This book is organized to help students understand both the financial system and its economic effects on their lives. That means surveying a broad series of topics, including what money is and how it is used; what a financial instrument is and how it is valued; what a financial market is and how it works; what a financial institution is and why we need it; and what a central bank is and how it operates. More important, it means showing students how to apply the five core principles of money and banking to the evolving financial and economic arrangements that they inevitably will confront during their lifetimes.

Part I: Money and the Financial System. Chapter 1 introduces the core principles of money and banking, which serve as touchstones throughout the book. Chapter 2 examines money both in theory and in practice. Chapter 3 follows with a bird’s-eye view of financial instruments, financial markets, and financial institutions. (Instructors who prefer to discuss the financial system first can cover Chapters 2 and 3 in reverse order.)

Part II: Interest Rates, Financial Instruments, and Financial Markets. Part II contains a detailed description of financial instruments and the financial theory required to understand them. It begins with an explanation of present value and risk, followed by specific discussions of bonds, stocks, derivatives, and foreign exchange. Students benefit from concrete examples of these concepts. In Chapter 7 (The Risk and Term Structure of Interest Rates), for example, students learn how the information contained in the risk and term structure of interest rates can be useful in forecasting. In Chapter 8 (Stocks, Stock Markets, and Market Efficiency), they learn about stock bubbles and how those anomalies influence the economy. And in Chapter 10 (Foreign Exchange), they study the Big Mac index to understand the concept of purchasing power parity. Throughout this section, two ideas are emphasized: that financial instruments transfer resources from savers to investors, and that in doing so, they transfer risk to those best equipped to bear it.

Part III: Financial Institutions. In the next section, the focus shifts to financial institutions. Chapter 11 introduces the economic theory that is the basis for our understanding of the role of financial intermediaries. Through a series of examples, students see the problems created by asymmetric information as well as how financial intermediaries can mitigate those problems. The remaining chapters in Part III put theory into practice. Chapter 12 presents a detailed discussion of banking, the bank balance sheet, and the risk that banks must manage. Chapter 13 provides a brief overview of the financial industry’s structure, and Chapter 14 explains financial regulation.

Part IV: Central Banks, Monetary Policy, and Financial Stability. Chapters 15 through 19 survey what central banks do and how they do it. This part of the book begins with a discussion of the role and objectives of central banks, which leads naturally to the principles that guide central bank design. Chapter 16 applies those principles to the Federal Reserve and the European Central Bank. Chapter 17 presents the central bank balance sheet, the process of multiple deposit creation, and the money supply. Chapters 18 and 19 cover operational policy, based on control of both the interest rate and the exchange rate. The goal of Part IV is to give students the knowledge they will need to cope with the inevitable changes that will occur in central bank structure.

Part V: Modern Monetary Economics. The last part of the book covers modern monetary economics. While most books cover this topic in six or more chapters, this one does it in four. This streamlined approach concentrates on what is important, presenting only the essential lessons that students truly need. Chapter 20 sets the stage by exploring the relationship between inflation and money growth. Starting with inflation keeps the presentation simple and powerful, and emphasizes the way monetary policymakers think about what they do. A discussion of aggregate demand, aggregate supply, and the determinants of inflation and output follows. Chapter 21 presents a dynamic aggregate demand curve that integrates monetary policy directly into the presentation. To complete the explanation of business-cycle fluctuations, Chapter 22 introduces shortrun and long-run aggregate supply, wrapping up the section with a discussion of the channels of monetary policy transmission and the challenges central bankers face today.

For those instructors who have the time, we recommend closing the course with a rereading of the first chapter and a review of the core principles. What is the future likely to hold for the five parts of the financial system: money, financial instruments, financial markets, financial institutions, and central banks? How do students envision each of these parts of the system 20 or even 50 years from now?