EC 223 - Lecture 01 - 2026-09-10

Overview

This was the first lecture of EC 223 — a course-organisation session plus a fast tour of the whole syllabus, delivered without slides for most of the class (the lecturer had trouble getting the projector/USB working). Igor laid out what the course covers: the Canadian financial system as a machine for connecting savers to borrowers, how interest rates and asset prices are determined, why banks and other intermediaries exist, what the Bank of Canada does, and how exchange rates work. The second half was a rapid preview of each major topic — bonds and stocks, financial crises, the money-supply/inflation link, fiscal vs. monetary policy, and international finance — each of which will be revisited in depth later. He also spent significant time on evaluation structure and on why students should not lean on AI, citing a recent empirical paper.

(Note: a student ambassador from the Student Works Management Program gave an unrelated recruiting pitch for the first ~2 minutes; not course content.)

Key concepts

• The financial system's core purpose — Connecting savers (people/institutions with excess funds) to borrowers (people, firms, governments with productive uses for funds). Financial intermediaries, mostly commercial banks, sit in the middle: the money in your chequing account is what the bank lends out to firms.
• Improved allocation of resources — The reason this connection matters. You wouldn't personally knock on a firm's door offering a loan; the bank routes idle funds to firms whose investment returns exceed the cost of borrowing, and that spread is what makes the economy grow.
• Interest rate as a price — Following the intro-course logic that prices signal excess demand or shortage, the interest rate is the price of (or directly connected to the price of) financial assets. A return observed on a government or corporate bond is read off the price of that asset and signals demand/supply conditions in that market.
• Credit allocation and risk management by banks — Which firms banks choose to lend to, and how they manage risk, has large consequences — "as we saw in several crises over history." After 2008, governments imposed many new rules and requirements aimed specifically at making banks manage risk better.
• Incentives and government intervention — A recurring lens for the course: what are the incentives of banks, firms, and individuals, and how can government intervene to make these markets more reliable and resilient.
• Security — A tradeable financial instrument representing a claim on the issuer's future income or assets.
• Bond — You lend to the issuer (government or corporation) and they promise to repay a set amount at a set date; the bond is a claim on the issuer's assets and earnings. The interest rate is the cost of borrowing to the issuer and the return to the lender.
• How interest rates move together — When the Bank of Canada changes its rate, corporate and government rates generally follow. Reason given: the Bank of Canada rate is always an outside option for a commercial bank, so if it rises and lending rates don't, banks would rather park funds with the central bank — other rates must move to keep lending attractive.
• Negative interest rates (student question, off-slide) — Has happened in Switzerland and Japan. No clear consensus on why anyone holds them, but two reasons offered: (1) logistics — a bank physically cannot vault billions in cash; (2) financial repression — regulations effectively force banks or the public to hold such bonds. The policy intent is to push banks out of reserves and into lending; banks sometimes still hold them because lending risk (default) could cost more than the negative rate.
• Stock — A share of ownership in a corporation, giving the owner a claim on the corporation's earnings and assets. Firms raise funds in essentially two ways: issue equity (go public) or issue corporate debt.
• Why stock prices matter — Two channels: higher prices mean a firm raises more per share issued, financing more investment; and price moves change the wealth of holders. He tied this to COVID-era stimulus, which may have raised stock prices and increased inequality — billionaires' wealth rising purely on stock price movements.
• Financial crisis — A major disruption in financial markets, characterised by sharp declines in asset prices and the failure of many financial institutions and firms, usually followed by a severe economic downturn. The 2007–9 global financial crisis began with defaults on US subprime mortgages. Bank failures cascade ("when one starts it just rolls downhill"), credit becomes scarce, and there is a domino effect — which is why financial markets are regulated far more heavily than any other market.
• Money growth and inflation — Strong long-run positive correlation between the growth rate of money supply and the inflation rate; over a 10-year span, average money growth correlates positively with average inflation. In the short run the relationship is much less clear because other factors dominate. Canada hasn't had hyperinflation, but monetising fiscal deficits has visible inflationary effects in developing countries, especially in Latin America.
• Monetary policy — Managing the money supply and interest rates; conducted by the Bank of Canada using a set of tools to be covered later.
• Fiscal policy — Decisions about government expenditures and tax revenues, conducted by federal and provincial governments. Budget deficit = spending in excess of revenue; budget surplus = spending less than revenue. Canadian governments hit unprecedented deficits during COVID, since partly recovered. Deficits are financed by borrowing — issuing bonds and repaying at maturity.
• Exchange rate — The price of one currency in terms of another, determined in foreign exchange markets. Course convention: an appreciation of the Canadian dollar is a rise in the price of the Canadian dollar (i.e. quotes are USD per CAD, so USD 0.80 per CAD 1 → exchange rate of 0.80). He flagged that textbooks differ on which direction they quote, so watch for it.
• Exchange rates and the real economy — A depreciation makes Canadian goods cheaper abroad (exports up) and foreign goods more expensive at home (imports down), so net exports rise, holding all else constant. Important caveat he added: exchange rates don't move "out of nowhere" — the same underlying weakness that caused the depreciation may itself be dragging on the economy, so you cannot infer from the data alone that a depreciation improves things.
• Volatility — Both stock prices and exchange rates fluctuate a lot. Stock prices (shown via the S&P/TSX composite index) grew a great deal over the years and are currently at very high levels, but are extremely volatile compared to bonds — enter at the wrong moment, e.g. the dot-com bubble around 2000, and recovery can take 10 years or more. He explicitly declined to call the current level a bubble: timing the market is impossible to predict, because "if it was, price would be wherever we predict."

