PrinciplesofMoneyandBanking - C Core Principle 3...

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Chapter 1 Cont. Five Core Principles of Money and Banking 1. Time has value 2. Risk requires compensation 3. Information is the basis for decisions 4. Markets determine prices and allocation resources a. Market economy- law of supply and demand b. Command economy- government sets prices and quantity 5. Stability improves welfare A. Core Principle 1: Time has value a. Time affect the value of financial instruments b. Interest is paid to compensate the lender for the time you have their money c. Chapter 4 develops an understanding of interest rates and how to use them B. Core Principle 2: Risk Requires compensation a. In a world of uncertainty, individuals will accept risk only if they are compensated b. In the financial world, compensation comes in the form of explicit payments: the higher the risk the bigger the payment
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Unformatted text preview: C. Core Principle 3: Information is the basis for decisions a. The more important decision, the more information we gather b. Collection and processing of information is the foundation of the financial system D. Core Principle 4: Markets determine prices and allocation resources a. Markets are the core of the economic system b. Markets channel resources and minimize the cost of gathering information and making transactions c. The better developed the financial markets, the faster the country will grow E. Core Principle 5: Stability improves welfare a. A stable economy reduces risk and improves everyone’s welfare b. Financial instability in the autumn of 2008 triggered the worse global downturn since the Great Depression c. A stable economy grows faster than an unstable one...
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This note was uploaded on 03/02/2011 for the course ECON 121 taught by Professor Labadie during the Spring '10 term at GWU.

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