Money and Banking Book

Money and Banking Book
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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 1 This text was adapted by The Saylor Foundation under aactionURI(http://creativecommons.org/licenses/by...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 2 Preface This book is designed to help you internalize the basics of money and banking. There is a litt...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 3 Chapter 1 Money, Banking, and Your World C H A P T E R O B J E C T I V E S By the end of this chapter...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 4 1.1 Dreams Dashed L E A R N I N G O B J E C T I V E 1. How can ignorance of the principles of money a...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 5 Rob and Barb had a more modest dream of a nice house in a good location with many conveniences, a low ...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 6 for it, prices rise and inflation ensues. When inflation increases, so too do nominal interest rates. ...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 7 [actionURI(http://sinclair.thefreelibrary.com/Jungle):2]http://sinclair.thefreelibrary.com/Jungle;acti...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 8 1.2 Hope Springs L E A R N I N G O B J E C T I V E 1. How can knowledge of the principles of money an...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 9 to be lucrative and fulfilling. Some, eager for a challenging and rewarding career, will try to start ...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 10 1.3 Suggested Browsing Financial Literacy Foundation:actionURI(http://www.finliteracy.org/): http://w...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 11 1.4 Suggested Reading Ayub, Muhammed. Understanding Islamic Finance. Hoboken, NJ: John Wiley and Sons...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 12 Chapter 2 The Financial System C H A P T E R O B J E C T I V E S By the end of this chapter, student...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 13 2.1 Evil and Brilliant Financiers? L E A R N I N G O B J E C T I V E 1. Are bankers, insurers, and o...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 14 astrophysics. Financiers, like politicians, religious leaders, and, yes, college professors, have mad...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 15 2.2 Financial Systems L E A R N I N G O B J E C T I V E 1. What is a financial system and why do we ...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 16 Occasionally, people and companies, especially small businesses or ones that sell into rapidly growi...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 17 costs, to drive them toward insignificance, lenders have to do quite a volume of business. Little guy...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 18 2.3 Asymmetric Information: The Real Evil L E A R N I N G O B J E C T I V E 1. What is asymmetric in...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 19 finance, financial systems make it possible for entrepreneurs and other firms to test their ideas in ...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 20  Financial systems help to reduce the problems associated with both adverse selection and moral ha...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 21 2.4 Financial Markets L E A R N I N G O B J E C T I V E 1. In what ways can financial markets and in...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 22 estate collateral), corporate bonds, government bonds, and commercial and consumer loans, have fixed ...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 23 brokering and dealing and usually also providing their clients with advice and information. Investmen...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 24 reversed course once again. Today, governments, corporations, and other securities issuers (borrowers...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 25 [4] “American Finance: And Then There Were None. What the death of the investment bank means for Wa...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 26 2.5 Financial Intermediaries L E A R N I N G O B J E C T I V E 1. In what ways can financial interme...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 27 Insurance companies are also divided between mutual and joint-stock corporations. They issue contract...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 28 Figure 2.5 Assets of financial intermediaries, selected years, 1945–2005

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 29

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 30 Figure 2.6 Financial assets to gross domestic product (GDP), 1945–2007 Financial markets have exhi...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 31 [1]actionURI(http://www.djindexes.com/mdsidx/index.cfm?event=showAverages): www.djindexes.com/mdsidx/...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 32 2.6 Competition Between Markets and Intermediaries L E A R N I N G O B J E C T I V E 1. What trade-o...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 33 environmentally or socially conscious companies and countries and less for those issued by dirty, rud...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 34 2.7 Regulation L E A R N I N G O B J E C T I V E 1. What are the major goals of financial regulation...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 35 Finally, regulators also try to ensure the soundness of the financial system by acting as a lender of...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 36 2.8 Suggested Reading Anonymous, Finance for Managers. Cambridge: Harvard Business School Press, 2002...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 37 Chapter 3 Money C H A P T E R O B J E C T I V E S By the end of this chapter, students should be abl...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 38 3.1 Of Love, Money, and Transactional Efficiency L E A R N I N G O B J E C T I V E 1. What is money a...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 39 that wealth makes people happy. Although sometimes used synonymously with wealth in everyday speech, ...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 40 number of traded goods because each has a money price, the good’s cost in terms of the unit of acco...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 41 Money also works as a store of value and as a standard of deferred compensation. By store of value, e...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 42 Of course, conversations like the one above rarely occur today. Except in New Jersey and a few other ...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 43 3.2 Better to Have Had Money and Lost It Than to Have Never Had Money at All L E A R N I N G O B J E ...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 44 In prisons, prisoner-of-war camps, and other settings where money is unavailable, inmates quickly lea...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 45 K E Y T A K E A W A Y S  Where money is absent, an available commodity with the best combination o...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 46 3.3 A Short History of Moolah L E A R N I N G O B J E C T I V E 1. What characteristics does a good ...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 47 in safe warehouses, and issued paper receipts for it. The receipts, shown in Figure 3.2 "Reprodu...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 48 rationality, however, they ought to peek into their wallets and purses, where they may discover, if t...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 49 present, believe it or not); and tissue paper, for both the nose and the posterior! They were also us...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 50 3.4 Commodity and Credit Monies L E A R N I N G O B J E C T I V E 1. How do representative and credi...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 51 prices would also drop by half because no one would harvest clams when they could earn twice as many ...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 52 SourceactionURI(http://www.measuringworth.com/inflation/):: http://www.measuringworth.com/inflation/...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 53 The end of gold’s reign was, in a sense, overdue. Gold’s monetary life had been extended by the ...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 54 By the eighteenth century, banks in Great Britain, the United States, and a few other places increase...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 55 keeping money invested locally. (For more details, broactionURI(http://www.ithacahours.com/):wsehttp:...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 56  Representative money and credit money are more efficient than commodity money because they are su...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 57 3.5 Measuring Money L E A R N I N G O B J E C T I V E 1. What is the money supply and how is it meas...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 58 K E Y T A K E A W A Y S  The money supply is the stock of all money in an economy.  It is measu...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 59 3.6 Suggested Reading Bernstein, Peter. A Primer on Money, Banking, and Gold. Hoboken, NJ: John Wiley...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 60 Chapter 4 Interest Rates C H A P T E R O B J E C T I V E S By the end of this chapter, students shou...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 61 4.1 The Interest of Interest L E A R N I N G O B J E C T I V E 1. What is interest and why is it imp...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 62 4.2 Present and Future Value L E A R N I N G O B J E C T I V E 1. What are the formulas for present ...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 63 The figures in the table are easily calculated by multiplying the previous year’s value by 1.10, 1...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 64 For $100 borrowed today at 10 percent compounded annually, in 100 years I’d owe you $1,378,061 (FV ...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 65 No; 5 × 20 = 100, but the money payable next year and in subsequent years is not worth $5 million to...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 66 9. Exactly 150 years ago, the U.S. government promised to pay a certain Indian tribe $3,500, or 7 per...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 67 4.3 Compounding Periods L E A R N I N G O B J E C T I V E 1. If interest compounds other than annual...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 68 For all questions in this set, interest compounds quarterly (four times a year) and there are no tran...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 69 4.4 Pricing Debt Instruments L E A R N I N G O B J E C T I V E 1. What are debt instruments and how ...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 70

