CHAPTER 1
Introduction to Money and Banking
TEACHING OBJECTIVES
Goals of Chapter 1
A. Provide an introduction to the textbook.
B. Discuss two main themes in the book
C. Describe the value of money and banking for everyday life.
D. Discuss why government policy is so crucial for money and
banking.
E. Examine ten surprising facts about money and banking that will be
discussed in greater detail in the book.
TEACHING NOTES
A. Introduction
1. Money flows around the world and is affected by government
policy
2. People encounter money and the financial system frequently
3. If economic policy is poor, the economy does not work well
4. The Federal Reserve is a key policy institution; its decisions
have worldwide implications
B. What Is in This Text?
1. The Value of Money and Banking for Everyday Life
a) The amount you must repay on a student loan is affected by
decisions of the Federal Reserve
b) The interest rate on mortgage loans depends on many
factors, including the Federal Reserve’s decision
c) The returns from investing in the stock market depend on the
profits of corporations, which in turn depend on economic
growth
d) Understanding interest rates and returns to the stock market
will help you make better decisions
2. Why Is Government Policy So Crucial for Money and Banking?
a) Why do we care about economic policy?
(1)Economic policy affects everyone in her or his everyday
life
(2)Policy matters more for the financial system than for other
industries because of externalities
b) Who are the policymakers and why are they so important?
, (1)Policymakers are a diverse group, including the Securities
and Exchange Commission, accounting rule-makers, and
the FDIC
(2)They are important because their decisions affect the
nation in many ways
c) What is the Federal Reserve?
(1)The Federal Reserve determines the money supply, sets
rules for check clearing, distributes currency, supervises
and regulates banks
(2)A major decision by the Fed is to change the target for the
federal funds rate
,C. Ten (Surprising) Facts Concerning Money and Banking
1. Most financial formulas—no matter how complicated they look—
are based on the compounding of interest
a) Complicated formulas related to financial transactions are
based on the simple idea of compounding
b) Borrowing requires repayment plus interest
c) Interest compounds over time; interest today is earned on
interest earned previously
d) Compounding makes a large difference over long periods
e) Compounding is the major principle in finance
2. More U.S. currency is held in foreign countries than in the
United States
a) More U.S. dollars circulate outside our borders than within
b) Foreigners use U.S. dollars to avoid problems caused by
inflation in their own countries
c) U.S. taxes are lower because foreigners use our currency, as
the U.S. government profits from the sale of currency to
foreigners
3. Interest rates on long-term loans are generally higher than
interest rates on short-term loans
a) There are many different interest rates
b) The longer the time before a loan is repaid, the higher the
interest rate usually is
c) The higher interest rate on long-term loans arises from
lender’s preferences and the increased riskiness of long-term
loans
4. To understand how interest rates affect economic decisions, you
must account for expected inflation
a) People do not care about how many dollars they earn from
lending; they care about what they can buy
b) How much a lender can buy in the future depends on the
expected inflation rate
c) People form expectations of inflation in different ways,
depending on circumstances
d) The real interest rate is of concern to investors; policymakers
can change the nominal interest rate, but changes in the real
interest rate depend on changes in people’s inflation
expectations
5. Buying stocks is the best way to increase your wealth—and the
worst
a) Deciding how to invest your savings depends on your
willingness to take risk
b) Investing in the stock market may yield high returns but it is
very risky
, c) Stock investors should understand both how the stock
market works within the financial system and what a
particular investment will yield
6. Banks and other financial institutions made major errors that
led to the financial crisis of 2008
a) Banks were relatively healthy in the 1990s and the early
2000s
b) Rapid growth in housing prices led banks and mortgage
brokers to make loans to people who did not have sufficient
income to pay back the loans
c) When housing prices dropped, banks lost money on subprime
loans and mortgage-backed securities
d) The global financial system froze up and a deep recession
followed
7. Recessions are difficult to predict
a) A recession occurs when overall business activity declines
b) Recessions are difficult to predict; indicators that seem to
predict recessions at one time lose their predictive ability at
other times
c) But analysis can reveal the economy’s susceptibility to a
shock that may lead to a recession
Introduction to Money and Banking
TEACHING OBJECTIVES
Goals of Chapter 1
A. Provide an introduction to the textbook.
B. Discuss two main themes in the book
C. Describe the value of money and banking for everyday life.
D. Discuss why government policy is so crucial for money and
banking.
