Why Study Money, Banking, and Financial Markets?
The basic activity of banks is to accept deposits and make loans.
The interest rate on three-month Treasury bills fluctuates more than the other interest rates and is
lower on average. The interest rate on Baa corporate bonds is higher on average than the other
Higher stock prices means that consumers’ wealth is higher and so they will be more likely to
increase their spending.
It makes British goods more expensive relative to American goods. Thus American businesses will
find it easier to sell their goods in the United States and abroad and the demand for their products
When the dollar increases in value, foreign goods become less expensive relative to American
goods; thus you are more likely to buy French-made jeans than American-made jeans. The resulting
drop in demand for American-made jeans because of the strong dollar hurts American jeans
manufacturers. On the other hand, the American company that imports jeans into the United States
now finds that the demand for its product has risen, so it is better off when the dollar is strong.
An Overview of the Financial System
Yes, I should take out the loan, because I will be better off as a result of doing so. My interest
payment will be $4,500 (90% of $5,000), but as a result, I will earn an additional $10,000, so I will
be ahead of the game by $5,500. Since Larry’s loan-sharking business can make some people better
off, as in this example, loan sharking may have social benefits. (One argument against legalizing
loan sharking, however, is that it is frequently a violent activity.)
The principal debt instruments used were foreign bonds which were sold in Britain and
denominated in pounds. The British gained because they were able to earn higher interest rates as a
result of lending to Americans, while the Americans gained because they now had access to capital
to start up profitable businesses such as railroads.
You would rather hold bonds, because bondholders are paid off before equity holders, who are the
They might not work hard enough while you are not looking or may steal or commit fraud.
True. If there are no information or transactions costs, people could make loans to each other at no
cost and would thus have no need for financial intermediaries.
A ranking from most liquid to least liquid is (a), (b), (c), and (d). The ranking is similar for the most
safe to the least safe.