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ECN 506
Mercy Anselm

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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