econ330 study guide

econ330 study guide - What are the five parts of the...

Info icon This preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
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?
Image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
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?
Image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern