Module 1
Introduction to Money and the Financial System Assignment
a. The Six Parts of the Financial System
The financial system1 has six parts, each of which plays a fundamental role in
our economy. Those parts are money, financial instruments, financial markets,
financial institutions, government regulatory agencies, and central banks. We use the
first part of the system, money, to pay for our purchases and to store our wealth. We
use the second part, financial instruments, to transfer resources from savers to
investors and to transfer risk to those who are best equipped to bear it. Stocks,
mortgages, and insurance policies are examples of financial instruments. The third
part of our financial system, financial markets, allows us to buy and sell financial
instruments quickly and cheaply. The New York Stock Exchange is an example of a
financial market. Financial institutions, the fourth part of the financial system, provide
a myriad of services, including access to the financial markets and collection of
information about prospective borrowers to ensure they are creditworthy.
Banks, securities firms, and insurance companies are prime examples of
financial institutions, each playing a crucial role in the broader financial system.
Banks serve as the backbone of the financial industry by providing a wide range of
services, including accepting deposits, extending loans, and offering savings and
checking accounts. They facilitate daily financial transactions for individuals and
businesses and play a critical role in the creation of credit, which fuels economic
growth. Through various lending products such as personal loans, mortgages, and
business loans, banks enable consumers to purchase homes, cars, and other goods,
while also supporting businesses in their expansion and operational needs.
Securities firms, on the other hand, are primarily involved in the trading and
issuance of securities. These firms help companies raise capital by underwriting and
distributing new issues of stocks and bonds. They also provide brokerage services to
individual and institutional investors, facilitating the buying and selling of securities
in the financial markets. Securities firms play a pivotal role in market liquidity,
ensuring that assets can be quickly bought or sold, which is essential for market
efficiency and stability. Additionally, they offer advisory services, helping clients with
investment strategies, portfolio management, and mergers and acquisitions.
Insurance companies are another vital component of the financial system.
They provide various forms of insurance coverage, including life, health, property,
and casualty insurance. By pooling risk among a large number of policyholders,
insurance companies help individuals and businesses mitigate the financial impact of
unexpected events, such as accidents, natural disasters, illnesses, and deaths. This risk
management function is essential for economic stability, as it provides a safety net
that allows individuals and businesses to recover and continue operations after
adverse events. Moreover, insurance companies are significant institutional investors,
managing large portfolios of investments that contribute to capital market stability
and growth.
Beyond these financial institutions, government regulatory agencies form the
fifth crucial part of the financial system. These agencies are tasked with overseeing
and regulating the activities of financial institutions to ensure their stability,
transparency, and integrity. They implement and enforce laws and regulations
designed to protect consumers, maintain fair and efficient markets, and prevent
financial crises. Examples of such agencies include the Federal Reserve in the United
States, which regulates and supervises banks, conducts monetary policy, and provides
financial services; the Securities and Exchange Commission (SEC), which oversees
securities markets and protects investors; and the Federal Deposit Insurance
Corporation (FDIC), which insures deposits and promotes public confidence in the
banking system.
Government regulatory agencies also play a critical role in systemic risk
management. They monitor financial markets and institutions for signs of instability
and take preemptive measures to address emerging risks. This includes conducting
stress tests on banks to assess their resilience to economic shocks, implementing
macroprudential policies to mitigate systemic risks, and coordinating with
international regulatory bodies to ensure global financial stability. During times of
crisis, these agencies often act as lenders of last resort, providing liquidity and support
to troubled institutions to prevent wider economic fallout.
Furthermore, regulatory agencies engage in consumer protection activities to
ensure that financial institutions adhere to ethical standards and fair practices. They
enforce regulations related to transparency, disclosure, and anti-fraud measures,
ensuring that consumers have access to accurate information and are not subject to
deceptive practices. Agencies like the Consumer Financial Protection Bureau (CFPB)
in the United States focus specifically on safeguarding consumer interests in the
financial sector, addressing issues such as predatory lending, unfair debt collection
practices, and financial product misrepresentation.
In summary, banks, securities firms, and insurance companies are integral
components of the financial system, each fulfilling distinct but interconnected roles
that support economic growth and stability. Banks facilitate financial transactions and
credit creation, securities firms provide market liquidity and capital raising services,
and insurance companies offer risk management and investment functions.
Complementing these institutions, government regulatory agencies form the fifth part
of the financial system, overseeing and regulating financial activities to ensure
stability, protect consumers, and manage systemic risks. Together, these elements
create a robust and dynamic financial system that underpins economic development
and resilience.
The individuals and organizations tasked with maintaining the integrity of the
financial system hold a significant responsibility. They ensure that the various
components of the financial system—including its instruments, markets, and
institutions—function smoothly, safely, and reliably. This involves overseeing
financial instruments such as stocks, bonds, and derivatives, ensuring they are traded
transparently and efficiently in the markets. Markets themselves, ranging from stock
exchanges to bond markets and commodity markets, require constant monitoring to
prevent manipulation and ensure fair trading practices. Financial institutions,
including banks, credit unions, insurance companies, and investment firms, are
regulated to ensure they adhere to standards that promote stability and protect
consumers.
Furthermore, the regulation of these elements is crucial in maintaining public
confidence in the financial system. Financial instruments must be designed to mitigate
risk and provide reliable returns, while markets must operate under rules that prevent
fraud and encourage transparency. Institutions are required to maintain adequate
capital reserves and follow prudent risk management practices to withstand financial
shocks.
At the apex of this regulatory framework are central banks, which play a
critical role in monitoring and stabilizing the economy. Central banks are responsible
for implementing monetary policy, which includes controlling inflation and managing
employment levels. They also provide liquidity to the banking system, act as a lender
of last resort during financial crises, and oversee payment systems to ensure they
function efficiently.
In the United States, the central bank is known as the Federal Reserve System,
often referred to simply as "the Fed." The Federal Reserve System comprises a central
governing board, twelve regional Federal Reserve Banks, and numerous member
banks. The Fed's responsibilities include regulating and supervising banks to ensure
they operate safely and soundly, conducting monetary policy to promote maximum
employment and stable prices, and providing financial services to depository
institutions, the federal government, and foreign official institutions.
The Fed uses various tools to carry out its functions, such as setting interest
rates, controlling the money supply, and using open market operations to influence the
availability and cost of money and credit. It also plays a vital role in the oversight and
regulation of the financial system, working to ensure that banks and other financial
institutions operate in a way that promotes the stability of the financial system and
protects consumers.