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 71 Today, such schedules are most easily created using specialized financial software, including Web sit...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 72 Museum of American Finance Even if it no longer uses a physical coupon like those illustrated in Fig...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 73 PV1 = $500/(1.06) = $471.70 (This is the interest payment after the first year. The $500 is the coupo...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 74 PV5=$10,500/(1.05)5=$8,227.0247 Calculating the price of a bond that makes quarterly payments over th...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 75 4.5 What’s the Yield on That? L E A R N I N G O B J E C T I V E 1. What is yield to maturity and f...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 76 Calculating the yield to maturity for a perpetual debt, one with no maturity or repayment date, like ...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 77 quick estimate called the current yield. Unfortunately, current yield can be wide of the mark, especi...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 78 4.6 Calculating Returns L E A R N I N G O B J E C T I V E 1. What is the rate of return and how does...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 79 maturity. For example, suppose you purchased the bond for $100 but its price a year hence stood at $1...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 80 75.23 percent. Duration is a technical measure of interest rate risk that we will not investigate her...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 81 4.7 Inflation and Interest Rates L E A R N I N G O B J E C T I V E 1. What is the difference between...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 82 In plain English, after the fact (ex post in economists’ lingo), the nominal interest rate is equa...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 83 Traditionally, inflation expectations were unobservable so real rates were known only ex post. Howeve...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 84 4.8 Suggested Reading Fisher, Irving. The Purchasing Power of Money: Its Determination and Relation t...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 85 Chapter 5 The Economics of Interest-Rate Fluctuations C H A P T E R O B J E C T I V E S By the end ...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 86 5.1 Interest Rate Fluctuations L E A R N I N G O B J E C T I V E 1. As a first approximation, what ca...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 87 Figure 5.2 Yields on one-month U.S. Treasury bills, March 2008

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 88 You should now be primed to ask, Why does the interest rate fluctuate? In other words, What causes i...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 89 supply curve slopes upward because, as the price of bonds increases (which is to say, as we learned i...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 90 As with other goods, the supply and demand curves for bonds can shift right or left, with results fa...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 91 K E Y T A K E A W A Y S  The interest rate changes due to changes in supply and demand for bonds. ...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 92 5.2 Shifts in Supply and Demand for Bonds L E A R N I N G O B J E C T I V E 1. What causes the suppl...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 93 factors discussed in Chapter 4 "Interest Rates" will affect return expectations and hence t...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 94 demand. Because investors often need to change their investment portfolio or dis-save (spend some of ...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 95 supply curve rightward and bond prices down (yields up), ceteris paribus. When governments run surplu...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 96 As Yoda might say, “Pause here, we must” to make sure we’re on track. [4] Try out these questi...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 97 If you noticed that the response of bond prices and yields to a business cycle expansion is indeterm...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 98 In reality, the first scenario is the one that usually wins out: during expansions, the interest rat...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 99  Expected inflation leads businesses to issue bonds because inflation reduces real borrowing costs...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 100 5.3 Liquidity Preference L E A R N I N G O B J E C T I V E 1. In Keynes’s liquidity preference fr...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 101 The intersection of the money supply and demand curves reveals the market rate of interest. Equilib...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 102 sense because there is more money to lend. If the money supply decreases, by contrast, the interest ...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 103 margins continue to shrink without forcing through price increases. Other companies have locked in l...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 104 2. If a steep recession sets in, what will happen to the interest rate? 3. The government has decide...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 105 5.4 Predictions and Effects L E A R N I N G O B J E C T I V E 1. How does the interest rate react t...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 106

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 107 The key point is that, as the money supply (here presented in per capita terms, from $1 to $25 per p...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 108 higher. Figure 5.11 "Money supply growth and nominal interest rates" summarizes this discu...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 109

