Lecture 3-Macroeconomics and the financial system.pdf

Lecture 3-Macroeconomics and the financial system.pdf -...

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30-Jan-18 1 MACROECONOMICS LECTURE 3 MACROECONOMICS AND THE FINANCIAL SYSTEM CONTENTS OF THE LECTURE 1. The size of the financial system 2. Financial contracts and financial interconnectedness 3. A map of the UK financial system CONTENTS OF THE LECTURE 1. The size of the financial system 2. Financial contracts and financial interconnectedness 3. A map of the UK financial system
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30-Jan-18 2 1. THE SIZE OF THE FINANCIAL SYSTEM UK residents earn around £1 trillion in wages per year. What is approximately the value of the balance sheets of the UK financial firms? (a) £3 trillion (b) £10 trillion (c) £20 trillion 4 Question 1. THE SIZE OF THE FINANCIAL SYSTEM The size of the UK financial system has grown rapidly in recent decades. The UK financial system is large compared to other advanced economies, such as the US, France and Japan, but is comparable to other countries with a historic specialisation in financial services, such as Switzerland. 5 The size of the financial system CONTENTS OF THE LECTURE 1. The size of the financial system 2. Financial contracts and financial interconnectedness 3. A map of the UK financial system
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30-Jan-18 3 2. FINANCIAL CONTRACTS AND FINANCIAL INTERCONNECTEDNESS Suppose that we have the following 6 economic agents: Two households: Household 1 and Household 2 Two non-financial companies: Ed’s Beds and Anne’s Van’s Two financial companies: Megabank and Unit Trust 7 2. FINANCIAL CONTRACTS AND FINANCIAL INTERCONNECTEDNESS Financial Contract 1: Mortgages Household 1 borrows money from Megabak in the form of a mortgage, which is used to purchase a house from Household 2.
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