In addition to its regulatory and monetary policy functions, the Federal
Reserve engages in extensive research and data analysis to better understand
economic trends and inform its policy decisions. It collaborates with other central
banks and international financial institutions to address global financial challenges
and promote stability in the international financial system.
In summary, the stability and reliability of the financial system depend on the
diligent efforts of those who oversee its various components. Through the combined
efforts of regulatory bodies, financial institutions, and central banks like the Federal
Reserve, the financial system can function effectively, supporting economic growth
and protecting the interests of the public.
While the essential functions that define these six categories endure, their form
is constantly evolving. Money once consisted of gold and silver coins. These were
eventually replaced by paper currency, which today is being eclipsed by electronic
funds transfers. Methods of accessing means of payment have changed dramatically
as well. As recently as 1970, people customarily obtained currency from bank tellers
when they cashed their paychecks or withdrew their savings from the local bank.
Today, they can get cash from practically any ATM anywhere in the world. To pay
their bills, people once wrote checks and put them in the mail, and then waited for
their monthly bank statements to make sure the transactions had been processed
correctly. Today, payments can be made automatically, and account holders can check
the transactions at any time on their bank’s website or on their smartphone.
Financial instruments (or securities, as they are often called) have evolved just
as; much as currency. In the last few centuries, investors could buy individual
stocks;through stockbrokers, but the transactions were costly. Furthermore, putting
together a portfolio of even a small number of stocks and bonds was extremely time-
consuming;; just; collecting the information necessary to evaluate a potential
investment was a daunting task. As a result, investing was an activity reserved for the
wealthy.
Today, financial institutions have significantly expanded their range of
services, making it possible for individuals with relatively modest amounts of money,
sometimes as little as $1,000, to participate in the financial markets. One of the most
accessible and popular investment vehicles they offer is mutual funds. Mutual funds
are designed to pool the savings of a large number of investors, thereby creating a
substantial collective fund that can be managed collectively.
By pooling resources, mutual funds gain significant advantages. Firstly, they
can diversify their investment portfolios extensively. This means that the funds can
invest in hundreds or even thousands of different stocks and bonds, spanning various
sectors, industries, and geographical regions. Such diversification is essential because
it reduces the risk that comes with investing in a single asset or a small number of
assets. If one stock or bond performs poorly, the impact on the overall portfolio is
mitigated by the performance of other holdings.
Moreover, mutual funds are managed by professional portfolio managers who
have expertise in selecting and managing investments. These managers conduct in-
depth research and analysis to identify investment opportunities, monitor market
trends, and make strategic decisions on behalf of the fund's investors. This
professional management can be a significant advantage for individual investors who
may not have the time, resources, or expertise to manage their own portfolios
effectively.
In addition to diversification and professional management, mutual funds offer
liquidity. Investors can buy or sell shares of a mutual fund on any business day,
allowing them to access their money relatively quickly if needed. This liquidity makes
mutual funds a convenient option for many investors, providing them with flexibility
and ease of access to their investments.
Mutual funds also come in various types, catering to different investment
objectives and risk tolerances. For example, equity funds primarily invest in stocks
and aim for capital appreciation, while bond funds invest in fixed-income securities
and seek to provide regular income. Balanced funds combine stocks and bonds to
offer a mix of growth and income, and money market funds invest in short-term, low-
risk securities to preserve capital and provide liquidity. There are also specialized
funds, such as sector funds, which focus on specific industries, and international
funds, which invest in foreign markets.
Another advantage of mutual funds is the ability to invest in fractional shares.
Unlike individual stocks, which often require purchasing whole shares, mutual funds
allow investors to buy fractional shares, making it easier to invest small amounts of
money. This feature is particularly beneficial for investors who are just starting and
may not have substantial capital to invest.
The accessibility of mutual funds has democratized investing, allowing a
broader segment of the population to participate in the financial markets. This
democratization has contributed to greater financial inclusion and the ability for more
people to build wealth over time. By offering a relatively low entry point and a range
of investment options, mutual funds have become a cornerstone of personal finance
and retirement planning.
In summary, financial institutions today have created opportunities for
individuals with as little as $1,000 to invest in mutual funds, thereby accessing
diversified portfolios of stocks and bonds. The benefits of mutual funds, including
diversification, professional management, liquidity, and the ability to invest in
fractional shares, make them an attractive option for many investors. This
accessibility and the range of mutual fund options available have significantly
broadened participation in the financial markets, promoting financial inclusion and
helping more people achieve their investment goals.
The markets where stocks and bonds are sold have undergone a similar
transformation. Originally, financial markets were located in coffeehouses and taverns
where individuals;met to exchange financial instruments. The next;step was to create
organized markets, like the New;York Stock Exchange—trading places specifically
dedicated to the buying and selling of stocks and bonds. Today, most of the activity
that;once occurred at these big-city financial exchanges is handled by electronic
networks. Buyers and sellers obtain price information and initiate transactions from
their desktop computers or from handheld devices. Because electronic networks have
reduced the cost of processing financial transactions, even small investors can afford
to participate in them. Just as important, today’s financial markets offer a much
broader array of financial instruments than those available even 50 years ago.
Financial institutions have changed, as well. Banks began as vaults where people
could store their valuables.
Gradually, over centuries, financial entities evolved into institutions that not
only safeguarded individuals' deposits but also extended loans, thus laying the
foundation for modern banking. Initially, these institutions were simple
establishments where individuals could deposit their wealth for safekeeping and earn
a modest interest in return. The primary role of these early bankers was to ensure the
security of these deposits while lending a portion of the deposited funds to borrowers,
thereby earning interest income. For hundreds of years, this fundamental activity of
accepting deposits and making loans was the core function of banks, and it played a
crucial role in facilitating trade, commerce, and economic development.
During the Renaissance period in Europe, banking began to take on more
sophisticated forms. Banks started to offer services such as currency exchange,
enabling merchants and traders to conduct business across different regions with
varying currencies. This period saw the emergence of famous banking families, like
the Medici in Italy, who innovated various financial instruments and practices that
laid the groundwork for modern banking systems. These early banks contributed
significantly to economic growth by providing the necessary capital for trade and
exploration.
