1、PART TWO Overviews of the Textbook Chapters and Teaching Tips 25 Chapter 1 Why Study Money, Banking, and Financial Markets? Before embarking on a study of money, banking, and financial markets, the student must be convinced that this subject is worth studying. Chapter 1 pursues this goal in two ways
2、. First, it shows the student that money and banking is an exciting field because it focuses on economic phenomena that affect everyday life. Second, using eight figures, this chapter encourages the student to look at data that bear on the central issues in this field. An additional purpose of Chapt
3、er 1 is to provide an overview for the entire book, previewing the topics that will be covered in later chapters, and to indicate how the book will be taught. In teaching this chapter, the most important goal should be to get the student excited about the material. I have found that talking about th
4、e data presented in the figures helps achieve this goal. Furthermore, it shows the student that the subject matter of money and banking has real-world implications that the student should care about. The Web appendix to this chapter reviews concepts regarding the definitions of aggregate output, inc
5、ome, and the price level that the student already has seen in an economic principles course. Since these concepts are extremely important, it might be worthwhile to have your students read this appendix outside of class to jog their memories. 26 Mishkin The Economics of Money, Banking, and Financial
6、 Markets, Ninth Edition Chapter 2 An Overview of the Financial System Chapter 2 is an introductory chapter that contains the background information on the structure and operation of financial markets that is needed in later chapters of the book. This chapter allows the instructor to branch out to va
7、rious choices of later chapters, thus allowing different degrees of coverage of financial markets and institutions. The most important point to transmit to the student is that financial markets and financial intermediaries are crucial to a well-functioning economy because they channel funds from tho
8、se who do not have a productive use for them to those who do. Professors who emphasize financial markets and institutions in their course will want to teach this chapter in detail, and those who focus on international issues will want to spend some time on the section “Internationalization of Financ
9、ial Markets.” However, those who slant their course to monetary theory and policy may want to give this chapter a more cursory treatment. No matter how much class time is devoted to this chapter, I have found that it is a good reference chapter for students. You might want to tell them that if in la
10、ter chapters they do not recall what some financial instrument is or who regulates whom, they can refer back to this chapter, especially to summary tables, such as Tables 3 and 5. The chapter introduces Global boxes, which are sprinkled throughout the text, to get students to recognize the growing i
11、mportance of the global economy. The Global box in this chapter gets students to think about how the financial system in the U.S. is both similar to and different from financial systems in other countries. Part Two: Overviews of the Textbook Chapters and Teaching Tips 27 Chapter 3 What Is Money? Bef
12、ore becoming immersed in the study of money and banking, the student must understand how money is defined and measured. The first half of Chapter 3 discusses the definition of money: how the economists definition differs from that of common speech, the functions of money, and a historical view of ho
13、w what serves as money has changed over time. The second half of the chapter describes the tricky issues involved in applying the definition of money in order to measure it. Once the student understands what money is, the most important point to get across to him or her is that economists are not ex
14、actly sure how to measure money. This presents to policymakers a serious problem: Although they might want to control the money supply to affect the economy, they are not sure which measure of money is the right one to control. In many situations, knowing which measure of money is the right one is n
15、ot crucial because different measures (such as Ml, M2, and M3) move together. But, as Figure 1 illustrates, this is sometimes not the case, presenting the policymaker with a dilemma. A second point to emphasize is illustrated in Table 2: We should not pay very much attention to short-run movements i
16、n the published money supply numbers, because data revisions can be substantial. Rather, we should focus on longer-run movements, such as growth rates over a years time. 28 Mishkin The Economics of Money, Banking, and Financial Markets, Ninth Edition Chapter 4 Understanding Interest Rates In my year
17、s of teaching money and banking, I have found that students have trouble with what I consider to be easy material because they do not understand what an interest rate isthat it is negatively associated with the price of a bond, that it differs from the return on a bond, and that there is an importan
18、t distinction between real and nominal interest rates. This chapter spends more time on these issues than does any other competing textbook. Furthermore, it contains many numerical applications to drive home the concepts. My experience has been that giving this material so much attention is well rew
19、arded. After putting more emphasis on this material in my money and banking courses, I witnessed a dramatic improvement in students understanding of bank asset and liability management, portfolio choice, models of the demand for money, and other topics in monetary theory. I also have found that stud
20、ents very much enjoy this chapter, especially the “Reading the Wall Street Journal” application in which they learn to read the bond page. They feel that this chapter is very “real world” and will be useful to them in their careers. This chapter introduces Following the Financial News boxes which co
21、ntain news items and data that are reported daily in the press. These boxes help explain how to read the data and help encourage students to start reading financial newspapers. An additional innovative feature of the book that first appears in this chapter are the special applications, “Reading the
22、Wall Street Journal.” These applications show students how the analytical framework in the book can be used directly to understand the daily data and columns in the United States leading financial newspaper. The students particularly like the application on reading the bond page of the Wall Street J
23、ournal because it shows them that the concepts developed in the chapter are actually used in the real world. Because the analytical material in this chapter is somewhat dry (although important), it is worthwhile spicing it up with discussion of the boxes to liven it up for students. The Global box o
24、n negative T-bill rates shows that strange things do indeed happen in the world. This chapter also introduces FYI boxes, which highlight dramatic historical episodes, interesting ideas, and intriguing facts to keep students excited about the material. Part Two: Overviews of the Textbook Chapters and
25、 Teaching Tips 29 Chapter 5 The Behavior of Interest Rates As is clear in the Preface to the textbook, I believe that money and banking is taught effectively by emphasizing a few economic principles and then applying them over and over again to the subject matter of this exciting field. Chapter 5 in
