Money and Banking

Welcome to ECON A305 Money and Banking.

ECON A305 Money and Banking is one of the higher level courses designed for the Bachelor of Social Sciences in Economics, Bachelor of Social Sciences with Honours in Economics, Bachelor of Social Sciences with Honours in Economics (with Finance), and Bachelor of Social Sciences with Honours in Economics (with Management) degrees. The course introduces the theories and principles of money, banking, and financial markets, and their relationships with the economy. It applies theoretical concepts to explain institutional features of financial sectors, with a particular focus on banking, and explains the relevance of money and banking to macroeconomic activities and outcomes.

You might have many expectations about this course. However, don't be misguided by its title. You are not going to learn how to make money and get rich overnight. Nor will you learn how to establish and run a bank. What you are going to study are the roles of money and banking in a market economy, such as the one here in Hong Kong.

Although extremely complicated, a market economy is essentially a monetary economy. Division of labour and specialization of production are the bases for growth in productivity. Efficient transactions make specialization possible, and these transactions are guaranteed by a good monetary system. Like the lubricant in an engine, money facilitates transactions, consumption, investment, and multinational trade and investment activities. Without money, resources will not flow, and a market economy will simply cease to exist. In the modern world, the institutions that create, manage, and control money are banks and central banks. How well money functions depends on the efficiency of the banking system. Therefore, money and banking are inseparable.

In Hong Kong, banks are everywhere. There is an old saying that in Hong Kong, there are more banks than rice-selling shops. The financial sector has been playing a dominant role in the economy of Hong Kong, and continues to take on ever greater importance in the post-1997 era. But do you really understand its importance as a service sector? The Hong Kong economy has been developing very rapidly and is at present one of the most prosperous economies in the world. The basis for this success is a free and open market system. And the basis of the free and open system is a well-functioning monetary system and banking system. Ask yourself these questions: If people lose confidence in the Hong Kong dollar and the linked exchange rate, what will happen? If inflation is sky-high, what will happen? Or, if the US and China change their interest rates, what will happen to the Hong Kong economy? Regardless of whether you are a business person or not, a basic understanding of how the monetary economy works will help you to make sense of the monetary phenomena happening around you every day.

The learning approach we take for this course is to explore a combination of theoretical concepts and frameworks, and real-world situations in selected countries, particularly Hong Kong and the US. You are expected to learn to use the theories, applying them to real-world cases.

There are no prerequisites to this higher level course, but you need to have a basic knowledge of elementary mathematics and graphical skills. Since the materials, textbooks, and exercises are written in English, you also need to have a good command of English, particularly in terms of reading and writing.

There are altogether nine units for this ten-credit, two-semester course. It will take about 36 weeks to complete, and you are expected to spend at least eight hours per week on the study materials. The textbook is well-written and provides the essential readings, but it is a US textbook. You need to read a lot of extra material to learn about money and banking in Hong Kong and China. On this basis, you are expected to independently work through the exercises for each unit, to hand in four assignments on time, and to pass a three-hour examination.

Purpose of this Course Guide

By now you will have completed other Hong Kong Metropolitan University courses. You are, therefore, well aware of the study skills required for distance learning, have developed your own study schedules and methods, and are familiar with the organization of HKMU courses. Even so, you should read this Course Guide thoroughly before proceeding to look at the study units or your textbooks. Some of the content will be familiar to you but much of the information is specific to ECON A305 Money and Banking. Please take time to read it.

The Course Guide tells you briefly about the course content and suggests ways for you to work your way through the material. It also provides some guidelines as to the amount of time you are likely to spend on each unit in order to complete the course successfully.

The Course Guide provides information on assignments, tutorials, and the examination. Please see the Presentation Schedule on the Online Learning Environment (OLE) for information about the due dates for the submission of assignments.

You will probably wish to refer to this Course Guide throughout the course to help clarify important points about studying with HKMU, so keep it in a convenient place.

Course aims

ECON A305 Money and Banking aims to:

• examine the theories and concepts of money, banking and the major financial markets in the modern market economy; and
• equip learners with theories to analyse the operations of the monetary, banking and the financial sectors, and assess their relevance to the macroeconomy.

Course learning outcomes

After completing the course, you should be able to:

• analyse the institutional arrangements of financial markets;
• identify and assess the factors determining the demand for money;
• illustrate the determination of the level and the term structure of interest rates;
• analyse the asset/liability management of commercial banks as financial intermediaries;
• discuss the role of central banking in the supply of money;
• identify and appraise the goals, targets, and tools of monetary policy;
• compare and evaluate the various transmission mechanisms of monetary policy; and
• analyse recent developments in financial innovations and their influence on the effectiveness of monetary policy.

Course overview

The following chart gives a general overview of the course structure.

In addition to this Course Guide, the course has the following important components. Please ensure that you have all of these materials available:

• study units
• texts and selected readings
• the Assignment File.

Study units

There are nine study units for this course. The discussions and topics progress from basic concepts to fundamental analysis, and continue on to interaction in an open economy. Later units are thus based on an understanding of earlier units. The course is composed of two blocks as follows:

• Block 1, from Unit 1 to Unit 5, explains and analyses the financial system of a market economy with emphasis on the financial markets and institutions, including the role and function of commercial banking and the recent developments in financial derivatives.
• Block 2, from Unit 6 to Unit 9, is an in-depth discussion on the function of the central bank and monetary policy. The specific topics include the economic analysis of banking management and regulation, central bank operation, and the theories and practices of monetary policy. The focus is on the challenges of the government's supervisory role and the effectiveness of monetary policy in relation to the proliferation of financial investment in the new era of financial innovation.

