1-6.1.5

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Reading: Money and Banking: “Chapter 20: Money Demand”
Link: Money and Banking: “Chapter 20: Money Demand” (PDF)

Instructions: Please note this reading will cover the subjects in subunits 6.1.1-6.1.5. When you click on the link above, you will be directed to “Chapter 20: Money Demand” of an on-line book Money and Banking. Please read Chapter 20 in its entirety.

Terms of Use: The text was adapted by The Saylor Foundation under a Creative Commons-Attribution-NonCommercial-ShareAlike 3.0 License without attribution as requested by the work's original creator or licensee.
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Web Media: Vimeo.com: Stephen Kinsella’s “Lecture 8: Theories of Money Demand” Video Lecture
Link: Vimeo.com: Stephen Kinsella’s “Lecture 8: Theories of Money Demand”Video Lecture (Adobe Flash)

Instructions: This video will cover sections 6.1.1-6.1.5. When you click on the link above, you will be directed to Stephen Kinsella’s “Lecture 8: Theories of Money Demand” hosted on Vimeo’s website. Please watch the video (about an hour and 9 minutes) in its entirety.

Note on the Media: The lecturer for this video, Stephen Kinsella, teaches economics at the University of Limerick.

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Assessment: Pearson Education: Frederic S. Mishkin’s “Chapter 22: The Demand for Money”: “Multiple Choice Quiz”
Link: Pearson Education: Frederic S. Mishkin’s “Chapter 22: The Demand for Money”: “Multiple Choice Quiz” (HTML)

Instructions: This quiz will assess what you have learned in subunits 6.1.1-6.1.5. When you click on the link above, you will be directed to Frederic S. Mishkin’s multiple choice quiz on “Chapter 22: The Demand for Money.” After you finish the 15 questions of the quiz, please click “Submit Answers for Grading” to check your answers.

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6.1.1 The Quantity Theory of Money

6.1.2 Is Velocity a Constant?

6.1.3 Keynes Liquidity Preference Theory

6.1.4 Friedman’s Monetary Quantity Theory of Money

6.1.5 Distinguishing Between the Friedman and Keynesian Theories

6.2 The Keynesian Framework and the ISLM Model

Note: This subunit presents the simple Keynesian model and introduces the ISLM model of simultaneous money and goods markets equilibrium. These models allow us to better understand the functioning of the economy and to better assess the effects of fiscal and monetary policy actions. In addition, the ISLM model is used to derive the aggregate demand curve that is used in aggregate demand and supply analysis.

Reading: Pearson Education Canada’s version of Frederic S. Mishkin’s “Chapter 23: The Keynesian Framework and the ISLM Model” Lecture Notes
Link: Pearson Education Canada’s version of Frederic S. Mishkin’s “Chapter 23: The Keynesian Framework and the ISLM Model” Lecture Notes (Microsoft PowerPoint)

Instructions: When you click on the link above, you will be directed to a webpage that lists links to lecture notes on specific chapters from Mishkin's The Economics of Money, Banking, and Financial Markets. Click on the "Chapter 23" link to download the presentation. Please read all of the slides for Chapter 23 for information that covers sections 6.2.1-6.2.3.

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Reading: Money and Banking: “Chapter 21: IS – LM”
Link: Money and Banking: “Chapter 21: IS – LM” (PDF)

Instructions: This reading will cover topics outlined in sections 6.2.1-6.2.3. When you click on the link above, you will be directed to “Chapter 21: IS – LM” of an on-line book Money and Banking. Please read Chapter 21 in its entirety.

Terms of Use: The text was adapted by The Saylor Foundation under a Creative Commons-Attribution-NonCommercial-ShareAlike 3.0 License without attribution as requested by the work's original creator or licensee.
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Web Media: YouTube: Micoschwartz’s “ISLM Video Tutorial”
Link: Micoschwartz’s “ISLM Video Tutorial” (YouTube)

Instructions: Please note this video addresses material covered in sections 6.2.1-6.2.3. When you click on the link above, you will be directed to Micoschwartz’s “ISLM Video Tutorial” hosted on YouTube. Please watch the video (5:20 minutes) in its entirety.

