Chapter One: Intro
Money has always been at the center of economic transactions-from the days of
gold and silver to make purchases to today’s payments with plastic cards. No longer
constrained by physical proximity, money flows around the globe through banking
institutions and financial markets. This seemingly free flow of money is constrained,
however, by rules under which banks and financial markets must operate, as dictated by
government policy. In this chapter we will see how these policy decisions affect
consumers, households, and businesses – the primary exchangers of money.
Economic policy determines the rules and regulations by which banks work
If these rules are poorly designed, the banking system will not work well. For
example, with efficient rules for banks, the interest rate on a car loan might be 7%, but if
inefficient rules raise banks’costs of making loans, the interest rate might be 10%
What Us in This Text?
The book covers a wide variety of topics. Two aspects of this coverage are
particular noteworthy: (1) applications of everyday life and (2) the purposes and
implications of government policy.
The Value of Money and Banking for Everyday Life
In July 2002, the interest rate on student loans declined from 6% to 4%. Why?
Because in 2001 the economy weakened, and Federal Reserve policymakers decided to
reduce interest rates to stimulate the economy. The Federal Reserve (US. called Fed for
short) reduced the interest rate in the market in which banks borrow money from each
other (federal funds market), and the reduced interest expense faced by banks led to the
decline in interest rate on U.S. government bonds, which, in turn, determined the interest
rate on student loans. What will happen to the interest rate on student loans in the future?
This depends on the Fed’s future actions, which are based on how fats the economy
grows and on the inflation rate.
Ahouse is the biggest purchase of most people’s lives. The interest rate on a
mortgage loan is influenced by a number of factors, including the Federal Reserve’s
monetary policy (as was the case with student loans), the worldwide demand for loans,
the healthiness of the bank
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