Economics of Money and Banking
Lecture Notes
WEEK 1: INTRODUCTION
n
Nominal GDP - ! ∑ pit qit (current prices)
i=1
n
Real GDP - ! ∑ pik qit (year k prices)
i=1
Aims of economics: understanding endogenous interactions between elements of the system;
understanding the ‘cause of things’.
The Financial System - traders, institutions, instruments and regulators. Exists to transfer
investment funds from those who have them in excess to those who require them. Debt is thus very
important! If the U.S. public debt (treasury bonds) was immediately paid off, the system would
collapse.
Lenders - Households --> Government --> Firms --> Foreigners.
Concerns of a lender:
• Return on their investment
• Risks (default, capital, income, inflation)
• Liquidity (the ease with which an asset can be converted into cash. Thus, money is 100%
liquid.)
Lending can be:
• Direct - lenders looking for agents bypassing the market
• Direct - lenders looking for agents through a market by issuing bonds
• Indirect - lenders working through financial intermediaries - banks - either directly or through
a market.
Borrowers - Firms --> Households --> Government --> Foreigners
Concerns of a borrower:
• Interest rates (the return paid in order to access funds)
• Terms and conditions (debt and equity)
• Flexibility and length of the borrowing (i.e. whether it allows for difficult or unexpected
circumstances)
Borrowing requires lending by definition (financial accounts). If the financial accounts are positive
(a surplus), the country lends to the world. If they are negative (a deficit), it borrows. Borrowers in
Europe:
• Private Non-Financial Corporations (PNFCs)
• Monetary and Financial Institutions (MFIs)
• The government
• Households and Non-Profit Institutions Serving Households (NPISHs)
!1
Lecture Notes
WEEK 1: INTRODUCTION
n
Nominal GDP - ! ∑ pit qit (current prices)
i=1
n
Real GDP - ! ∑ pik qit (year k prices)
i=1
Aims of economics: understanding endogenous interactions between elements of the system;
understanding the ‘cause of things’.
The Financial System - traders, institutions, instruments and regulators. Exists to transfer
investment funds from those who have them in excess to those who require them. Debt is thus very
important! If the U.S. public debt (treasury bonds) was immediately paid off, the system would
collapse.
Lenders - Households --> Government --> Firms --> Foreigners.
Concerns of a lender:
• Return on their investment
• Risks (default, capital, income, inflation)
• Liquidity (the ease with which an asset can be converted into cash. Thus, money is 100%
liquid.)
Lending can be:
• Direct - lenders looking for agents bypassing the market
• Direct - lenders looking for agents through a market by issuing bonds
• Indirect - lenders working through financial intermediaries - banks - either directly or through
a market.
Borrowers - Firms --> Households --> Government --> Foreigners
Concerns of a borrower:
• Interest rates (the return paid in order to access funds)
• Terms and conditions (debt and equity)
• Flexibility and length of the borrowing (i.e. whether it allows for difficult or unexpected
circumstances)
Borrowing requires lending by definition (financial accounts). If the financial accounts are positive
(a surplus), the country lends to the world. If they are negative (a deficit), it borrows. Borrowers in
Europe:
• Private Non-Financial Corporations (PNFCs)
• Monetary and Financial Institutions (MFIs)
• The government
• Households and Non-Profit Institutions Serving Households (NPISHs)
!1
