Financial and Monetary Theory

Week 15: Revision lecture

Final exam Time: December 16, 2015 Venue: to be informed Working time: 2 hours Closed-book Total marks: 100, weighted 50% of

total assessment You have to achieve at least 50 marks

of this final exam to pass this course.

Final examStructure: Part 1: 40 marks

MCQ: 20 questions, 2 marks/each Part 2: Short-answer questions (30

marks) 3 questions, 10 marks/each

Part 3: Problems and applications (30 marks). 2 problems, 15 marks/each

Final exam Topics to be covered: ALL topics

Final examHints: For Part 1: work again on all MCQs in the tutorials read again the text book, understand key

words,For Part 2 & 3: work again on all tutorial problems, including

duration calculation and application search more information about Vietnam’s facts:

inflation, monetary tools, exchange rate…

Week 1 & 2 Overview of financial system

Types of financial institutions and instruments

Money definition and interest rates

Week 3&4: Behavior of interest rates Loanable funds framework:

Demand and supply of bonds Theory of asset demand Factors affecting demand Factors affecting supply The Fisher effect: expected inflation The interest rates behavior in

business cycle

Week 3&4: Behavior of interest rates Liquidity preference framework: demand and

supply of money Factors affecting demand for money Factors affecting supply of money Effects of increase in money supply on

interest rates (other factors are not constant): Liquidity effect Income effect Price-level effect Expected inflation effect

Week 5: The risk and term structure of the interest rates Risk structure:

Different bond, same maturity, different IRs Default risk Liquidity Tax treatment

Term structure: Same bond, different maturity, different IRs

Expectations theory Segmented market theory Liquidity premium theory

Week 6: Stock market Gordon Growth Model Stock price determination The efficient market hypothesis

Week 7: Foreign exchange market Exchange rate definition Appreciation/depreciation In the long-run:

Exchange rate determination The law of one price The purchasing power parity

Factors changing exchange rates In the short run:

Exchange rate determination Demand for and supply of assets denominated in one

currency Factors changing exchange rates

Week 8: Bank and bank management A commercial bank balance sheet:

Assets and liabilities How a commercial bank makes profits Liquidity management Asset management Liability management Capital adequacy management Credit risk management Interest rate management

Week 9: Analysis of financial structure Transaction costs Asymmetric information

Adverse selection Moral hazard

The role of direct finance vs. indirect finance

Week 10: Central banks and monetary tools Central banks: compare with

commercial banks Intervention in the foreign exchange

market: unsterilized and sterilized Fed funds rate: determination and

movement Monetary tools: advantages and

disadvantages

Week 13: Multiple deposit creation A central bank balance sheet Monetary base Effect of monetary tools on the final T-account

of central bank, commercial banks, non-bank public.

Change in the total deposit in the entire banking system

Money multiplier m = (1 + c)/(r + e + c)

Rr

DD

1

Week 14: Money and inflation Definition of inflation Inflation is a monetary phenomenon

Fiscal policy Negative supply shock

Other targets of the government will result in inflation: High employment rate: cost-push and demand

pull inflation Low budget deficit: monetary base increase due

to printing money/creating high-power money