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 110 Stop and Think Box Famed monetary economist and Nobel laureate Milton Friedman [1] was a staunch sup...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 111 [actionURI(http://taylorandfrancis.metapress.com/(vqspd445seikpajibz05ch45)/%20app/home/contribution...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 112 5.5 Suggested Reading Bibow, Jorg. Keynes on Monetary Policy, Finance and Uncertainty: Reassessing L...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 113 Chapter 6 The Economics of Interest-Rate Spreads and Yield Curves C H A P T E R O B J E C T I V E S...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 114 6.1 A Short History of Interest Rates A L E A R N I N G O B J E C T I V E 1. How and why has the in...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 115 Figure 6.2 The term structure of interest rates in the United States, 1960–2006 The graphs reveal...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 116 interest rates low (as we’ll see in Chapter 16 "Monetary Policy Tools"). After the war, ...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 117 6.2 Interest-Rate Determinants I: The Risk Structure L E A R N I N G O B J E C T I V E 1. What is t...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 118 Nevertheless, except for a special type of bond called TIPS, the government and other bond issuers p...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 119 Equipped with this knowledge, we can easily understand the reasons for the rank ordering in Figure ...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 120 Stop and Think Box Corporate bond ratings go all the way down to C (Moody’s) or D (Standard and Po...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 121 Risk, after-tax returns, and liquidity also help to explain changes in spreads, the difference betw...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 122 During crises, spreads can quickly soar because investors sell riskier assets, like Baa bonds, driv...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 123 3. If several important bond brokers reduced the brokerage fee they charge for trading Baa corporate...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 124 6.3 The Determinants of Interest Rates II: The Term Structure L E A R N I N G O B J E C T I V E 1. ...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 125 or Z. What explains this? (Remember, it can’t be tax, default, or liquidity risk because those var...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 126 Generally, investors prefer short-term bonds to long-term ones, but they reverse their preference if...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 127 i5 = (4 + 5 + 6 + 7 + 8)/5 + .5 = 30/5 + .5 = 6.5, again implying an upward sloping curve because 4 ...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 128 Empirical research suggests that the yield curve is a good predictor of future interest rates in the...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 129 Maturity Yield (%) 3 months 6.20 6 months 6.35 1 year 2 years 6.30 3 years 6.30 5 years 6.15 7 year...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 130 6.4 Suggested Reading Choudry, Moorad. Analysing and Interpreting the Yield Curve. Hoboken, NJ: John...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 131 Chapter 7 Rational Expectations, Efficient Markets, and the Valuation of Corporate Equities C H A ...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 132 7.1 The Theory of Rational Expectations L E A R N I N G O B J E C T I V E 1. When are expectations ...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 133 nervousness. Rabbits become elephants, brawls in a tavern become rebellions, faint shadows appear to...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 134 update their expectations, or forecasts, with great frequency, as new information becomes available,...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 135 significant price changes throughout the pond for quite a long time. (Economists call such boulders ...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 136  Expectations are irrational if some available pertinent information is ignored or if conclusions...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 137 7.2 Valuing Corporate Equities L E A R N I N G O B J E C T I V E 1. How are corporate equities valu...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 138 stockholders sell their shares, so they have more control over their tax liabilities. Similarly, com...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 139 E X E R C I S E S 1. Use the one-period valuation model P = E/(1 + k) + P1/(1 + k) to price the foll...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 140 8. E = most recent earnings 9. k = required return 10. g = constant growth rate 11. So the price of ...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 141  In general, corporate equities are valued the same way that any financial security is, by discou...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 142 7.3 Financial Market Efficiency L E A R N I N G O B J E C T I V E 1. In what senses can financial m...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 143 there, while selling in the high market decreases the price there.) Therefore, only slight price dif...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 144 Some economists believe financial markets are so efficient that unexploited profit opportunities lik...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 145 outperform (provide higher returns than) the market. In any given period, some funds beat the market...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 146 profits. They watched their money double seemingly day after day, week after week, month after month...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 147 K E Y T A K E A W A Y S  Markets are efficient if they allocate resources to their most highly va...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 148 7.4 Evidence of Market Efficiency L E A R N I N G O B J E C T I V E 1. How efficient are our markets...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 149 In fact, in addition to allocational efficiency, economists talk about three types of market efficie...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 150 it was possible to make outsized profits by purchasing homes sold at foreclosure, tax, and other auc...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 151 As far as emulating your friend’s trading strategies, you should investigate the matter more thoro...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 152 Some anomalies may be due to deficiencies in our understanding of risk and liquidity rather than mar...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 153 Behavioral finance uses insights from evolutionary psychology, anthropology, sociology, the neurosci...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 154  If the market is strong form efficient, inside information is useless too because prices reflect...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 155 to the second will be +$2 even though both series provide precisely the same information. In other w...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 156 7.5 Suggested Reading Bernstein, Peter. Against the Gods: The Remarkable Story of Risk. Hoboken, NJ:...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 157 Chapter 8 Financial Structure, Transaction Costs, and Asymmetric Information C H A P T E R O B J E ...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 158 8.1 The Sources of External Finance L E A R N I N G O B J E C T I V E 1. How can companies meet the...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 159 As noted above, the numbers in Figure 8.1 "Sources of external finance for nonfinancial compan...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 160 funds directly by selling stocks and bonds? Finally, why are financial systems worldwide one of the ...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 161 8.2 Transaction Costs, Asymmetric Information, and the Free-Rider Problem L E A R N I N G O B J E C...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 162 able to find a relative, co-religionist, colleague, or other acquaintance to lend to relatively chea...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 163 might given its Thomas Friedman–The World Is Flatishness [3]), it will only reinforce the point ma...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 164 Financial intermediaries and markets can reduce or mitigate asymmetric information, but they can no ...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 165  They are important because they detract from bottom-line profits, eliminating or greatly reducin...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 166 8.3 Adverse Selection L E A R N I N G O B J E C T I V E 1. What problems do asymmetric information ...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 167 for used cars of the particular make, model, year, and mileage for sale. (Another copy and paste job...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 168 advertisement is overwhelming. Many borrowers are in the market. Information is asymmetric—you can...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 169 Credit-protection insurance policies promise to make payments to people who find themselves unemploy...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 170 decreased the effectiveness of the ratings because the new arrangement quickly led to rating inflati...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 171  It can be mitigated by screening out high-risk members of the applicant pool.  Financial mark...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 172 8.4 Moral Hazard L E A R N I N G O B J E C T I V E 1. What is moral hazard and how can it be mitiga...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 173 Stop and Think Box Investment banks engage in many activities, two of which, research and underwriti...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 174 accurately disclose their interests in the companies that they research and evaluate. That extra tra...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 175 reduce moral hazard. Borrowers don’t take kindly to losing, say, their homes. Also, the more equit...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 176 [1]actionURI(http://en.wikipedia.org/wiki/Great_Wall_of_China): http://en.wikipedia.org/wiki/Great_...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 177 8.5 Agency Problems L E A R N I N G O B J E C T I V E 1. What are agency problems and how can they ...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 178 than were being offered. Whenever that occurs, shares must be rationed by nonprice mechanisms. The i...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 179 began to deduct the value of bankrupt accounts from the collectors’ denominators. Under the new in...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 180 invested in privately owned (versus publicly traded) companies, stems from this dynamic as well as t...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 181 K E Y T A K E A W A Y S  Agency problems are a special form of moral hazard involving employers a...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 182 8.6 Suggested Reading Allen, Franklin, and Douglas Gale. Comparing Financial Systems. Cambridge, MA:...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 183 Chapter 9 Bank Management C H A P T E R O B J E C T I V E S By the end of this chapter, students sh...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 184 9.1 The Balance Sheet L E A R N I N G O B J E C T I V E 1. What is a balance sheet and what are the...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 185 Figure 9.2 Assets and liabilities of U.S. commercial banks, March 7, 2007

