Copyright © 2022 Pearson Education, Inc. Online Instructor‘s Resource Manual By Leonie L. Stone State University of New York at Geneseo For Money, Banking, and the Financial System Fourth Edition R. Glenn Hubbard Columbia University Anthony Patrick O‘Brien Lehigh University Copyright © 2022 Pearson Education, Inc. Contents Preface ................................ ................................ ................................ ................................ .... v Part 1: Foundations Chapter 1 Introducing Money and the Financial System ................................ ............................ 1 Chapter 2 Money and the Payments System ................................ ................................ ............... 11 Chapter 3 Interest Rates and Rates of Return ................................ ................................ ............. 25 Chapter 4 Determining Interest Rates ................................ ................................ ......................... 40 Part 2: Financial Markets Chapter 5 The R isk Structure and Term Structure of Interest Rates ................................ ........... 61 Chapter 6 The Stock Market, Information, and Financial Market Efficiency ............................. 72 Chapter 7 Derivatives and Derivatives Markets ................................ ................................ .......... 88 Chapter 8 The Market for Foreign Exchange ................................ ................................ .............. 101 Part 3: Financial Instituti ons Chapter 9 Transactions Costs, Asymmetric Information, and the Structure of the Financial System ................................ ................................ .. 117 Chapter 10 The Economics of Banking ................................ ................................ ........................ 127 Chapter 11 Beyond Commercial Banks: Shadow Banks and Nonbank Financial Institutions ..... 144 Chapter 12 Financia l Crises and Financial Regulation ................................ ................................ . 158 Part 4: Monetary Policy Chapter 13 The Federal Reserve and Central Banking ................................ ................................ . 178 Chapter 14 The Federal Reserve‘s Balance Sheet and the Money Supply Process ...................... 191 Chapter 15 Monetary Policy ................................ ................................ ................................ ......... 207 Chapter 16 The Internat ional Financial System and Monetary Policy ................................ ......... 230 Part 5: The Financial system and the Macroeconomy Chapter 17 Monetary Theory I: The Aggregate Demand and Aggregate Supply Model ............. 247 Chapter 18 Monetary Theory II: The IS–MP Model ................................ ................................ ..... 266 Copyright © 2022 Pearson Education, Inc. Chapter 1 Introducing Money and the Financial System Brief Chapter Summary and Learning Objectives 1.1 Key Components of the Financial System (pages 2 –15) Identify the key components of the financial system. Financial assets, financial institutions, the Federal Reserve , and financial regulators are the key components of the financial system. There are many different types of financial assets with distinctive characteristics. Financial institutions are distinguished by how they transfer funds from savers or lenders to borrowers. There are various regulators that provide oversight to different sectors of the financial system. 1.2 The Crises of 2007 –2009 and 2020 (pages 15 –19) Provide an overview of the financial crises of 2007 –2009 and 2020. The financial crisis of 2007 -2009 provides an opportunity to explore the role and significance of the financial system in the economy. The crisis of 2020 again shows the uses of Fed tools in supporting the economy. 1.3 Key Issues and Questions About Money, B anking , and the Financial System (pages 19 –21) Explain the key issues and questions concerning the financial system. Beginning with Chapter 2, the start of each chapter highlights one key issue and a related question. Answers to the questions appear at the end of the chapters, using analysis from the chapters. Key Terms Asset , p. 2. Anything of value owned by a person or a firm. Bond , p. 3. A financial security issued by a corporation or a government that represents a promise to repay a fixed amount of money. Bubble , p. 16. An unsustainable increase in the price of a class of assets. Commercial bank , p. 6. A financial firm that serves as a financial intermediary by taking in deposits and using them to make loans. Diversification , p. 13. Splitting wealth among many different assets to reduce risk. Interest rate , p. 3 . The cost of borrowing funds (or the payment for lending funds), usually expressed as a percentage of the amount borrowed. Liquidity , p. 13. The ease with which an asset can be exchanged for money. Monetary policy , p. 11. The actions the Federal Reserve takes to manage the money supply and interest rates to pur sue macroeconomic policy objectives. Money , p. 3. Anything that is generally accepted in payment for goods and services or to pay off debts. Money supply , p. 3. The total quantity of money Copyright © 2022 Pearson Education, Inc. Dividend , p. 3. A payment that a corporation makes to its shareholders. Federal funds rate , p. 1 2. The interest rate that banks charge each other on short -term loans. Federal Reserve , p. 11. The central bank of the United States; usually referred to as ―the Fed.‖ Financial asset , p. 2. An asset that represents a claim on someone else for a payment. Financial crisis , p. 16. A significant disruption in the flow of funds from lender to borrowers. Financial i ntermediary , p. 4. A financial firm, such as a bank, that borrows funds from savers and lends them to borrowers. Financial liability , p. 4. A financial claim owed by a person or a firm. Financial market , p. 2. A place or channel for buying or selling stock s, bonds, and other securities. Foreign exchange , p. 4. Units of foreign currency. Information , p. 14. Facts about borrowers and expectations of returns on financial assets. in the economy. Portfolio , p. 8. A collection of assets, such as stocks and bonds. Primary market , p. 9. A financial market in which stocks, bonds, and other securities are sold for the first time. Risk sharing , p. 13. A service the financial system provides that allows savers to spread and transfer risk. Secondary market , p. 9. A financial market in which investors buy and sell existing securities. Securitization , p. 4. The process of converting loans and other financial assets that are not tradable into securities. Security , p. 2. A financial asset that can be boug ht and sold in a financial market. Stock , p. 3. A financial securit y that represent s partial ownership of a firm; also called an equit y. Chapter Outline The Coronavirus , Financial Markets, and the Flow of Funds March 16, 2020 was ―one of the worst days the financial markets have seen ,‖ according to an article in the Wall Street Journal , due to the effects of the Covid -19 pandemic. As it became clear that the pandemic would cause a significant recession, many investors stopped buying financial assets . Corporations, cities, and school districts all found it difficult to use financial markets to borrow money and so had difficulty paying their bills, including the salaries and wages of their employees. The Federal Reserve took steps to stabilize the financial system and restore the flow of credit to borrowers. A well -functioning financial system is a crucial determinant of economic prosperity. Without an efficient financial system, there will be little borrowing or lending, and so people will be stuck ea rning low incomes and the country will make very little economic progress. To see the importance of borrowing and lending to an economy, suppose that you come up with an idea for a company: You design a smartphone application (―app‖) that will deliver a t extbook chapter to a student‘s phone for a limited time for a low price. You have a lot of work to do to get your company off the ground —
perfecting the software, designing the page in the app store where you will sell it, negotiating with textbook publishers to gain access to their books, and marketing your idea to students. You will have to spend a lot of money before you receive any revenue from sales. Where will you get this money? We can demonstrate the importance of borrowing and le nding to an economy by considering the process a company uses to develop a new product. The company will have to spend a l ot of money before it receives any revenue from sales of the new product. Nearly every entrepreneur faces the same challenge. The role of the financial system is to channel funds from savers to businesses. During the economic crisis that began in 2007, the financial system was disrupted and large sections of the U.S. economy were cut off
