Student Guide

ECO/561 Version 9

Week Five Student Guide

This weeks topics include credit markets effect on the economy, as well as global economic
conditions regarding trade and specialization business decisions. Concepts discussed include
credit markets and the role of the Federal Reserve in creating money and controlling the money
supply, as well as how economies interact with one another. The readings for the week address
the role of the Federal Reserve and foreign exchange. These concepts emphasize the role of
central banks in global financial crises and the tools they must utilize.

Credit Markets and Globalization

OBJECTIVE: Project the effect of credit markets on the economy.
Resource: Ch. 18 of Money, Banking, and Financial Markets
Content

Ch. 18: Financial Crises of Money, Banking, and Financial Markets

o
o
o

The Mechanics of Financial Crises

Policy Responses to Financial Crises
Financial Crises in Emerging Economies

Resource: Ch. 27, 32, & 33 of Economics

Content

Ch. 27: Basic Macroeconomic Relationships of Economics

o
o
o

Ch. 32: Money Creation of Economics

o
o
o
o

The Income-Consumption and Income-Saving Relationships

The Interest-RateInvestment Relationship
The Multiplier Effect

The Fractional Reserve System

A Single Commercial Bank
Money-Creating Transactions of a Commercial Bank
The Banking System: Multiple-Deposit Expansion

Ch. 33: Interest Rates and Monetary Policy of Economics

o
o
o
o
o
o
o

Interest Rates
The Consolidated Balance Sheet of the Federal Reserve Banks
Tools of Monetary Policy
Targeting the Federal Funds Rate
Monetary Policy, Real GDP, and the Price Level
Monetary Policy: Evaluation and Issues
The Big Picture

Student Guide
ECO/561 Version 9
OBJECTIVE: Project the effect of global economic conditions regarding trade and specialization
business decisions.

Resource: Ch. 31 of Economics

Content

Ch. 31: Money and Banking of Economics

o
o
o
o
o

The Functions of Money

The Components of the Money Supply
What Backs the Money Supply?
The Federal Reserve and the Banking System
Recent Developments in Money and Banking

Resource: Ch. 1719 of International Economics

Content

Ch. 17: The Foreign Exchange Market of International Economics

o
o
o

Ch. 18: Forward Exchange and International Financial Investment of International Economics
o
o
o
o
o
o

The Basics of Currency Trading

Demand and Supply for Foreign Exchange
Arbitrage Within the Spot Exchange Market

Exchange Rate Risk

The Market Basics of Forward Foreign Exchange
International Financial Investment
International Investment With Cover
International Investment Without Cover
Does Interest Parity Really Hold? Empirical Evidence

Ch. 19: What Determines Exchange Rates? of International Economics

o
o
o
o
o
o

A Road Map
Exchange Rates in the Short Run
The Long Run: Purchasing Power Parity (PPP)
The Long Run: The Monetary Approach
Exchange Rate Overshooting
How Well Can We Predict Exchange Rates?

Note. The information above is intended to help you complete your assignments. Read chapters
in their entirety, as indicated in the syllabus. Additional information from sections not outlined
above may be needed for classroom discussions.