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week 1 notes - ECON 330 WEEK 1 NOTES A What do we mean by...

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ECON 330 : WEEK 1 NOTES A. What do we mean by financial markets? a. Markets in which funds are transferred from people who have an excess of available funds to people who have a shortage of funds B. The Bond Market and Interest Rates a. A security (financial instrument) is claim on the issuer’s future income or assets b. A bond is a debt security that promises to make payments periodically for a specific period of time c. An interest rate is the cost of borrowing or the price paid to rent funds. C. The Stock Market a. The stock market represents a share of ownership in a corporation b. A share of stock is a claim on the earnings and assets of the corporation D. The Foreign Exchange Market a. The foreign exchange market is where funds are converted from one currency into another b. The foreign exchange rate is the price of one currency in terms of another currency. c. The foreign exchange market determines the foreign exchange rate. E. Banking and Financial institutions a. Financial intermediaries- are institutions that borrow funds from people who have saved and make loans to others. These include institutions such as banks, insurance companies, mutual funds, pension funds, and finance companies. i. Banks are institutions that accept deposits and make loans F. Money and Business Cycle a. Evidence suggests that money play an important role in generating business cycles. i. Business cycles- the upward and downward movement of aggregate output produced in the economy. b. Monetary theory ties changes in the money supply to changes in aggregate economic activity and the price level. G. What is the relationship between money and inflation? a. The aggregate price level is the average price of goods and services in an economy. b. A continual rise in the price level (inflation) affects all economic players. c. Data shows a connection between the money supply and the price level.
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i. Increase in the money supply increases the price level. A. Money and interest Rates a. Interest rates are the price of money b. Prior to 1980, the rate of money growth and the interest rate on long term treasure bonds were closely tied. i. Since then the relationship is less clear but is still an important determinant of interest rates. B. What is the most important function of financial markets? Are financial markets useful? a. Function of financial markets is to channel funds from economic players that have saved surplus funds to those that have a shortage of funds. b. Financial markets promotes economic efficiency by producing an efficient allocation of capital which increases production C. Function of Financial Intermediaries: Indirect Finance a. Lower transaction costs i. Through Economies of Scale – the reduction in transaction cost per dollar of transaction. As the size of the transactions increases.
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