E. Examine ten surprising facts about money and banking that will be
discussed in greater detail in the book.
TEACHING NOTES
A. Introduction
1. Money flows around the world and is affected by government
policy
2. People encounter money and the financial system frequently
3. If economic policy is poor, the economy does not work well
4. The Federal Reserve is a key policy institution; its decisions
have worldwide implications
B. What Is in This Text?
1. The Value of Money and Banking for Everyday Life
a) The amount you must repay on a student loan is affected by
decisions of the Federal Reserve
b) The interest rate on mortgage loans depends on many
factors, including the Federal Reserve’s decision
c) The returns from investing in the stock market depend on the
profits of corporations, which in turn depend on economic
growth
d) Understanding interest rates and returns to the stock market
will help you make better decisions
2. Why Is Government Policy So Crucial for Money and Banking?
a) Why do we care about economic policy?
(1)Economic policy affects everyone in her or his everyday
life
(2)Policy matters more for the financial system than for other
industries because of externalities
b) Who are the policymakers and why are they so important?
, (1)Policymakers are a diverse group, including the Securities
and Exchange Commission, accounting rule-makers, and
the FDIC
(2)They are important because their decisions affect the
nation in many ways
c) What is the Federal Reserve?
(1)The Federal Reserve determines the money supply, sets
rules for check clearing, distributes currency, supervises
and regulates banks
(2)A major decision by the Fed is to change the target for the
federal funds rate
,C. Ten (Surprising) Facts Concerning Money and Banking
1. Most financial formulas—no matter how complicated they look—
are based on the compounding of interest
a) Complicated formulas related to financial transactions are
based on the simple idea of compounding
b) Borrowing requires repayment plus interest
c) Interest compounds over time; interest today is earned on
interest earned previously
d) Compounding makes a large difference over long periods
e) Compounding is the major principle in finance
2. More U.S. currency is held in foreign countries than in the
United States
a) More U.S. dollars circulate outside our borders than within
b) Foreigners use U.S. dollars to avoid problems caused by
inflation in their own countries
c) U.S. taxes are lower because foreigners use our currency, as
the U.S. government profits from the sale of currency to
foreigners
3. Interest rates on long-term loans are generally higher than
interest rates on short-term loans
a) There are many different interest rates
b) The longer the time before a loan is repaid, the higher the
interest rate usually is
c) The higher interest rate on long-term loans arises from
lender’s preferences and the increased riskiness of long-term
loans
4. To understand how interest rates affect economic decisions, you
must account for expected inflation
a) People do not care about how many dollars they earn from
lending; they care about what they can buy
b) How much a lender can buy in the future depends on the
expected inflation rate
c) People form expectations of inflation in different ways,
depending on circumstances
d) The real interest rate is of concern to investors; policymakers
can change the nominal interest rate, but changes in the real
interest rate depend on changes in people’s inflation
expectations
5. Buying stocks is the best way to increase your wealth—and the
worst
a) Deciding how to invest your savings depends on your
willingness to take risk
b) Investing in the stock market may yield high returns but it is
very risky
, c) Stock investors should understand both how the stock
market works within the financial system and what a
particular investment will yield
6. Banks and other financial institutions made major errors that
led to the financial crisis of 2008
a) Banks were relatively healthy in the 1990s and the early
2000s
b) Rapid growth in housing prices led banks and mortgage
brokers to make loans to people who did not have sufficient
income to pay back the loans
c) When housing prices dropped, banks lost money on subprime
loans and mortgage-backed securities
d) The global financial system froze up and a deep recession
followed
7. Recessions are difficult to predict
a) A recession occurs when overall business activity declines
b) Recessions are difficult to predict; indicators that seem to
predict recessions at one time lose their predictive ability at
other times
c) But analysis can reveal the economy’s susceptibility to a
shock that may lead to a recession