As time progressed, the industrial revolution brought about significant changes
in the financial landscape. The increasing complexity of economic activities required
more advanced financial services. Banks began to diversify their offerings beyond
traditional deposit-taking and lending. They started to provide services such as
investment banking, facilitating the issuance of stocks and bonds, and helping
companies raise capital for expansion. They also began to offer wealth management
services, assisting individuals in managing their investments and planning for their
financial futures.
By the 20th century, the role of banks had expanded even further. They
became integral to the financial infrastructure, offering a wide range of products and
services to meet the needs of both individual and corporate clients. Banks started to
provide checking accounts, enabling customers to write checks and make payments
conveniently. They introduced credit cards, which revolutionized consumer spending
by allowing individuals to borrow funds for purchases and pay them back over time.
Furthermore, banks developed various savings products, such as certificates of deposit
(CDs) and money market accounts, offering customers different options to grow their
wealth.
Today, a bank is more like a financial supermarket, offering an extensive array
of financial products and services under one roof. Modern banks cater to a diverse
clientele, ranging from individuals and small businesses to large corporations and
government entities. The range of services they offer includes not only traditional
banking activities but also investment services, insurance products, and financial
planning.
In the retail banking sector, banks provide personal banking services that
include savings and checking accounts, personal loans, mortgages, and credit cards.
They offer online and mobile banking platforms, allowing customers to manage their
finances from anywhere at any time. Through these digital channels, customers can
transfer funds, pay bills, check account balances, and even apply for loans. Banks also
provide automated teller machines (ATMs) and branch services for customers who
prefer in-person interactions.
In addition to retail banking, banks offer commercial banking services to
businesses of all sizes. These services include business loans and lines of credit,
commercial real estate financing, and cash management solutions. Banks assist
businesses in managing their working capital, processing payments, and optimizing
their financial operations. They also provide merchant services, enabling businesses to
accept payments from customers through various methods, including credit and debit
cards.
Investment banking is another critical area where modern banks operate.
Investment banks help companies raise capital by underwriting and distributing stocks
and bonds. They provide advisory services for mergers and acquisitions, helping
companies navigate complex transactions and achieve their strategic objectives.
Investment banks also engage in trading activities, buying and selling securities on
behalf of their clients and managing investment portfolios.
Moreover, banks offer wealth management and private banking services to
high-net-worth individuals and families. These services include investment advice,
portfolio management, estate planning, and tax optimization. Wealth managers work
closely with clients to develop personalized financial strategies that align with their
long-term goals and risk tolerance.
Insurance is another area where banks have expanded their offerings. Many
banks now provide insurance products, such as life insurance, health insurance,
property and casualty insurance, and annuities. By offering these products, banks help
customers protect their assets and manage risks associated with unexpected events.
Furthermore, banks play a crucial role in the global financial system. They
facilitate international trade and finance by providing foreign exchange services, trade
finance, and cross-border payment solutions. Banks help businesses and individuals
conduct transactions in different currencies, manage exchange rate risks, and navigate
the complexities of international markets.
In summary, the evolution of banks from simple institutions that accepted
deposits and made loans to comprehensive financial supermarkets reflects their
adaptive nature and integral role in the economy. Today, banks offer a wide range of
financial products and services, including retail banking, commercial banking,
investment banking, wealth management, insurance, and international finance. This
diversity of offerings allows banks to meet the varied needs of their customers and
contribute to the stability and growth of the global financial system.
Walking into a modern financial institution, you will discover a vast and
diverse assortment of financial products and services available for sale. The offerings
range from basic banking services to sophisticated investment opportunities, catering
to the needs of individuals, families, and businesses alike. The sheer variety of options
can be overwhelming, but it reflects the comprehensive approach these institutions
take to meet the diverse financial needs of their clients.
One of the primary services offered is access to the financial markets. Whether
you are a seasoned investor or a novice looking to start your investment journey,
financial institutions provide various platforms and tools to facilitate trading in stocks,
bonds, mutual funds, and other securities. These platforms often come with advanced
features, including real-time market data, analytical tools, and educational resources
to help investors make informed decisions. Additionally, financial advisors are
available to provide personalized investment advice, helping clients develop and
implement strategies that align with their financial goals and risk tolerance.
Beyond investment opportunities, financial institutions offer a wide range of
insurance products designed to protect individuals and their assets. These include life
insurance policies that provide financial security to beneficiaries in the event of the
policyholder's death, health insurance plans that cover medical expenses, property
insurance to protect homes and other real estate, and auto insurance for vehicle
protection. Specialized insurance products, such as travel insurance and disability
insurance, are also available to cover specific risks and needs.
Mortgages are another critical product offered by financial institutions.
Whether you are looking to buy your first home, refinance an existing mortgage, or
invest in real estate, financial institutions provide a variety of mortgage options to suit
different financial situations and goals. These can include fixed-rate mortgages,
adjustable-rate mortgages, and government-backed loans like FHA and VA loans.
Mortgage specialists work with clients to navigate the application process, understand
the terms and conditions, and secure the best possible rates.
Consumer credit products are also widely available, ranging from credit cards
and personal loans to lines of credit. Credit cards come with various features, such as
rewards programs, cash back, and low introductory interest rates, making them a
versatile tool for managing expenses and earning benefits. Personal loans can be used
for a variety of purposes, including home improvements, debt consolidation, or
unexpected expenses. Lines of credit provide flexible borrowing options, allowing
clients to access funds as needed and pay interest only on the amount borrowed.
For those looking to plan for the future, financial institutions offer a plethora
of retirement planning services and investment vehicles. These can include individual
retirement accounts (IRAs), 401(k) plans, and annuities. Financial advisors assist
clients in creating comprehensive retirement plans that consider their long-term goals,
expected retirement age, and desired lifestyle. They provide guidance on selecting the
right mix of investments to ensure a secure and comfortable retirement.
In addition to traditional financial products, many institutions now offer digital
banking services that provide convenience and accessibility. Online and mobile
banking platforms allow clients to manage their accounts, transfer funds, pay bills,
and monitor their investments from anywhere, at any time. These platforms often
include budgeting tools, financial calculators, and personalized alerts to help clients
stay on top of their finances.
Furthermore, financial institutions provide wealth management and estate
planning services for high-net-worth individuals. Wealth management services
include comprehensive financial planning, investment management, tax planning, and
risk management. Estate planning ensures that clients' assets are distributed according
to their wishes, with strategies to minimize taxes and protect beneficiaries. Trust
services are also available, offering solutions for managing and transferring wealth.
