econ330 study guide

Econ330 study guide - What are the five parts of the Financial System Each part plays a fundamental role in our economy 1 Money pay for purchases

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What are the five parts of the Financial System? Each part plays a fundamental role in our economy 1. Money – pay for purchases and pay for wealth 2. Financial instruments – transfer resources from savers to investors and transfer risk to those who are best equipped to bear it, a security is a claim on the issuer’s future income or assets (bond, stocks, bank loans, commercial paper) and a bond is a debt security that promises to make payments periodically for period of time (mortgages and insurance policies) 3. Financial markets – allow us to buy and sell financial instruments quickly and cheaply (NYSE) 4. Financial institutions – provide services like access to financial markets and collection of info about borrowers to ensure that they are credit worthy (banks – accept deposits and make loans, securities firms, and insurance companies), mutual funds pull savings of large number of investors 5. Central banks – monitor and stabilize the economy (Federal Reserve System), began by monarchs to finance wars, now control the availability of money and credit to ensure low inflation, high growth, and stability of the financial system Why is a well functioning financial system important? 1. Facilitate payments – trade value for value, checking accounts (ATMs, credit cards) 2. Channel funds from savers to borrowers – trade value for a promise, 3. Enables risk sharing—insurance and forwards contracts What are the five core principles of money and banking? 1. Time – Time has value it affects the value of financial transactions (interest) 2. Risk – Risk Requires Compensation investors must be paid to assume risk, the higher the risk, the bigger the payment required (car insurance), charge a higher rate if chance borrower will not repay 3. Information – Information is the basis for decisions 4. Markets – Markets Set Prices and Allocate Resources gather info from individual participants and aggregate it into a set of prices that signals what is valuable, sources of information 5. Stability – Stability improves welfare stability is desirable, relates to risk, a stable economy grows faster Chap. 2 Understand what money is, how we use it, and how we measure it Money= anything that can readily be used to make economic transactions, stock concept, not the same as wealth or income, total collection of pieces of property that serve to store value Income = flow of earning per unit of time Wealth= value of assets – liabilities What are the 3 characteristics of money?
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1. Means of payment – primary use of money, finalizes payments so buyers and sellers have no further claim on each other 2. Unit of Account – used to quote prices and record debts, standard of value 3. Store of Value – used to move purchasing power into the future, retain its worth from day to day, liquidity is a measure of the ease with which an asset can be turned into a means of payment What is the payments system? The web of arrangements that allow for the exchange of goods and services and
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This note was uploaded on 12/01/2010 for the course ECON 305 taught by Professor Terrell during the Fall '08 term at Maryland.

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Econ330 study guide - What are the five parts of the Financial System Each part plays a fundamental role in our economy 1 Money pay for purchases

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