Formulas & models

No formulas were presented; the lecture was conceptual. He noted that pricing methods will come later, including the discounted cash flow framework for valuing stocks.

Worked examples

• Simple bond return. Lend the government $100 on a bond with a 5% one-year return. If the government does not default, you receive $105 in a year.
• Interest rate rise (class discussion). If rates jumped from 4% to 20%: a student answered that people would move money into high-yield savings or the bank. Igor confirmed — you'd save more and spend less, because financing a car (for example) becomes more expensive. Consuming less reduces economic activity, which is one route into a recession. He added an aside: money left in a chequing account earns zero — "you're just giving free money to the bank."
• Exchange rate depreciation — Canadian exporter. A Canadian firm sells a table for CAD 100. At an exchange rate of CAD 1 = USD 1, the US price is USD 100. If CAD 1 now buys only USD 0.80 (a depreciation), the US price falls to USD 80 — Canadian firms become more competitive internationally, exports rise.
• Exchange rate depreciation — Canadian importer. The mirror case: an American table that used to cost CAD 100 now costs more — he gave roughly CAD 120 without doing the arithmetic on the spot, so treat the number as illustrative. Imports fall.
• Appreciation check (class question). If CAD 1 goes from buying USD 0.80 to buying USD 1.00, the Canadian dollar has appreciated — one Canadian dollar now buys more US dollars.