Business clients also benefit from a wide array of services designed to support
their financial needs. These include business loans and lines of credit, commercial real
estate financing, treasury and cash management services, merchant services for
payment processing, and employee benefit plans. Financial institutions work closely
with business owners to understand their unique needs and provide tailored solutions
to help them grow and succeed.
In summary, stepping into a modern financial institution reveals an extensive
range of financial products and services, from access to financial markets and
investment advice to insurance policies, mortgages, consumer credit, and retirement
planning. The comprehensive offerings are designed to meet the diverse needs of
clients, providing them with the tools and guidance to manage their finances, protect
their assets, and achieve their financial goals.
The activities of government regulatory agencies and the design of regulation
have been evolving and have entered a period of more rapid change, too. In the
aftermath of the financial crisis of 1929–1933, when the failure of thousands of banks
led to the Great Depression, the U.S. government introduced regulatory agencies to
provide wide-ranging financial regulation—rules for the operation of financial
institutions and markets—and supervision—oversight through examination and
enforcement. The U.S. agencies established in the 1930s to issue and enforce these
financial rules still operate. Yet, the evolution of financial instruments, institutions,
and markets has led to many changes in the ways that regulatory agencies work. A
bank examiner used to count the money in the cash drawers and call borrowers to see
if the loans on a bank’s books were real. The examiner might even visit workplaces to
see if the loans were used as designed to buy equipment or build a factory. Today,
banks engage in millions of transactions, many of which are far more complex and
difficult to understand than a loan or a mortgage. So, a government examiner also
looks at the systems that a bank uses to manage its various risks. In doing so,
regulators try to encourage best practices throughout the financial industry.
However, the failure of regulators in the United States and elsewhere around
the world to anticipate or prevent the financial crisis of 2007–2009 has led many
governments to undertake far-reaching changes to financial regulation and the
regulatory agencies. The Dodd-Frank Wall Street Reform and Consumer Protection
Act, adopted in 2010 and known as the Dodd-Frank Act, is the largest U.S. regulatory
change since the 1930s. Also in 2010, regulators of many nations agreed on a third,
major update of standards for internationally active banks—known as Basel III after
the Swiss city where the policymakers meet. Both reforms took years to implement,
and have prompted further changes to tailor the rules and limit the resulting regulatory
burden. Their influence will continue to shape the financial system for decades.
Finally, central banks have changed a great deal. They began as large private
banks founded by monarchs to finance wars. For instance, King William of Orange
created the Bank of England in 1694 for the express purpose of raising taxes and
borrowing to finance a war between Austria, England, and the Netherlands on one
side and Louis;XIV’s France on the other. Eventually, these government treasuries
grew into the modern central banks we know today. While only a few central banks
existed in 1900, now nearly every country in the world has one, and they have
become one of the most important institutions in government. Central banks control
the availability of money and credit to promote low inflation, high growth, and the
stability of the financial system. Because their current mission is to serve the public at
large rather than land-hungry monarchs, their operating methods have changed as
well. A central bank’s decisions used to be shrouded in mystery, but today’s
policymakers strive for transparency in their operations. Officials at the European
Central Bank (ECB) and the U.S. Federal Reserve—two of the most important central
banks in the world—go out of their way to explain the rationale for their decisions.
Though the changing nature of our financial system is a fascinating topic, it
poses challenges for both students and instructors. How can we teach and learn about
money and banking in a way that will stand the test of time, so that the knowledge we
gain won’t become outmoded? The answer is that we must develop a way to
understand and adapt to the evolutionary structure of the financial system. That means
discussing money and banking within a framework of core principles that do not
change over time.
b. The Five Core Principles of Money and Banking
Five core principles will inform our analysis of the financial system and its
interaction with the real economy. Once you have grasped these principles, you will
have a better understanding not only of what is happening in the financial world today
but of changes that will undoubtedly occur in the future. The five principles are based
on time, risk, information, markets, and stability.
The first principle of money and banking is that time has value. At some very
basic level, everyone knows this. If you take a job at the local supermarket, you will
almost surely be paid by the hour. An hour’s worth of work equals a certain number of
dollars. Literally, your time has a price. On a more sophisticated level, time affects the
value of financial transactions. Most loan contracts allow the borrower to spread out
the payments over time. If you take out an auto loan, for example, the lender will
allow you to make a series of monthly payments over three, four, or even five years. If
you add up the payments, you’ll discover that the total exceeds the amount of the
loan. At an interest rate of 4 percent, a fouryear, $10,000 car loan will require 48
monthly payments of $226 each. That means you will repay a total of $10,848 (48
times $226).
The reason your repayments total more than the original loan amount is due to
the fact that you are paying interest, which serves to compensate the lender for the
duration during which you utilize the borrowed funds. Interest is essentially the cost
of borrowing money, reflecting the time value of money concept. This principle states
that a specific amount of money today is worth more than the same amount in the
future due to its potential earning capacity. Thus, lenders charge interest to account for
this opportunity cost.
When you take out a loan, the lender is providing you with funds that could
have been used for other investment opportunities. These opportunities could have
generated returns, such as investing in the stock market, purchasing real estate, or
financing other borrowers. The interest you pay is, in essence, a form of rent for the
use of the lender’s capital over the loan period. It compensates the lender not only for
the potential returns they forgo but also for the risk they assume by lending you the
money.
The opportunity cost to the lender is a significant consideration in determining
the interest rate charged on the loan. For instance, if the lender could have invested
the money elsewhere and earned a 5% return, they would want to charge at least that
much in interest to make lending to you worthwhile. Additionally, the interest rate
also reflects the credit risk associated with lending. If the lender perceives you as a
higher risk of default, they will charge a higher interest rate to compensate for that
risk.
Moreover, interest rates are influenced by broader economic factors, including
inflation, central bank policies, and market conditions. During periods of high
inflation, lenders require higher interest rates to ensure that the purchasing power of
their money is maintained over time. Central banks, such as the Federal Reserve in the
United States, influence interest rates through their monetary policy decisions,
affecting the cost of borrowing and lending throughout the economy.
When you make loan repayments, each installment typically includes both
principal and interest components. In the early stages of the loan, a larger portion of
your payments goes towards interest, with the remainder applied to the principal. As
the loan progresses, the interest portion decreases, and more of your payment goes
towards reducing the principal balance. This structure, known as amortization, ensures
that the loan is gradually paid off over its term.
