《货币银行学》课程授课教案（英文讲义）Chapter 01 An Introduction to Money and the Financial System

Chapter1Problems and Solutions1,TheUnited States Treasury borrows money on behalf of thefederal government allthe time.One type of government borrowing, called a Treasury bill, promises afixed payment at some number of months in the future.The Treasury receives lessfor a promise to make a payment of s100 in six months than it does for a promise tomakeapayment of $10o in three months.Why?Explain howthis arrangementillustrates the core principle that time has value.Answer: Since time has value, a promise to make a payment of s100 three months fromnowisworthless than $100today.2.Describe the links between the five components of thefinancial system and thefivecoreprinciplesofmoneyandbankingAnswerMoney economizes on theneed to obtain information.Sellers don't need toknowa.who buyers areb.Financial instruments promise payment that may ormay not be made in the futurePricing them uses the first two core principles:time has value and risk requirescompensationsFinancial markets are where financial instruments are bought and sold. They provide?information,andtheysetprices.Coreprinciples#3and#4comeintoplay1Financial institutions collect and process information.They are based on then factthat information is the basis for decisions.Central banks are engaged in stabilizing the economy and averting financial crisis;theirbehavior is based on the coreprinciplethat stability improves welfare.3.Socialists argue that, to reduce the power exerted by the owners of capital, the stateshouldcontroltheallocationofresources.Thus, in a socialist system, the stateallocates investment resources.In a market-based capitalist system, financialmarkets do that job.Which approach do you think works better, and why?Relateyour answer to the core principle that markets set prices and allocate resources.Answer:Markets allocateusethepricesystemtoallocate resourcesto theirmostefficientuses.Marketsaggregateinformationfromamultitudeof sources.Commandeconomies do not aggregate information as well, and do not allocateresources asefficiently4.Most investment advisers tell their clients to purchase shares in one or more mutualfunds rather than to buy individual stocks.They argue that this practice reduces risk.Explain whyAnswer:Holding a large number of investments tends to reduce risk since they areunlikely to all go down (or up) at the same time.1Instructor's Manual t/a Cecchetti:Money,Banking,and Financial Markets

Instructor’s Manual t/a Cecchetti: Money, Banking, and Financial Markets 1 Chapter 1 Problems and Solutions 1. The United States Treasury borrows money on behalf of the federal government all the time. One type of government borrowing, called a Treasury bill, promises a fixed payment at some number of months in the future. The Treasury receives less for a promise to make a payment of $100 in six months than it does for a promise to make a payment of $100 in three months. Why? Explain how this arrangement illustrates the core principle that time has value. Answer: Since time has value, a promise to make a payment of $100 three months from now is worth less than $100 today. 2. Describe the links between the five components of the financial system and the five core principles of money and banking. Answer: a. Money economizes on the need to obtain information. Sellers don’t need to know who buyers are. b. Financial instruments promise payment that may or may not be made in the future. Pricing them uses the first two core principles: time has value and risk requires compensations. c. Financial markets are where financial instruments are bought and sold. They provide information, and they set prices. Core principles #3 and #4 come into play. d. Financial institutions collect and process information. They are based on then fact that information is the basis for decisions. e. Central banks are engaged in stabilizing the economy and averting financial crisis; their behavior is based on the core principle that stability improves welfare. 3. Socialists argue that, to reduce the power exerted by the owners of capital, the state should control the allocation of resources. Thus, in a socialist system, the state allocates investment resources. In a market-based capitalist system, financial markets do that job. Which approach do you think works better, and why? Relate your answer to the core principle that markets set prices and allocate resources. Answer: Markets allocate use the price system to allocate resources to their most efficient uses. Markets aggregate information from a multitude of sources. Command economies do not aggregate information as well, and do not allocate resources as efficiently. 4. Most investment advisers tell their clients to purchase shares in one or more mutual funds rather than to buy individual stocks. They argue that this practice reduces risk. Explain why. Answer: Holding a large number of investments tends to reduce risk since they are unlikely to all go down (or up) at the same time

