Topic Business Subtopic “Pure intellectual stimulation that can be popped into & Economics Business the [audio or video player] anytime.” —Harvard Magazine M Money and Banking: “Passionate, erudite, living legend lecturers. Academia’s o best lecturers are being captured on tape.” n e —The Los Angeles Times y a What Everyone Should Know n d “A serious force in American education.” B a —The Wall Street Journal n k Course Guidebook i n g Professor Michael K. Salemi University of North Carolina at Chapel Hill Professor Michael K. Salemi is Professor of Economics and Chair of the Department of Economics at the University of North Carolina at Chapel Hill. Recognized at both the university and national levels for his outstanding teaching, he has also delivered seminars on monetary policy to political leaders in emerging Asian economies. He received the Bower Medal in Economic Education from the Council for Economic Education and the Villard Award for Research in Economic Education from the National Association of Economic Educators. THE GREAT COURSES® Corporate Headquarters 4840 Westfields Boulevard, Suite 500 Chantilly, VA 20151-2299 G USA u Phone: 1-800-832-2412 id e www.thegreatcourses.com b o Cover Image: © Patrick Hermans/Shutterstock. o Course No. 5630 © 2012 The Teaching Company. PB5630A k PUBLISHED BY: THE GREAT COURSES Corporate Headquarters 4840 Westfi elds Boulevard, Suite 500 Chantilly, Virginia 20151-2299 Phone: 1-800-832-2412 Fax: 703-378-3819 www.thegreatcourses.com Copyright © The Teaching Company, 2012 Printed in the United States of America This book is in copyright. All rights reserved. Without limiting the rights under copyright reserved above, no part of this publication may be reproduced, stored in or introduced into a retrieval system, or transmitted, in any form, or by any means (electronic, mechanical, photocopying, recording, or otherwise), without the prior written permission of The Teaching Company. Credits begin on page 274 and constitute a continuation of the copyright page. Michael K. Salemi, Ph.D. Professor of Economics and Chair of the Department of Economics University of North Carolina at Chapel Hill P rofessor Michael K. Salemi is Professor of Economics and Chair of the Department of Economics at the University of North Carolina at Chapel Hill. He has been a member of the faculty there since 1976 and a Professor of Economics since 1987. He has held three distinguished term professorships at UNC–Chapel Hill: Zachary Smith Professor of Economics from 1993 to 1996 and Bowman and Gordon Gray Professor of Economics from 1987 to 1990 and again from 2005 to 2010. As an undergraduate, Professor Salemi studied Economics at St. Mary’s College in Winona, Minnesota, and received his bachelor’s degree in 1968. He earned master’s degrees in Economics from Purdue University in 1969 and from the University of Minnesota–Minneapolis in 1973, and he earned his doctorate in Economics from the University of Minnesota–Minneapolis in 1976. At UNC–Chapel Hill, Professor Salemi has taught a wide variety of undergraduate courses, including Money as a Cultural, Economic, and Social Institution, a (cid:191) rst-year seminar he created. He routinely teaches Principles of Economics and has taught Intermediate Macroeconomic Theory and Money, Banking, and Financial Markets. To graduate students, Professor Salemi has taught Advanced Macroeconomic Theory, Monetary Theory, and advanced seminars in Macroeconomic Policy and Research on Monetary Policy. Professor Salemi has completed a variety of international assignments during his career. He was a Research Associate and Visiting Professor at The Graduate Institute in Geneva, Switzerland, from 1982 to 1983 and 1985 to 1987 and in 2001 and 2002. The Asian Development Bank selected him as a contributor to seminars on monetary policy for transitional economies in Beijing in 1991 and in Lao in 1992. Under the aegis of the Swiss State i Secretariat for Economic Affairs, he designed and delivered a technical assistance and training program at the State Bank of Vietnam in Hanoi in 2004. More recently, he was a visiting fellow at the Hong Kong Institute for Monetary Research in 2007 and again in 2008. Professor Salemi is the author of 2 books and more than 60 published articles in macroeconomics, domestic and international monetary theory, and economic education. He is the coauthor of Discussing Economics: A Classroom Guide to Preparing Discussion Questions and Leading Discussion and Teaching Innovations in Economics. His journal publications have focused on formulation and estimation of optimal monetary policies, explanations for high unemployment in Hong Kong, and strategies for effectively teaching economics to undergraduate students. Professor Salemi has had a career-long interest in economic education. While a graduate student, he served as Assistant Director of the Center for Economic Education at the University of Minnesota–Minneapolis. In 1977, he created the Teacher Training Program for graduate student instructors of economics at UNC–Chapel Hill, a program that is widely described as one of the best of its kind in the world. Professor Salemi has taught in the program and has helped administer it throughout his career. An acknowledged expert in economic education, Professor Salemi has served as an instructor, workshop director, and workshop program director for national programs in teacher education. He was co-principal investigator for “Interactive Teaching in Undergraduate Economics Courses: Bridging the Gap between Current and Best Practices,” funded by the National Science Foundation from 2004 to 2010. The American Economic Association (AEA) selected him to serve on its Committee on Economic Education from1981 to 1988, 1990 to 2000, and 2001 to 