For example, consider a mortgage loan. In the initial years of the mortgage,
most of your monthly payments go towards paying interest, with a smaller portion
reducing the principal. Over time, as the principal decreases, the interest portion of
your payments also reduces, and a larger share goes towards paying down the
principal. This amortization process is designed to balance the interest costs over the
life of the loan while ensuring that the principal is fully repaid by the end of the term.
The concept of paying interest also applies to other forms of credit, such as
credit cards and personal loans. With credit cards, the interest rate is usually higher
than that of secured loans like mortgages because credit card debt is unsecured,
meaning there is no collateral backing the loan. This higher interest rate reflects the
increased risk to the lender. Additionally, if you only make the minimum payment
each month, it will take significantly longer to pay off the debt, and you will end up
paying much more in interest over time.
Personal loans, which can be used for a variety of purposes such as home
improvements, medical expenses, or consolidating other debts, also involve interest
payments. The interest rate on personal loans can vary widely based on factors such as
your credit score, income, and the amount borrowed. Just like with other loans, the
total amount you repay will be more than the principal due to the interest charges.
It is essential to understand the impact of interest on your overall repayment
amount and to consider the total cost of borrowing before taking out a loan.
Comparing interest rates, loan terms, and repayment structures can help you make
informed decisions and manage your debt effectively. Additionally, maintaining a
good credit score and financial health can help you secure lower interest rates and
reduce the cost of borrowing.
In summary, the reason your repayments total more than the original loan
amount is due to the interest charged by the lender. This interest compensates the
lender for the time you use the funds, reflecting the opportunity cost and risk
associated with lending. Interest rates are influenced by factors such as inflation,
central bank policies, and economic conditions, and understanding these elements can
help you make better borrowing decisions. By being aware of the amortization
process and the impact of interest on your repayments, you can manage your loans
more effectively and minimize the total cost of borrowing.
Interest payments are fundamental to a market economy. Then, throughout the
remainder, we will apply the principle that time has value in our discussion of the
valuation of bonds, stocks, and other financial instruments involving future payments.
How much should you be willing to pay for a particular stock or bond? Figuring out
what alternative investments are worth, and comparing them, means valuing payments
made on different future dates. The same principle applies to the question of how
much you must invest today to achieve a particular financial objective in the future.
How much of your salary, for example, do you need to save each month to meet your
goal of buying a house? The length of time your savings will be earning interest is a
key to answering this question.
The world is filled with uncertainty. More events, both good and bad, can
happen than will happen. Some of the possibilities, such as the likelihood of your
home doubling in value after you buy it, are welcome. Other possibilities, such as the
chance that you might lose your job and not be able to make your car payments, are
distinctly unwelcome. Dealing effectively with risk requires that you consider the full
range of possibilities in order to eliminate some risks, reduce others, pay someone to
assume particularly onerous risks, and just live with what’s left. Needless to say, no
one will assume your risks for free, which brings us to the second core principle of
money and banking: Risk requires compensation. In the financial world,
compensation is made in the form of explicit payments. That is, investors must be
paid to assume risk; the higher the risk, the bigger the required payment.
Car insurance is a common example of paying someone else to shoulder a risk
you don’t want to take. If your car is wrecked in an accident, you will want to be able
to repair it. But beyond that, auto insurance shelters drivers from the possibility of
losing all their wealth in the event that they cause an accident in which someone is
seriously injured. Although the chances of causing such an accident are quite small,
the results can be so serious that, even if the government didn’t require it, most of us
would voluntarily purchase auto insurance. Driving without it just isn’t worth the risk.
The insurance company pools the premiums that policyholders pay and invests them.
Even though some of the premiums will be spent to settle claims when cars are stolen
or damaged by collisions, the chance to make a profit is good. So both the insurance
company and the drivers who buy policies are ultimately better off. Bearing in mind
that time has value and risk requires compensation, we can begin to see the rationale
behind the valuation of a broad set of financial instruments.
For example, when a lender evaluates a loan application, one of the critical
factors they assess is the likelihood that the borrower will be able to repay the loan.
This likelihood, or credit risk, significantly influences the interest rate that the lender
will charge. If there is a higher chance that the borrower may default on the loan, the
lender will impose a higher interest rate to compensate for this increased risk. This
principle applies broadly across different types of borrowers, including individuals,
companies, and even governments.
Consider a situation where a company or government is experiencing financial
difficulties and is on the verge of being unable to pay its bills. Despite these
challenges, such an entity may still be able to issue bonds to raise funds. These bonds
are known as high-yield or junk bonds due to their higher risk of default. Because of
the elevated risk associated with these bonds, investors demand significantly higher
interest rates compared to bonds issued by more financially stable entities. This higher
interest rate serves as compensation for the substantial risk that the bond issuer might
fail to make interest payments or repay the principal amount.
To illustrate this with more detail, let’s look at how lenders determine the
appropriate interest rate for a high-risk borrower. First, they conduct a thorough credit
analysis, examining the borrower’s financial health, credit history, cash flow stability,
and the overall economic environment. This analysis helps the lender estimate the
probability of default, which is a critical input in pricing the loan.
For instance, a company teetering on the edge of bankruptcy would be
assessed as having a high probability of default. Lenders might look at factors such as
the company’s debt-to-equity ratio, liquidity ratios, profitability, and recent trends in
revenue and expenses. If these indicators are negative, the lender will perceive the
loan as highly risky. To offset this risk, the lender sets a high interest rate, which
serves two purposes: it compensates for the risk of potential loss, and it ensures that
the lender receives a higher return to justify taking on the risky loan.
This concept of risk requiring compensation is fundamental to the functioning
of financial markets. Investors and lenders are constantly balancing the potential
returns from an investment against the risks involved. In the case of junk bonds, the
high interest rates are designed to attract investors who are willing to accept a greater
risk of default in exchange for the possibility of higher returns. These investors are
typically more risk-tolerant and may include hedge funds, private equity firms, and
individual investors seeking higher yields.
Moreover, the issuance of high-yield bonds is a critical mechanism for
companies and governments with lower credit ratings to access capital. While these
entities must pay more for borrowing, the funds raised through high-yield bonds can
be vital for restructuring, expanding operations, or covering short-term cash flow
needs. However, it’s essential for these borrowers to manage the high cost of
borrowing carefully, as failure to meet the high-interest obligations can exacerbate
their financial woes.
In the broader financial ecosystem, the relationship between risk and
compensation also affects how financial products are priced and marketed. For
example, insurance companies charge higher premiums for policies that cover riskier
individuals or activities. Similarly, investors demand higher returns for holding stocks
of companies with volatile earnings or uncertain growth prospects compared to stable,
blue-chip companies.