Note on the Media: This video provides visual representations of the Hicks-Hansel Model of Keynes’s Theory of Aggregate Demand, focusing on the IS-LM interpretation. This tutorial is based off of the concepts in the book, Macroeconomics, 7^thedition by Dornbusch, Fischer, Startz, Atkins, and Sparks.

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6.2.1 Determining of Aggregate Output

6.2.2 The ISLM Model

6.2.3 ISLM Approach to Aggregate Output and Interest Rates

Assessment: Pearson Education: Frederic S. Mishkin’s Multiple Choice Quiz on “Chapter 23: The Keynesian Framework and the ISLM Model”
Link: Pearson Education: Frederic S. Mishkin’s “Chapter 23: The Keynesian Framework and the ISLM Model”: “Multiple Choice Quiz” (HTML)

Instructions: This quiz will assess what you have learned in sections 6.2.1-6.2.3. When you click on the link above, you will be directed to Frederic S. Mishkin’s multiple choice quiz on “Chapter 23: The Keynesian Framework and the ISLM Model.” After you finish the 15 questions of the quiz, please click “Submit Answers for Grading” to redirect to the answer key.

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6.3 Monetary and Fiscal Policy in the ISLM Model

Note: In this section, we explore the mechanics of the ISLM model, discovering how monetary policy—the control of the money supply and interest rates—and fiscal policy—the control of government spending and taxes—affect the level of aggregate output and interest rates. Because policymakers have these two tools at their disposal, they will be interested in knowing the effects each policy can be expected to have on the economy. The ISLM model provides a convenient and powerful framework for comparing the relative effects of proposed monetary and fiscal actions. By comparing these predicted effects, policymakers can better decide which policy is most appropriate.

Reading: Pearson Education Canada’s version of Frederic S. Mishkin’s “Chapter 24: Monetary and Fiscal Policy in the ISLM Model” Lecture Notes
Link: Pearson Education Canada’s version of Frederic S. Mishkin’s “Chapter 24: Monetary and Fiscal Policy in the ISLM Model” Lecture Notes (Microsoft PowerPoint)

Instructions: When you click on the link above, you will be directed to a webpage that lists links to lecture notes on specific chapters from Mishkin's The Economics of Money, Banking, and Financial Markets. Click on the "Chapter 24" link to download the presentation. Please read all of the slides for Chapter 24 for information that covers sections 6.3.1-6.3.4.

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Reading: Money and Banking: “Chapter 22: IS – LM in Action”
Link: Money and Banking: “Chapter 22: IS-LM in Action” (PDF)

Instructions: Please note this reading will address the topics in sections 6.3.1-6.3.4. When you click on the link above, you will be directed to “Chapter 22: IS – LM in Action” of an on-line book Money and Banking. Please read Chapter 22 in its entirety.

Terms of Use: “The text was adapted by The Saylor Foundation under a Creative Commons-Attribution-NonCommercial-ShareAlike 3.0 License without attribution as requested by the works original creator or licensee”
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Web Media: YouTube: lostmy1’s “Fiscal Policy versus Monetary Policy in the IS-LM Model” Video
Link: lostmy1’s “Fiscal Policy versus Monetary Policy in the IS-LM Model”Video (YouTube)

Instructions: This video will address topics covered in 6.3.1-6.3.4. When you click on the link above, you will be directed to a video on “Fiscal Policy versus Monetary Policy in the IS-LM Model.” Please watch the video (6:12 minutes) in its entirety.

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Lecture: The Khan Academy's "LM part of the IS-LM model"
Link: The Khan Academy's "LM part of the IS-LM model" (YouTube).

Instructions: Please watch this entire video lecture (7:49).

