Chapter 1
Why Study
Money, Banking,
and Financial
Markets?
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• To examine how financial markets such as
bond and stock work
• To examine how financial institutions
such as banks, investment and insurance
companies work
• To examine the role of money in the
economy
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Why Study Financial Markets?
• Financial markets are markets in which
funds are transferred from people and firms
who have an excess of available funds to
people and firms who have a need of funds
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The Bond Market and Interest Rates
• A security (financial instrument) is a
claim on the issuer’s future income or
assets.
• A bond is a debt security that promises to
make payments periodically for a specified
period of time.
• An interest rate is the cost of borrowing or
the price paid for the rental of funds.
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Figure 1 Interest Rates on Selected
Bonds, 1950–2014
Source: Federal Reserve Bank of St. Louis, FRED database: [Link]
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The Stock Market
• Common stock represents a share of
ownership in a corporation.
• A share of stock is a claim on the residual
earnings and assets of the corporation.
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Why Study Financial Institutions
and Banking?
• Financial intermediaries: institutions that
borrow funds from people who have saved and in
turn make loans to other people.
– Banks: accept deposits and make loans
Can you name the four biggest banks in Vietnam?
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Why Study Money and Monetary
Policy?
• Evidence suggests that money plays an
important role in generating business
cycles.
• Recessions (unemployment) and
expansions affect all of us.
• Monetary theory ties changes in the money
supply to changes in aggregate economic
activity and the price level.
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The Business Cycle
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Money, Business Cycles, and
Inflation
• The aggregate price level is the average
price of goods and services in an economy
• A continual rise in the price level (inflation)
affects all economic players
• Data shows a connection between the
money supply and the price level
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Figure 3 Money Growth (M2 Annual Rate) and the
Business Cycle in the United States 1950–2014
Source: Federal Reserve Bank of St. Louis, FRED database: [Link]
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Figure 4 Aggregate Price Level and the Money
Supply in the United States, 1950–2014
Source: Federal Reserve Bank of St. Louis, FRED database: [Link]
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Figure 5 Average Inflation Rate Versus Average Rate
of Money Growth, Selected Countries, 2003-2013
Source: International Financial Statistics. [Link]
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Vietnam inflation and money supply
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Money and Interest Rates
• Interest rates are the price of credit
• Prior to 1980, the rate of money growth and
the interest rate on long-term Treasury
bonds were closely tied
• Since then, the relationship is less clear but
the rate of money growth is still an
important determinant of interest rates
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Figure 6 Money Growth (M2 Annual Rate) and Interest
Rates (Long-Term U.S. Treasury Bonds), 1950–2014
Source: Federal Reserve Bank of St. Louis, FRED database: [Link]
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Money supply and interest rate in Vietnam
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Fiscal Policy and Monetary Policy
• Monetary policy is the management of the
money supply and interest rates
– Conducted in the U.S. by the Federal Reserve System
(Fed)
– Conducted in Vietnam. by the State Bank of Vietnam (SBV)
• Fiscal policy deals with government spending
and taxation
– Budget deficit is the excess of expenditures over
revenues for a particular year
– Budget surplus is the excess of revenues over
expenditures for a particular year
– Any deficit must be financed by borrowing
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Homework
• Read Mishkin, chapter 1, 2
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Vocabulary
1. Financial markets: thị trường tài chính
2. Bond: trái phiếu
3. Stock: cổ phiếu
4. Financial Institutions: định chế tài chính
5. Financial intermediation: trung gian tài chính
6. Monetary policy: chính sách tiền tệ
7. Business cycle: chu kỳ kinh tế
8. Economic variables: biến số kinh tế
9. Exchange rate: tỷ giá hối đoái
[Link] : nguồn tài chính
[Link]: sự dư thừa
[Link] rate: lãi suất
[Link]: chứng khoán
[Link]: khoản cho vay
[Link] crises: khủng hoảng tài chính
[Link] funds: quỹ lương hưu
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17. Recession: sự suy thoái
18. Aggregate: toàn bộ, tổng số
19. Inflation: lạm phát
20. Treasury bond: trái phiếu kho bạc
21. Fiscal policy: chính sách tài khóa
22. Budget deficit: thâm hụt ngân sách
23. Budget surplus: thặng dư ngân sách
24. Expenditures: chi tiêu
25. Revenues: thu nhập
26. Capital controls: quản lý vốn
27. Domestic financial system: thị trường tài chính trong nước
28. Equilibrium: trạng thái cân bằng
29. Transaction costs : chi phí giao dịch
30. Asymmetic information: thông tin bất đối xứng
31. Deflator: chỉ số giảm phát
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