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 186 Figure 9.1 "Bank assets and liabilities" lists and describes the major types of bank asse...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 187 In the first half of the nineteenth century, bank reserves in the United States consisted solely of ...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 188 9.2 Assets, Liabilities, and T-Accounts L E A R N I N G O B J E C T I V E S 1. In five words, what d...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 189 taking out policy loans, but remember that one of the advantages of relatively large intermediaries ...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 190 this lesson the hard way, U.S. regulators will close a bank down well before its equity reaches zero...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 191 Some Bank Assets Liabilities Reserves +$17.52 Transaction deposits +$17.52 If another person deposit...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 192 5. W Bank sells $500,000 of Treasuries and uses the proceeds to fund two $200,000 mortgages and the ...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 193 9.3 Bank Management Principles L E A R N I N G O B J E C T I V E 1. What are the major problems fac...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 194 There are only 30 days in June. It can’t be in thousands of dollars because this bank would be wel...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 195 Big Apple Bank Balance Sheet (Millions USD) Loans $70 Borrowings $5 Other assets $10 Capital $10 Tot...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 196 The bankers might also decide to try to lure depositors back by offering a higher rate of interest, ...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 197 4. A large depositor says that she needs $1.5 million from her checking account, but just for two da...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 198 Consider the balance sheet of Safety Bank: Safety Bank Balance Sheet (Billions USD) Assets Liabiliti...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 199 Shaky Bank Balance Sheet (Billions USD) Loans $85 Borrowings $9 Other assets $4 Capital −$4 Totals...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 200 c. By increasing (decreasing) the bank’s assets, which, with capital held constant, increases (dec...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 201 9.4 Credit Risk L E A R N I N G O B J E C T I V E 1. What is credit risk and how do bankers manage ...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 202 To help improve their screening acumen, many financial intermediaries specialize. By making loans to...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 203 beneficial for both lenders and borrowers that most commercial loans are in fact loan commitments. S...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 204 thing as a free lunch in economics). Lenders would learn that they can make crazy loans to anyone be...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 205 9.5 Interest-Rate Risk L E A R N I N G O B J E C T I V E 1. What is interest rate risk and how do b...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 206 to pay high rates on their short-term liabilities. Mounting losses induced many bankers to take on a...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 207 Risk Sensitive Assets (Millions USD) Risk Sensitive Liabilities (Millions USD) Change in Interest Ra...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 208 Of course, not all rate-sensitive liabilities and assets have the same maturities, so to assess thei...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 209 far in this direction because it runs against their nature; few people want to borrow if the loans a...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 210 9.6 Off the Balance Sheet L E A R N I N G O B J E C T I V E 1. What are off-balance-sheet activitie...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 211 Bankers can also hedge their bank’s interest rate risk by engaging in interest rate swaps. A bank ...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 212 [1] This is not to say that these activities are not accounted for. It isn’t illegal or even slimy...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 213 9.7 Suggested Reading Choudhry, Moorad. Bank Asset and Liability Management: Strategy, Trading, Anal...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 214 Chapter 10 Innovation and Structure in Banking and Finance C H A P T E R O B J E C T I V E S By the...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 215 10.1 Early Financial Innovations L E A R N I N G O B J E C T I V E 1. Why do bankers and other fina...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 216 nimbly, issuing deposits instead. Unlike most countries, which developed a few, large banks with ext...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 217 certainly be able to pay claims when an insured person dies. From the late nineteenth century until ...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 218 10.2 Innovations Galore L E A R N I N G O B J E C T I V E 1. Why did the Great Inflation spur finan...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 219 Bankers responded to the increased interest rate risk by inducing others to assume it. As discussed...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 220 that with adjustable-rate loans, interest rate risk, as well as reward, falls on the borrower, rathe...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 221  Bankers innovated by introducing new products, like adjustable-rate mortgages and sweep accounts...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 222 10.3 Loophole Mining and Lobbying L E A R N I N G O B J E C T I V E 1. What are loophole mining and...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 223 Bankers also used loophole mining by creating so-called sweep accounts, checking accounts that were ...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 224 [1] Doug Arner, Financial Stability, Economic Growth, and the Role of Law (New York: Cambridge Unive...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 225 10.4 Banking on Technology L E A R N I N G O B J E C T I V E 1. How has technology aided financial ...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 226 Since then, several major credit card networks have arisen, and thousands of institutions, including...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 227 networks of them instead of branches. Before bank branching restrictions were lifted, ATMs also rece...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 228  Technology, particularly digital electronic computers and telecommunication devices, made possib...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 229 10.5 Banking Industry Profitability and Structure L E A R N I N G O B J E C T I V E 1. What role do...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 230 mandatory information disclosure and constant feedback from investors on the issuing firm’s perfor...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 231 information they create about borrowers to offer loans or securities underwriting and can use branch...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 232 The Federal Reserve labels the entities that have arisen from the recent wave of mergers large, com...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 233 turn give those banks considerable market power, the ability to charge more for loans and to pay les...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 234 Figure 10.7 Shares of top ten U.S. banks, 1984–2004 Those 500 or so big banks, however, control t...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 235 Stop and Think Box In 2003, Canada was home to the banks listed in Figure 10.8 "Canadian bank a...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 236 So the five-bank concentration ratio (for assets) in Canada in 2003 was 86 percent. The Herfindahl ...

  • Page 237

    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 237 So the Herfindahl index for bank assets in Canada in 2003 was 1,590. Starting a new bank is not as ...

  • Page 238

    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 238 observers think that the U.S. banking sector will remain competitive, composed of numerous small ban...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 239 help international businesses to conduct trade and banks to avoid reserve requirements and other tax...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 240  This deregulation may increase competition for financial intermediaries, thereby driving innovat...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 241 10.6 Suggested Reading Anderloni, Luisa, David Llewellyn, and Reinhard Schmidt. Financial Innovation...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 242 Chapter 11 The Economics of Financial Regulation C H A P T E R O B J E C T I V E S By the end of th...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 243 11.1 Public Interest versus Private Interest L E A R N I N G O B J E C T I V E 1. Why can’t the g...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 244 In many countries, the ones we will call “predatory” in the context of the Growth Diamond model ...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 245 Although Figure 11.1 "Asymmetric information and regulation" is esthetically pleasing (gr...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 246 government, where the legislature may try to discredit the executive’s policies, or vice versa, an...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 247  It is important to know which model is a more accurate description of reality because the models...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 248 11.2 The Great Depression as Regulatory Failure L E A R N I N G O B J E C T I V E 1. How did the go...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 249 Weren’t evil financiers completely responsible for this mess, as nine out of ten people thought a...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 250 1928, the Federal Reserve could have deflated the asset bubble before it grew to enormous proportion...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 251 death spiral. Since then, bank runs have been rare occurrences directed at specific shaky banks and ...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 252 “You are not free to raise funds on the capital markets [9] unless you fill out the numerous pages...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 253 [9] This part is inaccurate. Just as we would expect from the discussion in Chapter 10 "Innovat...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 254 11.3 The Savings and Loan Regulatory Debacle L E A R N I N G O B J E C T I V E 1. How did regulator...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 255 Typical Savings and Loan Bank Balance Sheet (Millions USD) Mortgages $130 Capital $10 Other assets $...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 256 should have shot them in the head instead, which as any zombie-movie fan knows is the only way to st...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 257 Scandinavia suffered from worse banking crises than the United States. In particular, Scandinavian b...

  • Page 258

    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 258 Episodes of Systematic and Borderline Financial Crises, Gerald Caprio and Daniela Klingebiel. K E Y...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 259  Second, they allowed the institutions most vulnerable to the rapidly changing financial environm...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 260 11.4 Better but Still Not Good: U.S. Regulatory Reforms L E A R N I N G O B J E C T I V E 1. Have r...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 261 Figure 11.4 Regulation of bank capitalization The other problem with FDICIA is that it weakened but...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 262 if it gets into trouble. (Banks in this respect are little different from drunken frat boys, or so I...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 263 11.5 Basel II’s Third Pillar L E A R N I N G O B J E C T I V E 1. Will Basel II render the bankin...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 264 Basel I suggested weighting sovereign bonds at zero. That’s great for developed countries, but ple...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 265 L = liquidity (reserves) S = sensitivity to market risk. A, M, and S are even more difficult to asce...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 266 K E Y T A K E A W A Y S  Basel I and II have provided regulators with more sophisticated ways of ...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 267 11.6 Suggested Reading Arner, Douglas. Financial Stability, Economic Growth, and the Role of Law. Ne...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 268 Chapter 12 The Financial Crisis of 2007–2008 C H A P T E R O B J E C T I V E S By the end of this...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 269 12.1 Financial Crises L E A R N I N G O B J E C T I V E 1. What is a financial crisis? A financial ...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 270 wealth and power, by the soul [sic] aid of this hocus pocus.”—Cause of, and Cure for, Hard Times...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 271 12.2 Asset Bubbles L E A R N I N G O B J E C T I V E 1. What are asset bubbles and what role does l...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 272 The effect of new technology can be thought of as increasing FV, leading, of course, to a higher PV....