Terms of Use: This video is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 United States License. This video was created by Salman Khan for the Khan Academy.
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Lecture: The Khan Academy's "Connecting the Keynesian Cross to the IS-Curve"
Link: The Khan Academy's "Connecting the Keynesian Cross to the IS-Curve" (YouTube).

Instructions: Please watch this entire video lecture (9:57).

Terms of Use: This video is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 United States License. This video was created by Salman Khan for the Khan Academy.
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Lecture: The Khan Academy's "Loanable Funds Interpretation of IS Curve"
Link: The Khan Academy's "Loanable Funds Interpretation of IS Curve" (YouTube).

Instructions: Please watch this entire video lecture (6:07).

Terms of Use: This video is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 United States License. This video was created by Salman Khan for the Khan Academy.
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Lecture: The Khan Academy's "Government Spending and the IS-LM model"
Link: The Khan Academy's "Government Spending and the IS-LM model" (YouTube).

Instructions: Please watch this entire video lecture (7:09).

Terms of Use: This video is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 United States License. This video was created by Salman Khan for the Khan Academy.
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6.3.1 Factors that Cause the IS Curve to Shift

6.3.2 Factors that Cause the LM Curve to Shift

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

6.3.4 Effectiveness of Monetary Versus Fiscal Policy

Assessment: Pearson Education: Frederic S. Mishkin’s Multiple Choice Quiz on “Chapter 24: Monetary and Fiscal Policy in the ISLM Model”
Link: Pearson Education: Frederic S. Mishkin’s Multiple Choice Quiz on “Chapter 24: Monetary and Fiscal Policy in the ISLM Model” (HTML)

Instructions: This quiz will assess what you have learned in subunits 6.3.1-6.3.4. When you click on the link above, you will be directed to Frederic S. Mishkin’s multiple choice quiz on “Chapter 24: Monetary and Fiscal Policy in the ISLM Model.” After you finish the 15 questions of the quiz, please click “Submit Answers for Grading” to check your answers.

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6.4 Aggregate Demand and Supply Analysis

Note: This subunit develops the basic tool of aggregate demand and supply analysis in order to study the effects of money on aggregate output and the price level. The model is very powerful in gaining insight into the workings of the economy, yet it is relatively simple and, with a little work, relatively easy to master.

Reading: Pearson Education Canada’s version of Frederic S. Mishkin’s “Chapter 25: Aggregate Demand and Supply Analysis” Lecture Notes
Link: Pearson Education Canada’s version of Frederic S. Mishkin’s “Chapter 25: Aggregate Demand and Supply Analysis” Lecture Notes (Microsoft PowerPoint)

Instructions: When you click on the link above, you will be directed to a webpage that lists links to lecture notes on specific chapters from Mishkin's The Economics of Money, Banking, and Financial Markets. Click on the "Chapter 25" link to download the presentation. Please read all of the slides for Chapter 25 for information that covers sections 6.4.1-6.4.3.

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Reading: Money and Banking: “Chapter 23: Aggregate Supply and Demand, the Growth Diamond, and Financial Shocks”
Link: Money and Banking: “Chapter 23: Aggregate Supply and Demand, the Growth Diamond, and Financial Shocks” (PDF)

Instructions: This reading will address the topics in sections 6.4.1-6.4.3. When you click on the link above, you will be directed to “Chapter 23: Aggregate Supply and Demand, the Growth Diamond, and Financial Shocks” of an on-line book Money and Banking. Please read Chapter 23 in its entirety.

Terms of Use: The text was adapted by The Saylor Foundation under a Creative Commons-Attribution-NonCommercial-ShareAlike 3.0 License without attribution as requested by the work's original creator or licensee.
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Web Media: YouTube: BrynJonesOnline’s “Aggregate Demand & Aggregate Supply” Video
Link: BrynJonesOnline’s “Aggregate Demand & Aggregate Supply”Video (YouTube)

Instructions: This video will cover topics in sections 6.4.1-6.4.3. When you click on the link above, you will be directed to a video on “Aggregate Demand & Aggregate Supply.” Please watch the brief video (4:13 minutes) in its entirety.