In summary, the principle that risk requires compensation is a cornerstone of
financial theory and practice. Lenders and investors demand higher returns for taking
on additional risk, whether through higher interest rates on loans, higher yields on
junk bonds, or higher expected returns on risky investments. This compensation for
risk is essential for the efficient allocation of capital in the economy, allowing
borrowers to access funds despite their higher risk profiles and enabling investors to
achieve returns that justify their risk exposure. The intricate dance between risk and
return underpins the dynamics of financial markets and ensures that capital flows to
where it is most needed, albeit at a price that reflects the inherent uncertainties.
Most of us collect information before making decisions. The more important
the decision, the more information we gather. Think of the difference between buying
a $5 sandwich and a $10,000 used car. You will surely spend more time comparing
cars than comparing sandwiches. What’s true for sandwiches and cars is true for
finance as well. That is, information is the basis for decisions. In fact, the collection
and processing of information is the foundation of the financial system. Before a bank
makes a loan, a loan officer will investigate the financial condition of the individual or
firm seeking it. Banks want to provide loans only to the highest-quality borrowers.
Thus, they spend a great deal of time gathering the information needed to evaluate the
creditworthiness of loan applicants. To understand the problem faced by the two
parties to any financial transaction, think about a home mortgage. Before making the
loan, the mortgage broker examines the applicant’s finances and researches the
home’s value to make sure the applicant can afford the monthly payments and the
property is more valuable than the loan.
And before the broker transfers the funds to the seller, the new homeowner
must purchase fire insurance. All these requirements arise from the fact that the lender
doesn’t know much about the borrower and wants to make sure the loan will be
repaid. When lenders fail to assess creditworthiness properly, they end up with more
borrowers;who are unable to repay their loans in the future. Large mistakes like these
were a key factor in the wave of U.S. mortgage delinquencies and defaults that
preceded the financial crisis of 2007–2009. Even as recently as 2018, mortgages on
more than two million U.S. homes still exceeded the underlying property value.
Information plays a key role in other parts of the financial system as well. When
merchants accept cash, they don’t need to worry about the customer’s identity. When
stocks change hands, the buyer doesn’t need to know anything about the seller, or vice
versa. Stock exchanges are organized to eliminate the need for costly information
gathering, facilitating the exchange of securities. In one way or another, information is
the key to the financial system.
Markets are the core of the economic system. They are the place, physical or
virtual, where buyers and sellers meet, where firms go to issue stocks and bonds, and
where individuals go to trade assets. Financial markets are essential to the economy,
channeling its resources and minimizing the cost of gathering information and making
transactions. In fact, well-developed financial markets are a necessary precondition
for healthy economic growth. For the most part, the better developed a country’s
financial markets, the faster the country will grow. The reason for this connection
between markets and growth is that markets determine prices and allocate resources.
Financial markets gather information from a large number of individual participants
and aggregate it into a set of prices that signals what is valuable and what is not. Thus,
markets are sources of information. By attaching prices to different stocks or bonds,
they provide a basis for the allocation of capital. To see how prices in the financial
markets allocate capital, think about a large firm wishing to finance the construction
of a new factory costing several hundred million dollars. To raise the funds, the firm
can go directly into the financial markets and issue stocks or bonds.
The higher the price investors are willing to pay in the market for a firm's
securities, the more appealing the idea of issuing these securities becomes to the firm.
This dynamic reflects a fundamental aspect of corporate finance and capital markets.
When investors demonstrate a willingness to pay a premium for a company's stocks or
bonds, it signals strong market confidence in the company's future prospects and
overall financial health. This positive market sentiment can greatly influence a firm's
decision-making process regarding capital raising activities.
Firstly, when a company's securities are trading at high prices, it suggests that
investors believe in the company's growth potential, profitability, and ability to
generate returns. This investor confidence can stem from various factors, including
strong financial performance, promising business strategies, favorable industry trends,
and positive economic conditions. High security prices not only boost the firm's
market capitalization but also enhance its reputation and credibility in the financial
markets. This increased credibility makes it more attractive for the firm to issue new
securities, whether in the form of stocks, bonds, or other financial instruments, as a
means to raise capital.
Issuing new securities in a favorable market environment allows the firm to
capitalize on high valuation levels. For equity issuance, this means the firm can sell
fewer shares to raise the desired amount of capital, thereby minimizing dilution of
existing shareholders' ownership. This is particularly advantageous as it allows the
firm to retain more control and ownership while still obtaining the necessary funds for
expansion, research and development, debt repayment, or other strategic initiatives.
For example, consider a technology company that has recently reported robust
earnings growth and launched a groundbreaking new product. Investors, anticipating
further success and revenue growth, drive up the company's stock price. Recognizing
this market enthusiasm, the company's management decides to issue new shares. By
doing so at a time when the stock price is high, the company can raise significant
capital without issuing an excessive number of new shares. This capital can then be
reinvested into further product development, marketing campaigns, or acquisitions
that could drive even more growth.
In the case of debt issuance, when a firm's bonds are trading at high prices, it
generally indicates that investors perceive the company as a low credit risk.
Consequently, the firm can issue new bonds at lower interest rates, reducing its cost of
borrowing. Lower borrowing costs can translate into substantial savings over the life
of the bonds, improving the firm's financial flexibility and enabling it to allocate
resources more effectively. This is particularly beneficial for companies that are
looking to finance large capital projects, refinance existing debt at more favorable
terms, or expand operations.
Moreover, the decision to issue new securities is also influenced by the
prevailing conditions in the broader financial markets and the macroeconomic
environment. Low interest rates, for instance, can make debt issuance more attractive,
as firms can lock in cheap financing. Conversely, during periods of high market
volatility or economic uncertainty, firms might be more cautious about issuing new
securities due to potential investor skittishness and higher required returns.
Additionally, regulatory considerations and market timing play crucial roles in
the decision-making process. Firms need to ensure compliance with securities
regulations and market norms when issuing new securities. Effective market timing,
informed by market conditions, investor sentiment, and strategic objectives, can
significantly enhance the success of a capital-raising initiative.
In summary, the higher the price investors are willing to pay in the market for
a firm's securities, the more appealing the idea of issuing these securities becomes.