2007 and to chair the committee from 1994 to 2000. More recently, the AEA chose him and William Walstad to design, administer, and teach a continuing education program in economic education. Professor Salemi has been a featured speaker on the teaching of economics throughout his career. He has given talks at many colleges and universities, ii including the University of Notre Dame, Michigan State University, Stanford University, Wellesley College, University of Kentucky, and Baylor University. He has been selected as a featured presenter at many conferences devoted to economic education. Professor Salemi has received numerous teaching awards. From UNC– Chapel Hill, he received the Tanner Award for Teaching in 1980, the Instructor Excellence Award of the Young Executive Institute in 1986, the Economics Undergraduate Teaching Award in 1994 and again in 2000, and the Economics Graduate Teaching Award in 2002. The recipient of a number of national awards as well, Professor Salemi was awarded the Bower Medal in Economic Education in 1998 from the Council for Economic Education. The National Association of Economic Educators awarded him the Villard Award for Research in Economic Education in 2001. The Gus A. Stavros Center named him a Great Teacher in Economics in 2007. He is also listed in Marquis Who’s Who in America. Professor Salemi is married to Ariana Pancaldo and is the father of Benjamin, Caitlin, and Chiara Salemi. He is an avid squash player and also an amateur photographer and woodworker. He enjoys hiking, particularly in the American Southwest. (cid:374) iii Table of Contents INTRODUCTION Professor Biography ............................................................................i Course Scope .....................................................................................1 LECTURE GUIDES LECTURE 1 The Importance of Money...................................................................5 LECTURE 2 Money as a Social Contract................................................................9 LECTURE 3 How Is Money Created? ...................................................................16 LECTURE 4 Monetary History of the United States ..............................................24 LECTURE 5 Local Currencies and Nonstandard Banks .......................................31 LECTURE 6 How In(cid:192) ation Erodes the Value of Money .........................................37 LECTURE 7 Hyperin(cid:192) ation Is the Repudiation of Money ......................................44 LECTURE 8 Saving—The Source of Funds for Investment..................................50 LECTURE 9 The Real Rate of Interest .................................................................59 LECTURE 10 Financial Intermediaries ...................................................................67 iv Table of Contents LECTURE 11 Commercial Banks ...........................................................................74 LECTURE 12 Central Banks ...................................................................................82 LECTURE 13 Present Value ...................................................................................89 LECTURE 14 Probability, Expected Value, and Uncertainty ...................................96 LECTURE 15 Risk and Risk Aversion ...................................................................103 LECTURE 16 An Introduction to Bond Markets ....................................................109 LECTURE 17 Bond Prices and Yields...................................................................117 LECTURE 18 How Economic Forces Affect Interest Rates ..................................124 LECTURE 19 Why Interest Rates Move Together ................................................131 LECTURE 20 The Term Structure of Interest Rates .............................................139 LECTURE 21 Introduction to the Stock Market .....................................................146 LECTURE 22 Stock Price Fundamentals..............................................................153 LECTURE 23 Stock Market Bubbles and Irrational Exuberance ..........................159 v Table of Contents LECTURE 24 Derivative Securities .......................................................................166 LECTURE 25 Asymmetric Information ..................................................................173 LECTURE 26 Regulation of Financial Firms .........................................................179 LECTURE 27 Subprime Mortgage Crisis and Reregulation..................................185 LECTURE 28 Interest Rate Policy at the Fed and ECB ........................................192 LECTURE 29 The Objectives of Monetary Policy .................................................197 LECTURE 30 Should Central Banks Follow a Policy Rule? .................................202 LECTURE 31 Extraordinary Tools for Extraordinary Times ...................................209 LECTURE 32 Central Bank Independence ...........................................................217 LECTURE 33 The Foreign Exchange Value of the Dollar .....................................223 LECTURE 34 Exchange Rates and International Banking ..................................232 LECTURE 35 Monetary Policy Coordination.........................................................239 vi Table of Contents LECTURE 36 Challenges for the Future ...............................................................246 SUPPLEMENTAL MATERIAL Glossary .........................................................................................253 Bibliography ....................................................................................258 Credits ............................................................................................274 vii viii