Flagged for exams

• Bring a calculator to the midterm. "You can bring like a simple calculator, especially in the first part we'll be using to calculate like asset prices, and things like that. So, the calculator will be important."
• The final is weighted toward post-midterm material. "It will cover all the content, but of course I'll put like a great emphasis in the post-midterm material." He clarified that first-half concepts (interest rates, asset prices, banks) are prerequisite knowledge for the second half but "I won't be like directly testing" them — which he said "reduces a bit like how much you need to cover for the final."
• Quizzes are the model for exam multiple-choice. "The quizzes will be a good indication on how the multiple-choice questions will be, because the quizzes will be like just multiple choice."
• Short-answer practice comes separately. He will send extra multiple-choice and especially short-answer practice questions before the midterm and the final, ungraded, because short answer is not tested in the quizzes.
• Take notes — slides won't cover everything. "I will try to make slides as clear as possible, covering most of the stuff, but of course some things I'll be explaining here, they won't be exactly written there. I'll get answers, and I'll clarify some points, so it's good to take notes."
• Don't rely on AI. He presented a recent paper (a few months old) using Chinese high-school data: two initially near-identical groups (matched on homework scores, completion time, and exam scores — the green and blue bars "kind of overlapping"); the group that adopted AI scored better on homework and finished faster, but their exam scores dropped. "You can try to use in the quizzes, this will help you... But there will be consequences." AI is acceptable at most as an assistant for a concept you don't understand, translating slides, or generating an extra example — and it "sometimes it's wrong or imprecise."
• He will announce midterm coverage on MyLearningSpace. "I know I'll probably get some emails before the midterm asking what we will cover. So, I'll probably announce there."
• Course-defining questions he expects students to answer by the end: What is money? How are interest rates and financial asset prices determined? Why do banks and other financial intermediaries exist? Why do financial crises occur? How does the Bank of Canada conduct monetary policy? Why do exchange rates change?
• Note the exchange-rate convention — he explicitly warned that different textbooks use opposite standards; this course uses appreciation = rise in the price of the Canadian dollar "unless it changes in the future."
• Money growth ↔ inflation is a long-run relationship, repeated twice: clear over a 10-year span, "not clear as clear as this" in the short term.

Admin & deadlines

• Class: In person, 5:30–6:50 PM. He will always try to finish about 10 minutes early and will stay afterwards for questions.
• Midterm: October 8th (before reading week). In person, closed book, simple calculator permitted. Mix of multiple choice and short answer, covering all material up to that point.
• Grade breakdown: Quizzes 14% (best 7 counted), midterm 37%, final exam 49%. (He twice referred to the quiz component as "these 40%" / "almost everyone get 40%" while stating 14% — the 40% figure appears to be a slip; confirm against the syllabus when posted.)
• Quizzes: Weekly, short (roughly 6–8 questions, not yet fixed), multiple choice only. Two attempts, open book and notes, no AI. A large completion window — "let's say 2 hours," still to be defined — with roughly 6 days to a week to complete each. First quiz expected to be posted starting next week; deadlines will be posted on MyLearningSpace.
• Midterm deferral policy: If you are unable to write the midterm, the weight transfers to the final. He does not recommend it — the final would then be almost your entire grade. You cannot start writing the midterm and then opt to transfer the weight; the option exists only if you don't sit the exam at all.
• Textbook: The Economics of Money, Banking and Financial Markets. Required, but MyLab will not be used.
• Course materials on MyLearningSpace (Brightspace): lecture slides, notes, a reading guide of which textbook topics to read, quizzes, practice questions for the exams, plus instructions and guidelines. Announcements posted there for any changes.
• Slides and syllabus: To be posted "hopefully today or most tomorrow" (i.e. by 2026-09-11).
• Attendance: Expected but not graded; no participation mark. If you miss class, consult the posted materials and get notes from classmates.
• Office hours: Wednesdays 3:15–4:15, office 2050E. His office is inside another office — email ahead or knock on the door/window and he'll open it. Extra or extended hours likely near the midterm and final.
• Email: Begin every subject line with EC223 so he can identify it. Email is for brief questions; deeper questions are better handled after class or in office hours.
• Topic sequence (subject to change): the role of money in the Canadian payment system; the Canadian financial system, markets and instruments; determination of interest rates; the risk and term structure of interest rates; rational expectations and efficient financial markets; financial intermediation and asymmetric information; financial crises; central banks and the Bank of Canada; the money supply process; conventional and unconventional monetary policy; the foreign exchange market. Fiscal policy coverage is uncertain; monetary policy is certain.
• Next lecture: Overview of financial systems, then the topic of money.
• About the lecturer: Igor recently completed his PhD in economics; main research field is international finance and sovereign defaults, with broad interests in applied economics. This is his first course at Laurier, though he has taught Money and Banking before. Students interested in research are welcome to email or raise it in office hours.

Transcribed automatically from the lecture recording. Audio archived at /mnt/porsche/configs/lectures/archive/2026-09/EC 223 - 2026-09-10 - Lecture 01.opus.