The course consists of the following units:

Unit 1  Financial markets and financial intermediaries

Unit 2  Money

Unit 3  Market interest rates

Unit 4  Major financial markets

Unit 5  Commercial banks

Unit 6  Central banks and the supply of money

Unit 7  Monetary policy: Tools, tactics and strategies

Unit 8  Monetary policy: Transmission mechanism, inflation, and policy debate

Unit 9  Financial structure and financial crisis

Textbook

Mishkin, F S (2022) The Economics of Money, Banking, and Financial Markets, 13th edn, Pearson.

You must buy this textbook. All page references in the study units refer to the 13th edition. You should therefore make sure that you obtain and use only the 13th edition.

Readings

The textbook looks closely at the structure of the US financial system and provides many US examples. It illustrates basic concepts and principles well. However, this course will also introduce the financial systems and examples from Hong Kong and other countries. Thus, a number of articles and book chapters introducing the case of Hong Kong and other countries are collected in the set of readings at the back of each respective unit.

Assignment File

The Assignment File is a collection of the assignments, consisting of four sets of short essay and calculation questions. It also specifies the details, such as the due date and marks allocation for each assignment. For more information refer to the assessment section.

Presentation Schedule

The Presentation Schedule is available on the Online Learning Environment. It gives the dates for completing assignments and attending tutorials, day schools, and so on.

The assessment for this course is made up of two components: continuous assessment and a three-hour examination. Generally speaking, you should pass both the continuous assessment and the final examination in order to pass this course. This means that you need to obtain at least 40% in both the continuous assessment and the final examination.

Continuous assessment

Continuous assessment counts for 50% of the total course scores. It will take the form of assignments. There are a total of four assignments and they all count towards the continuous assessment portion of your course score.

Examination

The final examination accounts for 50% of the total course marks. It will be held at the end of the course, and is three hours long. It contains short essay and calculation questions and covers material from all of the study units.

Course marking scheme

You are encouraged to put into practice the following strategy for working through the course:

• Read this Course Guide carefully. Check the suggested study schedule and mark down important dates, such as the assignment due dates and tutorial dates. Try to keep up with the schedule and meet the dates.
• Start the first study unit. Read the introduction of the unit. The introduction indicates the main topics and expectations for the unit.
• Work through the unit. The unit embodies a suggested sequence of study, but you can revise it to suit your own judgement and strategy.
• Read the text (textbook) and readings where the unit suggests that you do so.
• Attempt the exercises at the end of each section. Then check your answers against those given at the end of the unit, and read the discussions of the exercises.
• Review the expectations in the unit's introduction to confirm that you have achieved them. Review the study materials and/or talk to your tutor if you are not sure that you have met the expectations.
• Turn to your Assignment File and complete the assignment according to the instructions in the unit. Submit your work no later than the due date.
• After you have turned in your assignment, and without waiting, start working on the next unit. Note that only in this way can you keep on schedule.
• After your assignment has been marked and returned to you, read through it, and pay particular attention to your tutor's comments and queries. Clarify any doubts immediately by phoning your tutor.
• After completing the last unit, review the whole course and prepare yourself for the final examination. Check again that you have met the course learning outcomes.

Here are some final words. You need to be a regular student, because only in this way can you keep what you have learned fresh in your mind, and keep on schedule. Note that time is tight but that time is in your own hands! You also need to be active in thinking, and to always ask 'why?'. The exercises in the units will stimulate your thinking, but you also need to challenge yourself to further your understanding of the logic behind the study materials.

Tutors

Tutors are available to provide assistance not just during the formal tutorials. Your tutor is also available online. Do not hesitate to contact your tutor if you need help. The following might be some typical circumstances in which you would find help necessary. Contact your tutor if:

• you do not understand any part of the study units or the assigned readings;
• you have any difficulty with self-tests or practice exercises; or
• you have a question or problem with assignments, or with your tutor's comments on or grading of an assignment.

Tutorials

Eleven two-hour tutorials are arranged to discuss the contents of each study unit and address your difficulties. Attendance at tutorials is voluntary, but you are strongly encouraged to attend, as the tutorial sessions are invaluable opportunities for you to exchange views with other students taking the same course and to hear the tutor explaining difficult points that are worth particular attention. I assure you that you will learn more in one hour with your tutor than you can learn by yourself spending the same amount of time.

While Hong Kong's prudent monetary arrangements and stable banking system have offered strong fundamental support to the territory's economic development, Hong Kong people have also gone through painful times brought about by problems in the banking system and speculation against the Hong Kong dollar. This course has been designed to introduce you to the features of the money and banking systems in Hong Kong, the US and some other countries as well as to the general principles of money and banking. The course goes one step further to explore the effectiveness of monetary operations on economic activities. After taking this course, I hope that you can answer questions not only of academic wisdom, but also of daily concern, such as 'Should the Hong Kong dollar link be maintained?', 'Is the high inflation in Hong Kong the government's fault?' and 'How will Hong Kong be affected if the US raises its interest rate again?'

Although this course will not teach you how to make money, I hope you will enjoy studying it. You may find some units easy, but some units are more difficult and challenging. You have to depend on yourself to go through the course, but don't forget, assistance from Hong Kong Metropolitan University is always available, and your tutor is always ready to help!

I wish you every success in your studies.