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 273 In this example, returns for the unleveraged investor are great: 110 − 100/100=.1 (rendered as 10%...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 274 12.3 Financial Panics L E A R N I N G O B J E C T I V E 1. What are financial panics and what cause...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 275 Stop and Think Box In New York in 1764, interest rates spiked from 6 to 12 percent and expected reve...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 276 90−100/100=−.1 80−100/100=−.2 70−100/100=−.3 The leveraged investors lose the same perce...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 277 12.4 Lender of Last Resort L E A R N I N G O B J E C T I V E 1. What is a lender of last resort and...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 278 market by promising to make large loans to banks exposed to brokers hurt by the steep decline in sto...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 279 12.5 Bailouts L E A R N I N G O B J E C T I V E 1. What is a bailout and how does it differ from th...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 280 The 1979 bailout of automaker Chrysler, which entailed a government guarantee of its debt, saved the...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 281 12.6 The Crisis of 2007–2008 L E A R N I N G O B J E C T I V E 1. What factors led to the present...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 282 Figure 12.4 U.S. interest rates, 2000–2008

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 283 Mortgages also became much easier to obtain. Traditionally, mortgage lenders held mortgage loans on...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 284 benefits of holding a large number of mortgages; CMOs allowed investors to pick the risk-return prof...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 285 trouble could easily refinance or sell the house for a profit. Indeed, many people began to purchase...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 286 Figure 12.6 Bond yields, September–October 2008

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 287 The damage, however, had been done and panic overtook both the credit and stock markets in Septembe...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 288 including the addition of a large sum of pork barrel sweeteners, the bill passed the Senate and the ...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 289  The government responded with huge bailouts of subprime mortgage holders and major financial ins...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 290 12.7 Suggested Reading Ben-Shahard, Danny, Charles Ka Yui Leung, and Seow Eng Ong. Mortgage Markets ...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 291 Chapter 13 Central Bank Form and Function C H A P T E R O B J E C T I V E S By the end of this chap...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 292 13.1 America’s Central Banks L E A R N I N G O B J E C T I V E S 1. What is a central bank? 2. Wh...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 293 for Independence) convinced many that the country needed a new central bank. As a result, the govern...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 294 use. (That is often the United States, hence the term dollarization.) Other central banking function...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 295 banks also may clear checks, regulate banks and/or other financial institutions, and serve as the na...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 296 13.2 The Federal Reserve System’s Structure L E A R N I N G O B J E C T I V E 1. What is the stru...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 297  Issue new Federal Reserve notes (FRNs) in place of worn currency  Clear checks  Lend to ba...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 298 renewable term. The chairperson is the most powerful member of the Fed because he or she controls th...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 299  Composed of the Board of Governors and the presidents of the district banks, the FOMC meets ever...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 300 13.3 Other Important Central Banks L E A R N I N G O B J E C T I V E 1. How do other central banks ...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 301 The ECB is part of a larger system, the European System of Central Banks (ESCB), some of the countri...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 302 [1]actionURI(http://www.eurotreaties.com/maastrichtext.html): http://www.eurotreaties.com/maastricht...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 303 13.4 Central Bank Independence L E A R N I N G O B J E C T I V E 1. What is central bank independen...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 304

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 305 Note that as a country’s central bank becomes more independent (as its independence score increase...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 306 delays in monetary policy decisions. The current de facto independence of those banks could be under...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 307 money supply at a faster rate than usual or lowering the interest rate—can stimulate a short burst...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 308 mere legislation (or, worse, executive fiat), and it is enhanced when central banks are composed of ...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 309 13.5 Suggested Reading Bremner, Robert. Chairman of the Fed: William McChesney Martin Jr. and the Cr...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 310 Chapter 14 The Money Supply Process C H A P T E R O B J E C T I V E S By the end of this chapter, s...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 311 14.1 The Central Bank’s Balance Sheet L E A R N I N G O B J E C T I V E S 1. Who determines the m...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 312 demand for the single currency unit denomination.) C includes only FRN and coins in the hands of non...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 313 14.2 Open Market Operations L E A R N I N G O B J E C T I V E 1. What are open market operations an...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 314 liabilities are everyone else’s assets. So if the central bank’s liabilities increase or decreas...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 315 transaction were reversed and Some Dude bought a bond from the central bank with currency, the notes...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 316 Central Bank Assets Liabilities Date Loans +$1,000,000 Reserves +$1,000,000 January 1, 2010 Loans ...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 317 14.3 A Simple Model of Multiple Deposit Creation L E A R N I N G O B J E C T I V E S 1. What is the...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 318 Recall from Chapter 9 "Bank Management" that deposits are created in the process of making...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 319 Notice that the increase in deposits is the same as the increase in loans from the previous bank. T...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 320 1. Use the simple deposit multiplier ∆D = (1/rr) × ∆R to calculate the change in deposits given...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 321 against the $100 in deposits created by the loan until all the money rests in Bank 2. Its deposits a...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 322 14.4 Suggested Reading Hummel, William. Money: What It Is, How It Works 2nd ed. Bloomington, IN: iUn...

  • Page 323

    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 323 Chapter 15 The Money Supply and the Money Multiplier C H A P T E R O B J E C T I V E S By the end o...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 324 15.1 A More Sophisticated Money Multiplier for M1 L E A R N I N G O B J E C T I V E S 1. How do the ...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 325 This is basically a less specific version of the formula you learned in Chapter 14 "The Money S...

  • Page 326

    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 326 m1=1+(100/400)/(.2 + (10/400)+(100/400)) m1=1.25/(.2+.025+.25) m1=1.25/.475=2.6316 Practice calculat...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 327 Explain Figure 15.1 "U.S. MB and M1, 1959–2007", Figure 15.2 "U.S. m", andFigu...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 328 Figure 15.3U.S. currency and checkable deposits, 1959–2007 Figure 15.4U.S. currency ratio, 1959...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 329 In Figure 15.1 "U.S. MB and M1, 1959–2007", M1 has increased because MB has increased, ...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 330 15.2 The M2 Money Multiplier L E A R N I N G O B J E C T I V E S 1. Why is the M2 multiplier almost...

  • Page 331

    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 331 Excess reserves = $10 million We’ll now add time deposits of $900 million and money market funds o...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 332  That fact is reflected in the inclusion of the time deposit and money market fund ratios in the ...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 333 15.3 Summary and Explanation L E A R N I N G O B J E C T I V E 1. How do central banks, banks, depo...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 334 are also less anxious to hold currency if the banking system is stable because their money is safer ...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 335 higher, ER/D dropped to .001 to .002. As we learned in Chapter 9 "Bank Management",expecte...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 336 15.4 Suggested Reading Macesich, George. The Money Supply Process: A Comparative Analysis. New York:...

  • Page 337

    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 337 Chapter 16 Monetary Policy Tools C H A P T E R O B J E C T I V E S By the end of this chapter, stud...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 338 16.1 The Federal Funds Market and Reserves L E A R N I N G O B J E C T I V E S 1. What three moneta...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 339 The downward slope of the demand curve for reserves is easily explained. Like anything else, as the...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 340 lowering ff* (ceteris paribus). When it sells, it moves the reserve supply curve left, increasing ff...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 341 Theoretically, the Fed could also directly affect the demand for reserves by changing the reserve r...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 342 In Chapter 13 "Central Bank Form and Function", you learned that America’s first central...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 343 16.2 Open Market Operations and the Discount Window L E A R N I N G O B J E C T I V E S 1. How does...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 344 effectively. As noted above, the discount rate puts an effective cap on ff* by providing banks with ...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 345 Continental Illinois, a large commercial bank; the stock market crash of 1987; and the subprime mort...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 346 Figure 16.5Total bank borrowings from the Federal Reserve System, 2001 Terrorists attacked New York...