Chapter1AnIntroductiontoMoneyandtheFinancialSystem5.Small businesses tend toborrowmoneyfrom banks.Would youlend directlyto asmall business?Relateyour answer to thethird core principle of money andbanking, that information is the basis for decisions.Answer: It would not be very prudent for you to make a loan to a small business. This istrue for two reasons.First, youhave a difficult time evaluating the borrower'screditworthiness; and second, it will be very costly for you to monitor what they do withthe funds.6.Financial innovation has reduced individuals'need to carry cash.Explain howAnswer:Everyonehas a number of alternativemethods of payment.Electronic forms,like credit and debit cards, are the primary ones that have reduced need to carry cash.7For many years, people got their mortgages at local banks.Today, prospectivehomeowners can get a mortgage through a broker who obtains fundsfrom institutionsall over the country.What effect do you think this financial innovation has had onan individual's ability to obtain a mortgage?What effect do you think it has had oninterest rates and mortgage fees?Answer:Mortgages have become more available and cheaper (both interms of fees andinterest rates).Increasedcompetition hasbeengoodforborrowers.One of theprimary reasons for this is that funds now flow easily between geographic regionsBanks used to be local, taking deposits and making loans in their communities.If thebank had nofunds toloan,a potential borrowerwas out of luck.Innovationhaschanged all that.Suppose central bankers have figured out a way to eliminate recessions.What8.financial and economic changes would you expect to see?Relate them to the coreprinciple that stability improves welfare.Answer:If recession were completelyeliminated,theneveryone's income wouldbestabilized and the returns tobusiness investment would become more predictable.Thiswould reduce risk and allow people to do things that they otherwise would not do.Onepossibility is the economy would growmorequickly.What is it important that financial markets offer individuals the ability to buy and sell9financial instruments quickly and cheaply?Answer: Without the ability to buy and sell stocks, bonds, and other financial instrumentsno onewould wantto hold them.Who would buy something they couldn't sell?Soease and low cost are essential for financial markets to work.And without thosemarkets,no one would issue the financial instruments.The financial system wouldgrind to a halt.2Instructor's Manual t/a Cecchetti:Money,Banking,and Financial Markets

Chapter 1 An Introduction to Money and the Financial System Instructor’s Manual t/a Cecchetti: Money, Banking, and Financial Markets 2 5. Small businesses tend to borrow money from banks. Would you lend directly to a small business? Relate your answer to the third core principle of money and banking, that information is the basis for decisions. Answer: It would not be very prudent for you to make a loan to a small business. This is true for two reasons. First, you have a difficult time evaluating the borrower’s creditworthiness; and second, it will be very costly for you to monitor what they do with the funds. 6. Financial innovation has reduced individuals’ need to carry cash. Explain how. Answer: Everyone has a number of alternative methods of payment. Electronic forms, like credit and debit cards, are the primary ones that have reduced need to carry cash. 7. For many years, people got their mortgages at local banks. Today, prospective homeowners can get a mortgage through a broker who obtains funds from institutions all over the country. What effect do you think this financial innovation has had on an individual’s ability to obtain a mortgage? What effect do you think it has had on interest rates and mortgage fees? Answer: Mortgages have become more available and cheaper (both in terms of fees and interest rates). Increased competition has been good for borrowers. One of the primary reasons for this is that funds now flow easily between geographic regions. Banks used to be local, taking deposits and making loans in their communities. If the bank had no funds to loan, a potential borrower was out of luck. Innovation has changed all that. 8. Suppose central bankers have figured out a way to eliminate recessions. What financial and economic changes would you expect to see? Relate them to the core principle that stability improves welfare. Answer: If recession were completely eliminated, then everyone’s income would be stabilized and the returns to business investment would become more predictable. This would reduce risk and allow people to do things that they otherwise would not do. One possibility is the economy would grow more quickly. 9. What is it important that financial markets offer individuals the ability to buy and sell financial instruments quickly and cheaply? Answer: Without the ability to buy and sell stocks, bonds, and other financial instruments no one would want to hold them. Who would buy something they couldn’t sell? So ease and low cost are essential for financial markets to work. And without those markets, no one would issue the financial instruments. The financial system would grind to a halt