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Lecture: The Khan Academy's "Keynesian Cross"
Link: The Khan Academy's "Keynesian Cross" (YouTube).

Instructions: Please watch this entire video lecture (9:20).

Terms of Use: This video is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 United States License. This video was created by Salman Khan for the Khan Academy.
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Lecture: The Khan Academy's "Details on Shifting Aggregate Planned Expenditures"
Link: The Khan Academy's "Details on Shifting Aggregate Planned Expenditures" (YouTube).

Instructions: Please watch this entire video lecture (11:45).

Terms of Use: This video is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 United States License. This video was created by Salman Khan for the Khan Academy.
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Lecture: The Khan Academy's "Keynesian Cross and the Multiplier"
Link: The Khan Academy's "Keynesian Cross and the Multiplier" (YouTube).

Instructions: Please watch this entire video lecture (10:27).

Terms of Use: This video is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 United States License. This video was created by Salman Khan for the Khan Academy.
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6.4.1 Three Views of Aggregate Demand (Monetarist, Keynesian, and Crowding-Out)

6.4.2 Aggregate Supply and Shifts in the Curve

6.4.3 Equilibrium in Aggregate Supply and Aggregate Demand

Assessment: Pearson Education: Frederic S. Mishkin’s “Chapter 25: Aggregate Demand and Supply Analysis”: “Multiple Choice Quiz”
Link: Pearson Education: Frederic S. Mishkin’s “Chapter 25: Aggregate Demand and Supply Analysis”: “Multiple Choice Quiz” (HTML)

Instructions: This quiz will assess what you have learned in sections 6.4.1-6.4.3. When you click on the link above, you will be directed to Frederic S. Mishkin’s multiple choice quiz on “Chapter 25: Aggregate Demand and Supply Analysis.” After you finish the 15 questions of the quiz, please click “Submit Answers for Grading” to redirect to the answer key.

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6.5 Transmission Mechanisms of Monetary Policy: The Evidence

Note: This subunit examines the connection between monetary policy and economic activity, focusing on the debate between the monetarists and the Keynesians over the years since the Great Depression, as well as it illustrates how the accumulation of evidence has led to greater consensus regarding the importance of monetary policy on economic activity.

Reading: Pearson Education Canada’s version of Frederic S. Mishkin’s “Chapter 26: Transmission Mechanisms of Monetary Policy: The Evidence” Lecture Notes
Link: Pearson Education Canada’s version of Frederic S. Mishkin’s “Chapter 26: Transmission Mechanisms of Monetary Policy: The Evidence” Lecture Notes (Microsoft PowerPoint)

Instructions: When you click on the link above, you will be directed to a webpage that lists links to lecture notes on specific chapters from Mishkin's The Economics of Money, Banking, and Financial Markets. Click on the "Chapter 26" link to download the presentation. Please read all of the slides for Chapter 26 for information that covers sections 6.5.1-6.5.4.

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Reading: Money and Banking: “Chapter 24: Monetary Policy Transmission Mechanisms”
Link: Money and Banking: “Chapter 24: Monetary Policy Transmission Mechanisms” (PDF)

Instructions: This reading covers topics outlined in sections 6.5.1-6.5.4. When you click on the link above, you will be directed to “Chapter 24: Monetary Policy Transmission Mechanisms” of an on-line book Money and Banking. Please read Chapter 24 in its entirety.

Terms of Use: The text was adapted by The Saylor Foundation under a Creative Commons-Attribution-NonCommercial-ShareAlike 3.0 License without attribution as requested by the work's original creator or licensee.
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Web Media: for 6.5.1-6.5.4: YouTube: Radiohogan’s “Keynes Versus Friedman”
Link: Radiohogan’s “Keynes versus Friedman” (YouTube)

Instructions: The information in this video will cover concepts in subunits 6.5.1-6.5.4. When you click on the link above, you will be directed to a video on “Keynes Versus Friedman.” Please watch the short video (8:50 minutes) in its entirety.

