Economics 272 Money, Credit and Banking

							Economics 272: Money, Credit, and Banking                                               Fall 2006
                                                                                        Juergen Fleck
Lectures: M, W: 2:50 – 4:20                                                             Pleasants 216
          Pleasants 304                                                                 Phone: 6696

Prerequisite: Economics 158

Office Hours: M - Th: 1:30 - 2:30; or by appointment.


                                        Course Objective:

This course will help you develop an understanding of the way financial markets work and how the
financial sector has been transformed by innovation, changes in regulation, and global competition.
The activities of financial institutions and the resulting flow of funds directly affect peoples’ wealth,
firms’ investment decisions and the economic well-being of countries around the world. We will
investigate the linkages between financial and product markets and analyze the effectiveness of the
Federal Reserve in regulating the banking industry and stabilizing the U.S. economy as a whole.
Issues related to international finance and the effects of international financial instability on
domestic markets will also be discussed.

The course will help you use economic reasoning to develop your own arguments when discussing
the consequences of economic policies. You will be expected to learn actively, think critically, and
solve problems in creative ways. To complete the assigned course projects, you will need to
identify, locate, and retrieve information, detail your search strategies and data sources, and apply
quantitative reasoning in presenting your findings. A working knowledge of basic macroeconomic
principles is expected, so you are encouraged to review your notes and textbook from your
introductory macroeconomics class.

I welcome diverging opinions and encourage you to participate actively in class. Please do not
hesitate to ask questions if any of the course material is unclear to you. If you are having
problems with the course work, you should come and see me right away. The longer you wait to
come for help, the more difficult it will be to catch. You are always welcome to discuss issues
that are on your mind with me during my scheduled office hours. You can reach me by phone or
under the e-mail address: jfleck@hollins.edu


                                         Required Text:

              Frederic S. Mishkin: Money, Banking, and Financial Markets,8th edition


                                         Assignments and Tests:

You are strongly encouraged to read a major newspaper or news magazine on a regular basis, since
current events will be incorporated into class discussions and may be used as examples in problem
sets and exams. Business Week, The Economist, and The Wall Street Journal are publications that
deal with the kind of problems discussed in class.

Problem sets will be assigned on a regular basis and you will be asked to discuss solutions in class.
You are strongly advised to work seriously on all of the problem sets, since they provide excellent
preparation for the exams. Working on problem sets in study groups is encouraged, but each student
must hand in her own solutions at the beginning of the class session when they are due. Late work
will neither be accepted nor credited and you will not be allowed to hand in a solution if you
fail to come to class.

Each student will complete two course projects (see the hand out on the project descriptions). Your
projects must be 3 - 5 pages long (typewritten and double-spaced, excluding graphs or tables).
Project I is due December 6, and Project II is due November 13.

Late work will neither be accepted nor credited and you will not be allowed to hand in an
assignment if you fail to come to class. Missing an exam with an unexcused absence or failing to
contact me at the earliest possible date to arrange a make-up will negatively affect your grade.


                                          Grading Policy:

Your final grade in this class will be determined by your overall performance as follows:

       First exam:                     30%            October 11

       Final exam:                     30%            Finals week

       Project I                       15%            December 6

       Project II                      15%            November 13

       Class participation and
         problem sets:                 10%


The two exams will be non-cumulative. The first exam will be given during class time; the final is
self-scheduled during the final exam week. In these exams you will be responsible for material
covered in class, the textbook, the problem sets, and any other assigned readings.

Since I like the flexibility to respond to questions and to new developments in the economy, I will
not always directly follow the sequence in the textbook. It is your responsibility to keep up with the
material discussed in class and to complete reading assignments on time.

No cell phones are allowed in class. If your cell phone goes off in class or if you are seen
checking messages during class time you will be asked to leave and you will not be credited
with that day’s work, including exams.
Economics 272                        Course Outline                      Juergen Fleck
Fall 2006


1. Introduction: Chapters 1 - 3
       The role of financial markets in our economy
       Money market and capital market instruments
       The functions of money


2. Financial Markets and Interest Rates: Chapters 4 - 7
       The time value of money
       Determination of bond prices and interest rates
       The loanable funds approach
       The term structure of interest rates
       The stock market and the efficient market hypothesis


3. The Role of Financial Institutions: Chapters 8 - 11
       Asymmetric information
       Moral hazard, adverse risk selection, and conflicts of interest
       Managing risk: profitability versus safety
       Reasons for financial crises
       Structure and performance of the banking industry
       Banking regulations and financial innovation
       Disintermediation and the S&L crisis


4. Monetary Policy: Chapters 12 - 16
     The structure of the Federal Reserve System
     The independence of central banks
     The money creation process
     Tools, targets and goals of monetary policy
     Policy procedures


5. The Foreign Exchange Market: Chapters 17 and 18
       The current account and capital account
       Exchange rate determination
       Purchasing power parity and interest rate parity
       Fixed versus flexible exchange rate systems
       The Euro
       The role of the IMF and the World Bank
       Foreign exchange market intervention
       Dollarization and currency boards
6. Monetary Theory: Chapters 19 - 25
      The demand for money balances
      The quantity theory of money
      National income accounting
      Households and firms: consumption and investment behavior
      The role of government
      The IS-LM model
      The AD-AS model
      The effectiveness of fiscal and monetary policies
      The neutrality of money
      Supply shocks
      The transmission mechanism
      Inflation, unemployment, and the Phillips curve
      Monetary growth rules versus active stabilization policies
      Adaptive versus rational expectations
      The importance of credibility