Chapter1An Introduction to Money and the Financial System10. When you apply for a loan, you must answer a lot of questions. Why?Why is theset of questions you must answer standardized?Answer: The questions are aimed at figuring out how likely you are to repay the loan.Theyare standardizedtoreducethecostofmakingtheloan.11. What factors determine the premiums individuals pay for automobile insurance?Why would differences in those factors affect the amount of the premiums?Relateyouranswertothecoreprinciplethatriskrequires compensation.Answer:The premium paid for auto insurance is determined by the likelihood of havingan accident and making a claim.The more likely someone is to have an accident, thehigher the premium.Thehigher the risk, the bigger thepayment to the company hastobe.12. Try to list the financial transactions you have engaged in over the past week.Howmight each one have been carried out 50 years ago?Answer:Commercial purchases that you made likely used credit cards and debit cards50 years ago they would have all used cash. Payment of utilities (if you do it) might havebeen done by electronic transfer, rather than a check (which would have been the method50 years ago),13. Would you expect a college loan to have a higher or lower interest rate than a homemortgage?Why or why not?In your answer be sure to use one of the coreprinciples of money and banking.Answer: To get a home mortgage, a borrower must promise the lender the house if theyfail tomakethepayments.This provides a guaranteeto theborrower.Without anyguarantee, we expectthe loan interest rate to be higherto reflect the added risk.Collegeloans that have no guarantee would likely be much too riskyfor any lender to make (orthey would have such a high interest rate than no student would be able to pay).But ifthere is a guarantee - the student's parents or the government guarantees most loans -then the interest rate will fall.If you look, what you will see is interest rates that areroughlyequal between mortgages and college loans because theguarantees (and risk)areequivalent.14.Merchants that accept Visa or MasterCard pay the issuer of the card a percentage ofthe transaction.For example, for each s100 charged on Visa cards, amerchantmight receive only s98.Explain both why Visa charges the fee and why themerchant pays it.(You should be able to use at least two core principles in youranswer.)Answer:The merchant pays Visa for two things.First they are paid immediately, andtime has value.Second, Visa takes the risk that the buyer will not pay, and risk requirescompensation.3Instructor's Manual t/a Cecchetti:Money,Banking,and Financial Markets

Chapter 1 An Introduction to Money and the Financial System Instructor’s Manual t/a Cecchetti: Money, Banking, and Financial Markets 3 10. When you apply for a loan, you must answer a lot of questions. Why? Why is the set of questions you must answer standardized? Answer: The questions are aimed at figuring out how likely you are to repay the loan. They are standardized to reduce the cost of making the loan. 11. What factors determine the premiums individuals pay for automobile insurance? Why would differences in those factors affect the amount of the premiums? Relate your answer to the core principle that risk requires compensation. Answer: The premium paid for auto insurance is determined by the likelihood of having an accident and making a claim. The more likely someone is to have an accident, the higher the premium. The higher the risk, the bigger the payment to the company has to be. 12. Try to list the financial transactions you have engaged in over the past week. How might each one have been carried out 50 years ago? Answer: Commercial purchases that you made likely used credit cards and debit cards. 50 years ago they would have all used cash. Payment of utilities (if you do it) might have been done by electronic transfer, rather than a check (which would have been the method 50 years ago). 13. Would you expect a college loan to have a higher or lower interest rate than a home mortgage? Why or why not? In your answer be sure to use one of the core principles of money and banking. Answer: To get a home mortgage, a borrower must promise the lender the house if they fail to make the payments. This provides a guarantee to the borrower. Without any guarantee, we expect the loan interest rate to be higher to reflect the added risk. College loans that have no guarantee would likely be much too risky for any lender to make (or they would have such a high interest rate than no student would be able to pay). But if there is a guarantee – the student’s parents or the government guarantees most loans – then the interest rate will fall. If you look, what you will see is interest rates that are roughly equal between mortgages and college loans because the guarantees (and risk) are equivalent. 14. Merchants that accept Visa or MasterCard pay the issuer of the card a percentage of the transaction. For example, for each $100 charged on Visa cards, a merchant might receive only $98. Explain both why Visa charges the fee and why the merchant pays it. (You should be able to use at least two core principles in your answer.) Answer: The merchant pays Visa for two things. First they are paid immediately, and time has value. Second, Visa takes the risk that the buyer will not pay, and risk requires compensation

Chapter1AnIntroductiontoMoneyandtheFinancialSystem15.The government is heavily involved in the financial system.Explain whyAnswer: For markets to work there have to be rules.And the rules need to be enforcedThe government both makes the rules and enforces them so that we all trust the marketsto work as they should.Without thegovernment to monitor the financial system,ensuring that people behave themselves, the system would collapse4Instructor'sManualt/aCecchetti:Money,Banking,andFinancial Markets

Chapter 1 An Introduction to Money and the Financial System Instructor’s Manual t/a Cecchetti: Money, Banking, and Financial Markets 4 15. The government is heavily involved in the financial system. Explain why. Answer: For markets to work there have to be rules. And the rules need to be enforced. The government both makes the rules and enforces them so that we all trust the markets to work as they should. Without the government to monitor the financial system, ensuring that people behave themselves, the system would collapse