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6.5.1 Framework for Evaluating Empirical Evidence

6.5.2 Early Evidence on the Importance of Money (Keynesian)

6.5.3 Early Evidence on the Importance of Money (Monetarist)

6.5.4 Transmission Mechanisms for Monetary Policy

Assessment: Pearson Education: Frederic S. Mishkin’s “Chapter 26: Transmission Mechanisms of Monetary Policy: The Evidence”: “Multiple Choice Quiz”
Link: Pearson Education: Frederic S. Mishkin’s “Chapter 26: Transmission Mechanisms of Monetary Policy: The Evidence”: “Multiple Choice Quiz” (HTML)

Instructions: This quiz will assess what you have learned in subunits 6.5.1-6.5.4. When you click on the link above, you will be directed to Frederic S. Mishkin’s multiple choice quiz on “Chapter 26: Transmission Mechanisms of Monetary Policy: The Evidence.” After you finish the 15 questions of the quiz, please click “Submit Answers for Grading” to check your answers.

Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.
See a broken link? Please let us know!

6.6 Money and Inflation 6.6 Money and Inflation

Note: In this subunit, the aggregate demand and supply analysis is used to examine the role of monetary policy in creating inflation. It will be shown that sustained inflation is always the result of sustained growth in the money supply.

Reading: Pearson Education Canada’s version of Frederic S. Mishkin’s “Chapter 27: Money and Inflation” Lecture Notes
Link: Pearson Education Canada's version of Frederic S. Mishkin’s “Chapter 27: Money and Inflation” Lecture Notes (Microsoft PowerPoint)

Instructions: When you click on the link above, you will be directed to a webpage that lists links to lecture notes on specific chapters from Mishkin's The Economics of Money, Banking, and Financial Markets. Click on the "Chapter 27" link to download the presentation. Please read all of the slides for Chapter 27 for information that covers sections 6.6.1-6.6.5.

Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.
See a broken link? Please let us know!
Reading: Money and Banking: “Chapter 25: Inflation and Money”
Link: Money and Banking: “Chapter 25: Inflation and Money” (PDF)

Instructions: This reading will cover concepts from subunits 6.6.1-6.6.5. When you click on the link above, you will be directed to “Chapter 25: Inflation and Money” of an on-line book Money and Banking. Please read Chapter 25 in its entirety.

Terms of Use: The text was adapted by The Saylor Foundation under a Creative Commons-Attribution-NonCommercial-ShareAlike 3.0 License without attribution as requested by the work's original creator or licensee.
See a broken link? Please let us know!
Web Media: Foundation for Economic Education’s (FEE) “Money and Inflation” Audio Lecture
Link: Foundation for Economic Education’s (FEE) “Money and Inflation” Audio Lecture (Mp3)

Instructions: Please note this video covers topics discussed in subunits 6.6.1-6.6.5. When you click on the links above, you will be directed to Freedom University's podcast page. Scroll down until you see "Money and Inflation: Anthony Carilli, and then select the hyperlink to listen to the podcast. Please listen to the lecture (approximately 1 hour and 33 minutes) in its entirety.

Note on the Media: The lecturer in this video, Dr. Anthony Carilli, is Professor of Economics and Director of the Center for Study of Political Economy at Hampden-Sydney College. This lecture was given at Freedom University in spring of 2009.

Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.
The Saylor Foundation does not yet have materials for this portion of the course. If you are interested in contributing your content to fill this gap or aware of a resource that could be used here, please submit it here.
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6.6.1 Money and Inflation: Historical Evidence

6.6.2 The Meaning of Inflation

6.6.3 Views of Inflation (Monetarist, Keynesian, Others)

6.6.4 Origins of Inflationary Monetary Policy

6.6.5 Activist/Non-Activist Policy Debate

Assessment: Pearson Education: Frederic S. Mishkin’s “Chapter 27: Money and Inflation”: “Multiple Choice Quiz”
Link: Pearson Education: Frederic S. Mishkin’s “Chapter 27: Money and Inflation”: “Multiple Choice Quiz” (HTML)

Instructions: This quiz will assess what you have learned in subunits 6.6.1-6.6.5. When you click on the link above, you will be directed to Frederic S. Mishkin’s multiple choice quiz on “Chapter 27: Money and Inflation.” After you finish the 15 questions of the quiz, please click “Submit Answers for Grading” to check your answers.

Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.
See a broken link? Please let us know!

6.7 Rational Expectations: Implications for Policy

Note: This subunit discusses the implications of rational expectations theory for macroeconomic stabilization policies. Rational expectations theory arose in the 1970s as an attempt to explain "stagflation" and the failure of government policies to prevent this unhappy state. How can the apparent ineffectiveness of government stabilization policies be explained? This section introduces models that attempt to answer this question.

Reading: Pearson Education Canada’s version of Frederic S. Mishkin’s “Chapter 28: Rational Expectations: Implications for Policy” Lecture Notes
Link: Pearson Education Canada’s version of Frederic S. Mishkin’s “Chapter 28: Rational Expectations: Implications for Policy” Lecture Notes (Microsoft PowerPoint)

Instructions: When you click on the link above, you will be directed to a webpage that lists links to lecture notes on specific chapters from Mishkin's The Economics of Money, Banking, and Financial Markets. Click on the "Chapter 28" link to download the presentation. Please read all of the slides for Chapter 28 for information that covers sections 6.7.1-6.7.5.

Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.
See a broken link? Please let us know!
Reading: Money and Banking: “Chapter 26: Rational Expectations Redux: Monetary Policy Implications”
Link: Money and Banking: “Chapter 26: Rational Expectations Redux: Monetary Policy Implications” (PDF)

Instructions: This reading will cover topics in subunits 6.7.1-6.7.5. When you click on the link above, you will be directed to “Chapter 26: Rational Expectations Redux: Monetary Policy Implications” of an on-line book Money and Banking. Please read Chapter 26 in its entirety.

Terms of Use: The text was adapted by The Saylor Foundation under a Creative Commons-Attribution-NonCommercial-ShareAlike 3.0 License without attribution as requested by the work's original creator or licensee.
See a broken link? Please let us know!
Web Media: YouTube: ignousoss’s “Rational Expectations” Video
Link: ignousoss’s “Rational Expectations”Video (YouTube)

Instructions: When you click on the links above, you will be directed to a video on “Rational Expectations.” Please watch the video (43:47 minutes) in its entirety.

Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.
See a broken link? Please let us know!

6.7.1 Lucas Critique of Policy Evaluation

6.7.2 New Classical Macroeconomic Model

6.7.3 New Keynesian Model

6.7.4 Comparison of the Two New Models with the Traditional Model

6.7.5 Impact of Rational Expectations Revolution

Assessment: Pearson Education: Frederic S. Mishkin’s “Chapter 28: Rational Expectations: Implications for Policy”: “Multiple Choice Quiz”
Link: Pearson Education: Frederic S. Mishkin’s “Chapter 28: Rational Expectations: Implications for Policy”: “Multiple Choice Quiz” (HTML)

Instructions: This quiz will assess what you have learned in sections 6.7.1-6.7.5. When you click on the link above, you will be directed to Frederic S. Mishkin’s multiple choice quiz on “Chapter 28: Rational Expectations: Implications for Policy.” After you finish the 15 questions of the quiz, please click “Submit Answers for Grading” to check your answers.

Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.
See a broken link? Please let us know!

Final Exam

Final Exam: The Saylor Foundation's "ECON302 Final Exam"
Link: The Saylor Foundation's "ECON302 Final Exam" (HTML)

Instructions: You must be logged into your Saylor Foundation School account in order to access this exam. If you do not yet have an account, you will be able to create one, free of charge, after clicking the link.
See a broken link? Please let us know!

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