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MoneyandFinancialSystem - o Government regulates this •...

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Money and the Financial System Money - unit of account; a medium of exchange; use to conduct a transaction; barter-trade (exchange of goods for goods); store their wealth; most liquid o Currency- coins and paper money o Fiat money- money because the government says it’s money, not backed by anything o Gold (commodity money)- Goldsmith- created vault Fractional reserve system- deposits are not backed by 100% reserve s Financial Instruments - allow us to transfer sources of wealth o Bond- debt IOU o Stock- ownership (equity) o “Savers”- people who have the wealth to transact; saver is letting consumer use the money so the consumer have to pay interest o Intertemporal Financial Market - exchange of goods and services; where buyers and sellers meet Financial Institutions - banks and insurance companies- insure the transfer; makes sure the borrower is credit worthy
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Unformatted text preview: o Government regulates this • Regulatory Agencies- o Insider trading-knowing something that no one else does Undermines confidence in the market Ex. Martha Stewart o SEC- Securities and Exchange Commission • Central Banks- System o Private banks were formally owned by monarchs who wanted to fund “conquests” o History of being secretive The Core Principles of Money and Banking 1. Time has value. scarcity, limited quantity, time also effect the value of your money a. (if you borrow money from the bank your loan rate will add interest to that money) The value of money in 10 years is different than in 5 years 2. Risk requires compensation. We will learn how to measure risk; wants to be compensated if taking on the risk a. Bond is debt- how risky is the debt- require very high interest rate (risk trimming)...
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