Eco 212 Money & Banking Fall 2008

1. Eco 212 Money & BankingFall 2008 • Course information • Course policies

2. Who am I? • Dr. Anwar Al-Shriaan • alshriaan@cba.edu.kw • Office hours: • MW 12:30-1:30, • and by appt.

3. About this course • Intro • Financial markets • Interest rates, exchange rates, stock market, derivatives • Financial institutions • structure, regulation • Federal Reserve System & monetary policy • Role of money in the economy

4. Course materials • required: • textbook • Mishkin, Frederic S., "The Economics of Money, Banking, and Financial Markets." Sixth edition, Addison Wesley (2001). • in bookstores

5. recommended: • course web site • It’s free! • Address on syllabus • course email list • Email me with ur name and ur class time

6. Grading • Point Structure: • Class Participation & Attendance 10 points • Homework and Quizzes 10 points • Exam 1 20 points • Exam 2 20 points • Final Exam 40 points

7. grading scale in syllabus • extra credit • About 10 pts. during the semester • must be present in class when assigned • attendance is graded and important to earn extra credits,

8. Makeups • one week’s notice (except emergencies) • require documented excused absence • may be essay exams or I may reweight the other exams

9. Attendance • explicitly graded • I expect regular attendance & punctuality • homework due at beginning of class • you are responsible for information in class • extra credit only available to those in attendance when it is offered

10. Cheating • cheating on an exam means a failing grade in the course • copied or very identical homework will receive a zero

11. Having problems in the course? • see me sooner, not later! Need accomodation? • see me after class or in my office

12. Chapter 1: Intro to Money & the Financial System • 5 Core Principles of Money & Banking • Time has value • Risk requires compensation • Information is the basis for decisions • Markets set prices and allocate resources • Stability improves welfare

13. in the news… • Subprime lending market meltdown • impact on mortgage markets • Impact on financial institutions • impact on the stock market • impact on the economy

14. The U.S. dollar • parity with the Canadian $! • Revaluation of the Chinese yuan? • Federal Reserve Chair Ben Bernanke • Reduction of federal funds rate • Largest since 1984 • A re-emergence of stagflation?

19. 1. Time has value • $100 today vs. $100 in one year • Are you indifferent? • Forensic economics • Value of a financial instrument depends on SIZE and TIMING of payments

20. Example: HGTV • My House is Worth What? • House purchased 2001: $225,000 • Renovations over 5 years: $41,000 • Estimated current value: $350,000 • Profit: $84,000…..Really? • NO! not really!

21. 2. Risk requires compensation • Risk comes from uncertainty • Risk is unavoidable • We don’t like it.

22. To take on risk, we demand compensation • Subprime mortgage rates > prime mortgage rates • We pay to avoid certain risks • Auto, life insurance • Low rates on checking, savings accounts

23. The value of a financial asset depends on the • size, • timing, and • CERTAINTY of its payments.

24. 3. Information is the basis for decisions • Rational decisions use all available info • Asymmetric info can impede markets • Financial institutions play a big role in gathering info • Financial regulation demands disclosure of certain info

25. 4. Markets set prices and allocate resources • Eco 110! • Markets set a price that rations scarce resources • Prices send a signal • Financial market prices allocate funds

26. 5. Stability improves welfare • Back to #2—we do not like uncertainty • Financial stability feeds economic growth and standards of living • Role of institutions, Federal Reserve