  • Page 347

    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 347  The Fed can move the equilibrium fed funds rate toward its target by changing the demand for res...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 348 16.3 The Monetary Policy Tools of Other Central Banks L E A R N I N G O B J E C T I V E 1. In what ...

  • Page 349

    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 349 In response to the financial crisis of 2008, the Fed began to pay interest rates on reserves and wi...

  • Page 350

    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 350  The market overnight rate can never dip below that rate because banks would simply invest their ...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 351 16.4 Suggested Reading Hetzel, Robert L. The Monetary Policy of the Federal Reserve: A History. New ...

  • Page 352

    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 352 Chapter 17 Monetary Policy Targets and Goals C H A P T E R O B J E C T I V E S By the end of this c...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 353 17.1 A Short History of Fed Blunders L E A R N I N G O B J E C T I V E S 1. Why was the Fed general...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 354 cyclical monetary policies. Since then, it has tried to engage in anti-cyclical policies. And that, ...

  • Page 355

    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 355 During World War II, the Fed became the Treasury’s lapdog. Okay, that is an exaggeration, but not ...

  • Page 356

    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 356 Shortages known as credit crunches resulted. Whenever p* > preg, shortages result because the qua...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 357  The Fed was also ineffective because it did not know about open market operations (OMO) at first...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 358 17.2 Central Bank Goal Trade-offs L E A R N I N G O B J E C T I V E 1. What trade-offs do central b...

  • Page 359

    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 359 Do note that almost nobody wants 100 percent employment, when everyone who wants a job has one. A li...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 360 17.3 Central Bank Targets L E A R N I N G O B J E C T I V E S 1. What is monetary targeting and why...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 361 changes in the demand for money will make the interest rate jiggle up and down. It can only keep i f...

  • Page 362

    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 362

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 363 Central banks can control ior MS, but not both. In response to all this, several leading central ban...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 364 Why doesn’t the Fed, which is charged with maintaining financial market and price stability, adopt...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 365 [2]actionURI(http://www.amazon.com/Inside-Greenspans-Briefcase-Investment-Strategies/dp/007138913X):...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 366 17.4 The Taylor Rule L E A R N I N G O B J E C T I V E 1. What is the Taylor Rule and why is it imp...

  • Page 367

    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 367 E X E R C I S E 1. Use the Taylor Rule—fft = π + ff*r + ½(π gap) + ½(Y gap)—to determine wha...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 368 Examine Figure 17.2 "The Fed’s feds fund target, 2003–2007" carefully. Assuming the Fe...

  • Page 369

    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 369 None of this means, however, that the Fed will continue to use the Taylor Rule, if indeed it does s...

  • Page 370

    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 370  The Taylor Rule is a simple equation—fft = π + ff*r + ½( π gap) + ½(Y gap)—that allows c...

  • Page 371

    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 371 17.5 Suggested Reading Blinder, Alan. Central Banking in Theory and Practice. Cambridge, MA: MIT Pre...

  • Page 372

    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 372 Chapter 18 Foreign Exchange C H A P T E R O B J E C T I V E S By the end of this chapter, students ...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 373 18.1 The Economic Importance of Currency Markets L E A R N I N G O B J E C T I V E 1. What is forei...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 374 buying a Canadian computer or automobile. (Okay, let’s not get crazy.) The point is you and your f...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 375 $17,000. If the dollar depreciates (buys fewer euro, and more USD are needed to buy €1), the Rabbi...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 376  It is important because the exchange rate, the price of one currency in terms of another, is a m...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 377 18.2 Determining the Exchange Rate L E A R N I N G O B J E C T I V E S 1. What is the structure of ...

  • Page 378

    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 378 Figure 18.3 How many Canadian dollars did it take to buy 1 USD? The figures, like the exchange rate...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 379 exercise ad nauseam (Latin for “until we vomit”) with every pair of currencies in the world. But...

  • Page 380

    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 380 another. Changes in exchange rates, by contrast, have profound consequences, as we have seen. They a...

  • Page 381

    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 381 18.3 Long-Run Determinants of Exchange Rates L E A R N I N G O B J E C T I V E S 1. What is purchas...

  • Page 382

    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 382 percent ([205 − 142]/142) more in Britain than in the United States. Over that same period, the po...

  • Page 383

    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 383 In addition, three other factors affect exchange rates in the long run: relative trade barriers, di...

  • Page 384

    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 384  As Country A’s price level and import demand increase, and as Country A’s productivity, trad...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 385 18.4 Short-Run Determinants of Exchange Rates L E A R N I N G O B J E C T I V E S 1. What are the s...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 386 Figure 18.7 Determinants of exchange rates in the short run

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 387

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 388 Stop and Think Box We learned in Chapter 4 "Interest Rates" that there is an important dis...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 389 We learned in Chapter 5 "The Economics of Interest-Rate Fluctuations" that increases in th...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 390 (have a negative sign, two of which make a positive, augmenting iF); otherwise, everyone would sell ...

  • Page 391

    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 391 Foreign Interest Rate Expected Future Exchange Rate Exchange Rate Today Answer: Domestic Interest Ra...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 392 18.5 Modeling the Market for Foreign Exchange L E A R N I N G O B J E C T I V E 1. How can the mark...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 393 We can immediately see that, holding all else constant, anything that increases demand for dollar-de...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 394 Figure 18.11Differential inflation in the United States and the Euro zone, 2000–2007 From the be...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 395 by the fed funds rate ff*) were higher than euro zone interest rates (proxied here by EONIA, the ECB...

  • Page 396

    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 396 18.6 Suggested Reading Galant, Mark, and Brian Dolan. Currency Trading for Dummies. Hoboken, NJ: Joh...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 397 Chapter 19 International Monetary Regimes C H A P T E R O B J E C T I V E S By the end of this chap...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 398 19.1 The Trilemma, or Impossible Trinity L E A R N I N G O B J E C T I V E S 1. What is the impossi...

  • Page 399

    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 399 Note that those were the prevailing regimes. Because nations determine their monetary relationship w...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 400 consideration (thus giving up on domestic goals like inflation or employment/gross domestic product ...

  • Page 401

    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 401  Specie standards, like the classical GS, maintained fixed exchange rates and allowed the free fl...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 402 19.2 Two Systems of Fixed Exchange Rates L E A R N I N G O B J E C T I V E 1. What were the two maj...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 403 As noted in Figure 19.2 "Strengths and weaknesses of international monetary regimes" and ...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 404 freight, interest lost in transit) were so large compared to later in the century that the U.S. mone...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 405 Most countries today allow their currencies to float freely or employ a managed float strategy. Wit...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 406 19.3 The Managed or Dirty Float L E A R N I N G O B J E C T I V E 1. How can central banks manage t...

  • Page 407

    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 407 it to appreciate. It does so by influencing both the domestic interest rate (nominal) and expectatio...

  • Page 408

    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 408 repay. (In June 1997, it took only about 25 baht to purchase a dollar. By the end of that year, it t...