26、troduces one of these basic economic principles: the theory of asset demand. This theory indicates that there are four primary factors that influence peoples decisions to hold assets: wealth, expected returns, risk, and liquidity. The simple idea that these four factors explain the demand for assets
27、 is, in fact, an extremely powerful one. It is used continually throughout the study of money and banking and makes it much easier for the student to understand how interest rates are determined, how banks manage their assets and liabilities, why financial innovation takes place, how prices are dete
28、rmined in the stock market and the foreign exchange market, and how various theories explain the demand for money. One teaching device that I have found helps students develop their intuition is the use of summary tables such as Table 1 in class. I use the blackboard to write a list of changes in va
29、riables that affect the demand for an asset and then ask students to fill in the table by reasoning how demand responds to each change. This exercise gives them good practice in developing their analytic abilities. I use this device continually throughout my course and in this book, as is evidenced
30、from similar summary tables in later chapters. I recommend this approach highly. Chapter 5 goes on to lay out two partial equilibrium approaches to the determination of interest rates: supply and demand in the bond market and the liquidity preference framework (supply and demand in the money market)
31、. As is made clear in this chapter, these approaches are not inconsistent with each other but are two different and useful ways of looking at the same thing. An important feature of the analysis in this chapter is that supply and demand is always done in terms of stocks of assets, not in terms of fl
32、ows. Recent literature in the professional journals almost always analyzes the determination of prices in financial markets with an asset-market approach: that is, stocks of assets are emphasized rather than flows. The reason for this is that keeping track of stocks of assets is easier than dealing
33、with flows. Correctly conducting analysis in terms of flows is very tricky, for example, when we encounter inflation. Thus there are two reasons for using a stock approach rather than a flow approach: (1) It is easier, and (2) it is more consistent with modern treatment of asset markets by economist
34、s. Another important feature of this chapter is that it lays out supply and demand analysis of the bond and money markets at a similar level to that found in principles of economics textbooks. The ceteris paribus derivation of supply and demand curves with numerical examples are presented, the conce
35、pt of equilibrium is carefully developed, the factors that shift the supply and demand curves are outlined, and the distinction between movements along a demand or supply curve and shifts in the curve are clearly drawn. My feeling is that the step-by-step treatment in this chapter is worthwhile beca
36、use supply and demand analysis is such a basic tool throughout the study of money, banking, and financial markets. I have found that even those students who have had excellent training in their principles course find that this chapter provides a valuable review of supply and demand analysis. 30 Mish
37、kin The Economics of Money, Banking, and Financial Markets, Ninth Edition An appendix to the chapter which can be found on the Web site shows how the analysis developed in the chapter can be applied to understanding how any assets price is determined. Many students like the application to the gold m
38、arket because this commodity piques almost everybodys interest. This chapter is also designed to show the student how useful economic analysis can be. The Following the Financial News box illustrates that the supply and demand analysis in this chapter is used in the real world to solve a practical p
39、roblemforecasting interest rates. The “Reading the Wall Street Journal” applications on the Credit Markets column shows students how they can use the concepts they have learned to understand material that they can read about every day. In teaching my class, I bring the previous days Wall Street Jour
40、nal columns into class and then use them to conduct a case discussion along the lines of the “Reading the Wall Street Journal” applications in the text. My students very much like the resulting case discussions and have told me that they are better than case discussions in other classes because the
41、material is so current. The application at the end of the chapter encourages students to use all they have learned in this chapter to analyze an important issue to policymakersthe relationship between money and interest rates. Part Two: Overviews of the Textbook Chapters and Teaching Tips 31 Chapter
42、 6 The Risk and Term Structure of Interest Rates Chapter 6 applies the tools the students learned in Chapter 5 to understanding why and how various interest rates differ. In courses that emphasize financial markets, this chapter is important because students are curious about the risk and term struc
43、ture of interest rates. On the other hand, professors who focus on monetary theory and policy in their courses might want to skip this chapter. The book has been designed so that skipping this chapter will not hinder the students understanding of later chapters. A particularly attractive feature of
44、this chapter is that it gives students a feel for the interaction of data and theory. As becomes clear in the discussion of the term structure, theories are modified because they cannot explain the data. On the other hand, theories do help to explain the data, as the application to interpreting yiel
45、d curves in the 19802009 period demonstrates. 32 Mishkin The Economics of Money, Banking, and Financial Markets, Ninth Edition Chapter 7 The Stock Market, the Theory of Rational Expectations, and Efficient Market Hypothesis Because the stock market is of such great interest to students, this chapter
46、 discusses theories of how stocks are priced and how information is incorporated into stock prices. Laying out the simple models of the one-period valuation model, the generalized dividend valuation model, and the Gordon growth model gives students the tools to understand how stock prices are determ
47、ined. Two applications show students how relevant these models are by applying them to see how monetary policy influences stock prices. An important development in monetary theory that has far-reaching implications for the way we evaluate economic policy is the theory of rational expectations. Chapt
48、er 7 explains this theory and its application to financial markets, which is referred to as the efficient market hypothesis. Although the theory of rational expectations can be laid out in mathematical terms, I have found that it is best to give the students an example such as Joe Commuters expectat
49、ions to give them an intuitive sense of what “rational expectations” mean. When provided with a graphic example like that used in the text, students have no trouble understanding the theory of rational expectations, which is really just good common sense. The implications of rational expectations theory become much clearer when this theory is used to understand behavior in the financial markets as in the efficient market hypothesis. Another area of exciting new research has been on the validity of rational expectations and efficient markets. Recent work has been dredging up