This investor willingness indicates strong market confidence, which can positively
impact the firm's market capitalization and reputation. By issuing new securities when
prices are high, the firm can efficiently raise capital with minimal shareholder dilution
or lower borrowing costs, thereby supporting its growth and strategic goals. This
interplay between market conditions, investor sentiment, and corporate finance
strategies underscores the importance of timing and market perception in successful
capital-raising efforts.
We will refer to the financial markets throughout much of this book. While our
primary will be the nature of financial instruments, we will also study the markets in
which those instruments are traded. Importantly, financial markets do not arise by
themselves—at least, not the large, well-oiled ones we see operating today. Markets
like the New York Stock Exchange, where billions of shares of stock change hands
every day, require rules in order to work properly, as well as authorities to police
them. Otherwise, they will not function. For people to be willing to participate in a
market, they must perceive it as fair. As we will see, this creates an important role for
the government. Regulators and supervisors of the financial system make and enforce
the rules, punishing people who violate them. When the government protects
investors, financial markets work well and help promote economic growth; otherwise
they don’t. Finally, even well-developed markets can break down.
When financial institutions fail or experience severe distress—as some did
during the financial crisis of 2007–2009—the repercussions can be profound and far-
reaching, jeopardizing the stability of the entire financial system. This period
highlighted the interconnectedness of financial institutions and markets, where the
collapse or distress of key entities could lead to cascading failures, undermining
confidence and exacerbating economic downturns. During the financial crisis,
numerous banks, mortgage lenders, and investment firms either failed or required
substantial government intervention to stay afloat. The crisis illustrated the systemic
risks inherent in modern financial systems, where the failure of one major institution
could trigger a domino effect, destabilizing other institutions and markets globally.
The 2007–2009 financial crisis was precipitated by a combination of factors,
including the collapse of the housing market, excessive risk-taking by financial
institutions, and the proliferation of complex financial products such as mortgage-
backed securities (MBS) and collateralized debt obligations (CDOs). These products,
while innovative, obscured the true risk of the underlying assets, leading to
widespread uncertainty and panic when defaults on subprime mortgages began to rise.
The crisis underscored the limitations of market self-regulation and the need for
robust oversight to prevent similar occurrences in the future.
In response to such crises, it has become evident that governments must play
an active and proactive role in promoting the healthy operation of financial markets.
This involvement is multifaceted, encompassing regulatory oversight, market
stabilization measures, and policy interventions designed to safeguard the financial
system. Government agencies, such as central banks and financial regulatory bodies,
are tasked with monitoring financial institutions, enforcing regulations, and taking
preemptive actions to mitigate risks.
Regulatory oversight involves setting and enforcing standards for financial
institutions to ensure they operate in a safe and sound manner. This includes capital
requirements, liquidity requirements, and risk management standards. For example,
the Basel III framework, developed in response to the financial crisis, introduced
stricter capital and liquidity requirements for banks, aimed at enhancing their ability
to absorb shocks and reducing the likelihood of failure. Additionally, governments
have implemented measures to increase transparency and accountability in the
financial sector, such as requiring greater disclosure of financial transactions and
imposing stricter penalties for misconduct.
Market stabilization measures are also crucial in times of crisis. During the
2007–2009 financial crisis, governments around the world implemented a range of
interventions to stabilize markets and restore confidence. Central banks, including the
Federal Reserve in the United States, took unprecedented actions, such as lowering
interest rates to near-zero levels, providing emergency liquidity to financial
institutions, and purchasing large quantities of financial assets through programs like
quantitative easing. These actions helped to stabilize financial markets, restore
liquidity, and support economic recovery.
Furthermore, policy interventions are necessary to address systemic risks and
promote long-term stability. Governments have established mechanisms to identify
and mitigate systemic risks, such as the Financial Stability Oversight Council (FSOC)
in the United States, which monitors potential threats to the financial system and
coordinates regulatory responses. Additionally, governments have implemented
reforms aimed at reducing the likelihood of future crises, such as the Dodd-Frank
Wall Street Reform and Consumer Protection Act, which introduced comprehensive
regulatory changes to address the root causes of the financial crisis.
Beyond regulatory and stabilization efforts, governments also play a role in
promoting financial inclusion and protecting consumers. Ensuring that individuals and
businesses have access to financial services is essential for economic growth and
stability. Governments have implemented policies and programs to expand access to
banking services, promote financial literacy, and protect consumers from predatory
practices. For example, the Consumer Financial Protection Bureau (CFPB) was
established in the United States to protect consumers in the financial marketplace and
ensure that they have the information needed to make informed financial decisions.
In summary, the financial crisis of 2007–2009 highlighted the systemic risks
and vulnerabilities inherent in modern financial systems, underscoring the need for
robust government involvement in promoting the healthy operation of markets.
Governments play a critical role in regulatory oversight, market stabilization, and
policy interventions designed to safeguard the financial system and prevent future
crises. Through these efforts, governments aim to ensure the stability, transparency,
and resilience of financial markets, thereby supporting sustainable economic growth
and protecting the interests of consumers and businesses alike.
Most of us prefer stable to variable incomes. We like getting raises, but the
prospect of a salary cut is not a pleasant one. This brings us to the fifth core principle
of money and banking: Stability improves welfare. Stability is a desirable quality, not
just in our personal lives but in the financial system as a whole. As we saw at the start
of this, financial instability in the autumn of 2008 brought us closer to a collapse of
the system than at any time since the 1930s, triggering the worst global downturn
since the Great Depression. And the banking and government debt crisis in the euro
area partly reversed Europe’s financial integration, a cornerstone of its successful
economic and political framework in recent decades.
If you are wondering whether this principle is related to Core Principle 2 (risk
requires compensation), you are right. Because volatility creates risk, reducing
volatility reduces risk. But while individuals can eliminate many risks on their own
(we’ll see how when we study financial instruments, some risks can be reduced only
by government policymakers. Business cycle fluctuations are an example of the sort
of instability individuals can’t eliminate on their own. And though “automatic
stabilizers” like unemployment insurance and the income tax system reduce the
burden of recessions on individuals, they cannot eliminate an economic slowdown.
Monetary policymakers can moderate these downswings by carefully adjusting
interest rates.