  • Page 409

    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 409 A graph, like the one in Figure 19.6 "Intervening in the FX market under a fixed exchange rate...

  • Page 410

    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 410 It means that the creation of a world currency is not likely anytime soon. As the European Union has...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 411 19.4 The Choice of International Policy Regime L E A R N I N G O B J E C T I V E 1. What are the co...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 412 the Chinese government has severely restricted international capital mobility via currency controls,...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 413 Unlike most bets, these are one-sided because the speculators lose little money if the central bank ...

  • Page 414

    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 414 Figure 19.8Hong Kong–USD exchange rate, 1984–2007 Figure 19.7 "Dollar-yen exchange rate, ...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 415 It appears highly likely from Figure 19.8 "Hong Kong–USD exchange rate, 1984–2007" tha...

  • Page 416

    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 416 [1] As noted in Chapter 18 "Foreign Exchange", however, not all goods and services are tra...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 417 19.5 Suggested Reading Bordon, Michael, and Barry Eichengreen. A Retrospective on the Bretton Woods ...

  • Page 418

    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 418 Chapter 20 Money Demand C H A P T E R O B J E C T I V E S By the end of this chapter, students shou...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 419 20.1 The Quantity Theory L E A R N I N G O B J E C T I V E 1. What is the quantity theory of money ...

  • Page 420

    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 420 rb – rm = the expected return on bonds minus the expected return on money rs – rm = the expected...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 421 This all makes perfectly good sense when you think about it. If people suspect they are permanently ...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 422 20.2 Liquidity Preference Theory L E A R N I N G O B J E C T I V E 1. What is the liquidity prefere...

  • Page 423

    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 423 1. Transactions: Economic agents need money to make payments. As their incomes rise, so, too, do the...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 424 Fluctuations" that interest rates rise during expansions and fall during recessions.) Keynes’...

  • Page 425

    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 425  When interest rates are low, by contrast, people expect them to rise, which will hurt bond price...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 426 20.3 Head to Head: Friedman versus Keynes L E A R N I N G O B J E C T I V E 1. How do the modern qu...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 427 1959–2008", it shows that the velocity of money (velocity = GDP/M1 because MV = PY can be sol...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 428 The chapter makes the point that velocity became much less stable and much less predictable in the ...

  • Page 429

    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 429 The breakdown of the quantity theory had severe repercussions for central banking, central bankers, ...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 430 Figure 20.4U.S. national debt, 1790–1860

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 431 Figure 20.5Volume of public securities trading in select U.S. markets, by year, 1790–1834

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 432

  • Page 433

    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 433 Velocity rises when there are money substitutes, highly liquid assets that allow economic agents to ...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 434 20.4 Suggested Reading Friedman, Milton. Money Mischief: Episodes in Monetary History. New York: Har...

  • Page 435

    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 435 Chapter 21 IS-LM C H A P T E R O B J E C T I V E S By the end of this chapter, students should be a...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 436 21.1 Aggregate Output and Keynesian Cross Diagrams L E A R N I N G O B J E C T I V E S 1. What does...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 437 mpc = marginal propensity to consume (change in consumer expenditure from an extra dollar of income ...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 438 4. A 5. Investment is composed of so-called fixed investment on equipment and structures and planned...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 439 8. 9. The 45-degree line simply represents the equilibrium Y = Yad. The other line, the aggregate d...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 440 15. If the marginal propensity to consume were to increase to .75, Y would increase to 16. Y = 800 ...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 441 To make the model more realistic, we can easily add NX to the equation. An increase in exports over ...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 442 K E Y T A K E A W A Y S  The equation Y = Yad = C + I + G + NX tells us that aggregate output (o...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 443  A Keynesian cross diagram is a graph with aggregate demand (Yad) on the vertical axis and aggreg...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 444 21.2 The IS-LM Model L E A R N I N G O B J E C T I V E S 1. What are the IS and LM curves? 2. What ...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 445 goods for that interest rate, which causes firms to decrease inventories, leading to a fall in outpu...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 446 When we put the IS and LM curves on the graph at the same time, as in Figure 21.4 "IS-LM diagr...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 447 Does Figure 21.5 "Real gross private domestic investment, 1925–2007"make sense? Why or w...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 448 Figure 21.7Federal government expenditures, 1945–2007

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 449 Figure 21.5 "Real gross private domestic investment, 1925–2007" makes perfectly good se...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 450 K E Y T A K E A W A Y S  The IS curve shows the points at which the quantity of goods supplied e...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 451  At all points to the left of the LM curve, an excess supply of money exists, inducing people to ...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 452 21.3 Suggested Reading Dimand, Robert, Edward Nelson, Robert Lucas, Mauro Boianovsky, David Colander...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 453 Chapter 22 IS-LM in Action C H A P T E R O B J E C T I V E S By the end of this chapter, students s...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 454 22.1 Shifting Curves: Causes and Effects L E A R N I N G O B J E C T I V E 1. What causes the LM an...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 455 An autonomous change in money demand (that is, a change not related to the price level, aggregate o...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 456 The IS curve, by contrast, shifts whenever an autonomous (unrelated to Y or i) change occurs in C, ...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 457 We can now see how government policies can affect output. As noted above, in the short run, an incre...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 458 Stop and Think Box Describe Hamilton’s Law (née Bagehot’s Law) in terms of the IS-LM model.Hin...

  • Page 459

    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 459  The IS curve shifts right (left) when C, I, G, or NX increase (decrease) or T decreases (increas...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 460 22.2 Implications for Monetary Policy L E A R N I N G O B J E C T I V E S 1. In the short term, wha...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 461 Figure 22.5 Effect of LM curve instability

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 462 As noted in Chapter 21 "IS-LM", the policy power of the IS-LM is severely limited by its ...

  • Page 463

    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 463 come down and output will increase. But because Y* is greater than Ynrl, prices will rise, shifting ...

  • Page 464

    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 464  Policymakers can raise the price level but they can’t get Y* permanently above Ynrl or the nat...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 465 22.3 Aggregate Demand Curve L E A R N I N G O B J E C T I V E 1. What is the aggregate demand (AD) ...

  • Page 466

    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 466 So if MS increases (decreases), it shifts right (left), and if Md increases (decreases) it shifts le...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 467 22.4 Suggested Reading Dimand, Robert, Edward Nelson, Robert Lucas, Mauro Boianovsky, David Colander...

  • Page 468

    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 468 Chapter 23 Aggregate Supply and Demand, the Growth Diamond, and Financial Shocks C H A P T E R O B ...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 469 23.1 Aggregate Demand L E A R N I N G O B J E C T I V E S 1. What is the AD curve and why does it s...

  • Page 470

    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 470 The quantity theory of money also shows that the AD curve should slope downward. Remember that the ...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 471 Continuing the example above, if we hold P constant at 1.0 but double M to $200 billion, then Y will...

  • Page 472

    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 472  Those variables shift AD for the same reasons they shift Yad and the IS curve, as discussed in C...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 473 23.2 Aggregate Supply L E A R N I N G O B J E C T I V E S 1. What is the short-run AS curve and why...

