1294410369877_Chapter1_Instructor_Notes - CHAPTER 1 AN...

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________________________________________________________________________________________________ 1 CHAPTER 1: AN INTRODUCTION TO MONEY AND THE FINANCIAL SYSTEM In reading Chapter 1, taking time to think about the ideas presented will pay dividends throughout the remainder of the term. In particular, the Five Core Principles presented in this chapter hold the key to your success in this course. But even more importantly, these five principles almost surely hold the key to your financial success in life. Why? Because while you could learn “facts” about the current structure of the financial system and how this structure affects you, by the time you might be able to apply these facts (say in five or ten years, when you will have achieved a good measure of success) they may no longer describe the financial system. After all, markets evolve and what is true at one time may well be irrelevant later. By learning basic principles and understanding how they help you understand evolving markets, you will be much better positioned to continue to capitalize on your initial successes. At every step of the text, you will use one or more of these principles to gain insights into how modern financial systems are organized, how they have evolved to their current states, and how to understand subsequent changes. A. T HE B ASICS This chapter has two major topics as well as an important appendix. First, a financial system has six key parts. They are: money, financial instruments, financial markets, financial institutions, regulatory agencies, and a central bank. Second, the financial system and how it interacts with the rest of the economy is learned most easily by understanding and applying Five Core Principles: (1) Time has value; (2) Risk is not undertaken without compensation; (3) Information is the basis for making decisions; (4) Markets efficiently allocate resources by determining prices; and (5) Stability enhances our welfare or well-being. Finally, the chapter appendix presents a definition of gross domestic product (GDP), including the distinction between “nominal” and “real” GDP. B. S OLIDIFY Y OUR K NOWLEDGE DISCUSSION/EXTENSIONS OF THE BASICS Let’s think in detail first about the key elements of the financial system. These are listed below, along with a brief discussion of each. Money is an asset widely used for buying things (a “means of payment”). Money being an asset means that it acts as a store of value. Bury it in a can in the back yard today, dig it up a couple of years later, and it will still be accepted for payments – it has retained value. Being widely acceptable means money is used throughout the economy. Young children might be able to use baseball cards when buying Xbox games from their friends, but most participants in the economy will not accept the cards as payments.
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Chapter 1: An Introduction to Money and the Financial System ________________________________________________________________________ 2 Baseball cards are not widely used even if a few people accept them in trades. Money as
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1294410369877_Chapter1_Instructor_Notes - CHAPTER 1 AN...

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