Central banks also have powerful tools to steady fragile financial systems and
to repair or support dysfunctional markets. In stabilizing the economy as a whole,
they eliminate risks that individuals can’t, improving everyone’s welfare in the
process, stabilizing the economy is a primary function of central banks like the
Federal Reserve and the European Central Bank. Officials of these institutions are
charged with controlling inflation and reducing business cycle fluctuations. That is,
they work to keep inflation low and stable and to keep growth high and stable. They
also have key roles in securing financial stability. When they are successful, they
reduce both the risk that individuals will lose their jobs and the uncertainty that firms
face in making investment decisions. Not surprisingly, a stable economy grows faster
than an unstable economy. Stability improves welfare.
c. Special Features of This Book
The very first special feature of every in this book is its introduction—each
one presents a real-world example that leads to the big questions the is designed to
answer, such as: What is money? What do banks do? How does the bond market
work? What does the Federal Reserve do to prevent or limit financial crises? After
that real-world setup, the text of each presents the economic and financial theory you
need to understand the topics covered. Learning objectives listed at the beginning of
the outline the core concepts that are discussed and should be mastered. Each also
contains a series of inserts that apply the theory. There are five types of inserts: Your
Financial World, Applying the Concept, Lessons from the Crisis, Money and Banking
Blog, and Tools of the Trade. Finally, the end of each is divided into four sections:
Key Terms, Using FRED, Lessons, and Problems. Here are some guidelines for using
the inserts and end-of- materials.
When most people decide to make a major purchase, they begin by collecting
information. If they are considering buying a car, they will first try to decide which
model is best for them and then work hard to pay the lowest price possible. Even for
smaller purchases, like clothes or groceries, people first gather information and then
buy. Financial transactions should be no different from consumer purchases. Become
informed first, and then buy. If you’re thinking, “That’s easier said than done,” you’re
right. The problem is that most people have very little knowledge of the financial
system, so they don’t know how to start or what kind of information to collect. That’s
where Your Financial World comes in. These inserts provide basic guidelines for
applying economic theory to the bread-and-butter financial decisions you make nearly
every day.
Applying the Concept inserts in educational texts serve as vital tools for
bridging the gap between theoretical knowledge and practical application. These
inserts are designed to show students and readers how to put theory into practice by
providing real-world examples that illustrate the ideas and concepts introduced. By
drawing from historical events, relevant public policy debates, and contemporary case
studies, these inserts offer a more tangible understanding of abstract theories and
principles.
For instance, consider on economic theories related to market behavior and
consumer decision-making. An Applying the Concept insert might explore the
historical example of the Great Depression and the New Deal policies implemented
by President Franklin D. Roosevelt's administration. This insert could detail how
Keynesian economic theories influenced the design of public works programs and
social safety nets aimed at stimulating demand and reducing unemployment. By
examining the real-world impact of these policies, students can better understand the
practical implications of Keynesian economics and how government intervention can
stabilize an economy in crisis.
Similarly, on environmental policy might include an Applying the Concept
insert that discusses the public policy debates surrounding climate change legislation.
This insert could highlight the development and implementation of the Paris
Agreement, an international treaty aimed at reducing greenhouse gas emissions and
combating global warming. By examining the negotiations, compromises, and
outcomes of this landmark agreement, students can gain insights into the complexities
of global environmental governance and the practical challenges of aligning diverse
national interests toward a common goal.
Applying the Concept inserts can also draw from contemporary case studies to
demonstrate the relevance of theoretical ideas to current events. For example, on
financial regulation might feature an insert on the 2008 financial crisis, detailing how
the collapse of Lehman Brothers and the subsequent global economic turmoil
underscored the need for stricter regulatory oversight. This insert could explore the
Dodd-Frank Wall Street Reform and Consumer Protection Act, highlighting how the
legislation addressed systemic risks and aimed to prevent future financial crises. By
connecting these theoretical discussions to recent history, students can appreciate the
ongoing evolution of financial regulation and the importance of adaptive policy-
making.
In the realm of public health, an Applying the Concept insert might examine
the implementation of vaccination programs to illustrate epidemiological theories and
principles. For instance, it could discuss the eradication of smallpox through a
coordinated global vaccination campaign led by the World Health Organization
(WHO). By detailing the strategies, challenges, and successes of this public health
initiative, students can understand the practical applications of herd immunity and the
critical role of international cooperation in disease control and prevention.
These inserts also serve to highlight the interdisciplinary nature of many
theoretical concepts, demonstrating how ideas from one field can inform practices in
another. For example, on behavioral economics might include an Applying the
Concept insert that examines the use of nudges in public policy to promote healthier
lifestyles. This insert could discuss initiatives such as the redesign of school cafeterias
to encourage healthier eating habits among students or the use of default options in
retirement savings plans to increase participation rates. By showing how behavioral
insights are applied in various policy domains, students can appreciate the cross-
cutting relevance of these theories.
Moreover, Applying the Concept inserts often include questions and activities
that encourage critical thinking and engagement. These might involve analyzing
additional case studies, debating the effectiveness of specific policies, or developing
hypothetical scenarios based on the theoretical frameworks. Such interactive elements
help reinforce the connection between theory and practice, fostering a deeper
understanding and encouraging students to think critically about how they might
apply these ideas in their own professional and personal lives.
In summary, Applying the Concept inserts are essential components of
educational texts that enhance learning by illustrating how theoretical ideas can be put
into practice. By providing real-world examples drawn from history, public policy
debates, and contemporary case studies, these inserts help students understand the
practical implications of the concepts they are studying. They demonstrate the
relevance of theoretical knowledge to real-world challenges, encourage critical
thinking and engagement, and highlight the interdisciplinary nature of many ideas.
Through these inserts, students gain a more comprehensive and applied understanding
of the subject matter, better preparing them to navigate and address complex issues in
their future careers and everyday lives.
These inserts cover episodes from the financial crisis of 2007–2009 and from
the European banking and government debt crisis that began shortly thereafter. One
goal is to give you a framework for understanding these crises and how they are
transforming the world of finance. Another goal is to highlight the relevance and
power of the ideas in the book more generally. Along the way, the various Lessons
from the Crisis offer you insight into the sources and effects of financial instability.
They also address the means that governments—including regulators and central
bankers—use to counter financial instability.
One of the primary purposes of this textbook is to help you understand the
business and financial news. Critically evaluating what you read, hear, and see means
developing a clear understanding of how the financial system works, as well as
reading the news regularly. Like many other skills, critical reading of contemporary
economic and financial analysis takes practice. You can’t just turn to an economics
blog, newspaper, or magazine and skim through it quickly and efficiently; you need to
learn how. Your instructor will make suggestions about what you should read.