  • Page 474

    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 474 are higher and hence businesses supply a higher quantity to the market. That is why the aggregate su...

  • Page 475

    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 475 Also, whenever Y exceeds Ynrl, the AS curve shifts left. That is because when Y exceeds Ynrl, the l...

  • Page 476

    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 476  When Y* is > Ynrl, the labor market is tight, pushing wages up and strengthening inflation ex...

  • Page 477

    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 477 23.3 Equilibrium Analysis L E A R N I N G O B J E C T I V E S 1. What is the ASL curve? 2. Why is i...

  • Page 478

    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 478 To study long-run changes in the economy, we need to add the vertical long-run aggregate supply curv...

  • Page 479

    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 479 The so-called self-correcting mechanism described above makes many policymakers uneasy, so the most...

  • Page 480

    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 480 Keynes, [1] once remarked, “[The l]ong run is a misleading guide to current affairs. In the long r...

  • Page 481

    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 481 and World War I (1917–1918)" and the AS-AD model to explain why people think wars induce grow...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 482 Y* often increases during wars because AD shifts right because of increases in G (tanks, guns, ships...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 483 [3]actionURI(http://www.minneapolisfed.org/research/prescott/): http://www.minneapolisfed.org/resear...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 484 23.4 The Growth Diamond L E A R N I N G O B J E C T I V E 1. What is the growth diamond and why is ...

  • Page 485

    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 485 Figure 23.8 The growth diamond The growth diamond is a powerful model because it can be applied to ...

  • Page 486

    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 486 In the early nineteenth century, Ontario, Canada (then a colony of Great Britain), and New York Stat...

  • Page 487

    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 487 course, times 4 equals the New York farm price). Canadian land values increased when Canadian intere...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 488 [1]actionURI(http://w4.stern.nyu.edu/economics/facultystaff.cfm?doc_id=1019): http://w4.stern.nyu.ed...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 489 23.5 Financial Shocks L E A R N I N G O B J E C T I V E 1. How do financial shocks and crises affec...

  • Page 490

    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 490 each unit of foreign currency. Many are unable to do so and they default, increasing uncertainty and...

  • Page 491

    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 491 wake causes uncertainty, higher interest rates, and balance sheet deterioration, all of which, as we...

  • Page 492

    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 492 market crash of 1987. Other times, like after the stock market crash of 1929, the economy did not fa...

  • Page 493

    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 493 Note: At any point the downward spiral can be stopped by adequate central bank intervention. Source...

  • Page 494

    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 494 But in case you didn’t get the memo, nothing is ever really free. (Well, except for free goods.) [...

  • Page 495

    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 495 23.6 Suggested Reading Baumol, William, Robert Litan, and Carl Schramm. Good Capitalism, Bad Capital...

  • Page 496

    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 496 Chapter 24 Monetary Policy Transmission Mechanisms C H A P T E R O B J E C T I V E S By the end of ...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 497 24.1 Modeling Reality L E A R N I N G O B J E C T I V E 1. Why are structural models generally supe...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 498 a high correlation between X and Y often think that X causes Y when in fact Y causes X. For example,...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 499 who smoke pot might be less educated than those who abstain from the weed, and it is the dearth of e...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 500 24.2 How Important Is Monetary Policy? L E A R N I N G O B J E C T I V E S 1. What types of evidenc...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 501 a sort of virtuous or pernicious cycle or chicken-egg problem. Or again maybe there is a mysterious ...

  • Page 502

    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 502  Timing evidence attempts to show that changes in M occur before changes in Y.  Statistical ev...

  • Page 503

    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 503 24.3 Transmission Mechanisms L E A R N I N G O B J E C T I V E 1. What are monetary policy transmis...

  • Page 504

    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 504 EMP, net worth ↓, asymmetric information ↓, lending ↑, I + C ↑, Y↑ EMP, i ↓, cash flow ...

  • Page 505

    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 505 to take more into account than just short-term interest rates. Policymakers need to worry about real...

  • Page 506

    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 506  EMP, ir↓, I + C + NX ↑, Y↑, EMP, q ↑, I ↑, Y↑  EMP, Pa ↑, wealth ↑, C ↑, Y...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 507 24.4 Suggested Reading Angeloni, Ignazio, Anil Kashyap, and Benoit Mojon. Monetary Policy Transmissi...

  • Page 508

    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 508 Chapter 25 Inflation and Money C H A P T E R O B J E C T I V E S By the end of this chapter, studen...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 509 25.1 Empirical Evidence of a Money-Inflation Link L E A R N I N G O B J E C T I V E S 1. What is th...

  • Page 510

    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 510 A negative supply shock, the almost complete cutoff of foreign trade, could well have hit poor Johnn...

  • Page 511

    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 511 Negative supply shocks are also one-off events, not the stuff of sustained increases in prices. An o...

  • Page 512

    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 512 Figure 25.3Government debt-to-GDP ratio Figure 25.4U.S. unemployment rates, 1961–1972

  • Page 513

    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 513 The data clearly show that M1 was growing over the period and likely causing inflation with a two-y...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 514  Other variables are bounded and produce only one-off changes in P*.  A negative supply shock ...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 515 25.2 Why Have Central Bankers So Often Gotten It Wrong? L E A R N I N G O B J E C T I V E S 1. Give...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 516 Consider a case of so-called cost-push inflation brought about by a negative supply shock or wage pu...

  • Page 517

    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 517 taxes. Governments get as addicted to the currency tax as individuals get addicted to crack or meth....

  • Page 518

    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 518  Budget deficits can also lead to sustained inflation if the government monetizes its debt direct...

  • Page 519

    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 519 25.3 Suggested Reading Ball, R. J. Inflation and the Theory of Money. Piscataway, NJ: Aldine Transac...

  • Page 520

    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 520 Chapter 26 Rational Expectations Redux: Monetary Policy Implications C H A P T E R O B J E C T I V ...

  • Page 521

    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 521 26.1 Rational Expectations L E A R N I N G O B J E C T I V E S 1. How does the new classical macroe...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 522 would happen but what economic agents (people, firms, governments) believed would occur. So in one i...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 523 What this means for policymakers is that they have to know not only how the economy works, which is...

  • Page 524

    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 524  Stabilization (limiting fluctuations in Y*) is also difficult because policymakers cannot know w...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 525 26.2 New Keynesians L E A R N I N G O B J E C T I V E 1. How does the new Keynesian model differ fr...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 526

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 527 Adherents of the new classical macroeconomic model believe that stabilization policy, the attempt to...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 528 Similarly, to the extent that wages and prices are sticky, some stabilization is possible because po...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 529 be “destickyfied” to some degree. Maybe contracts indexed to inflation will expire and not be re...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 530 In Bolivia in the first half of 1985, prices rose by 20,000 percent. Within one month, inflation was...

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    Saylor UactionURI(http://www.saylor.org/books):RL: http://www.saylor.org/booksactionURI(http://www.saylor.org/books): Saylor.org actionURI(http://creativecommons.org/licenses/by-nc-sa/3.0/): 531 26.4 Suggested Reading Gali, Jordi. Monetary Policy, Inflation, and the Business Cycle: An Introduct...