im3 - Chapter 3 Overview of the Financial System Overview...

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Overview of the Financial System Overview This chapter gives a comprehensive overview of the financial system. Its purpose is to introduce students to the twin roles of the financial system: (1) matching savers and borrowers, and (2) providing risk- sharing, liquidity, and information services. The structure and operation of financial markets and financial intermediaries are explained in terms of this framework. Parts II and III of the book make considerable use of this material, so it is important that students grasp the economic role that the financial system plays. This knowledge will provide them with a better understanding of the material than comes from the “laundry list” approach to describing financial markets and financial institutions found in some other texts. Instructors of courses that emphasize financial institutions will probably want to spend considerable time working through the details on financial institutions set out in this chapter. Instructors of courses that emphasize policy questions may want to use these sections of the chapter mainly to give students a brief overview of the financial system. Students can use the chapter to refer back to while studying later chapters if they need a brief definition of a particular financial asset or financial intermediary. Important points made in the chapter include: the role of financial markets in providing the services of risk sharing, liquidity, and information to borrowers and lenders; the distinction between direct finance through financial markets and indirect finance through financial intermediaries; the classification of financial markets into primary or secondary, auction or over-the-counter, money or capital, and cash or derivative; examples of types of financial intermediaries and types of assets traded in money and capital markets; recent developments in financial innovations; and the objectives of financial regulation and its effects. Outline I. What is the Purpose of the Financial System? A) The financial system provides channels to transfer funds from individuals and groups who have saved money to individuals and groups who want to borrow money. B) Savers are suppliers of funds, providing funds to borrowers in return for promises of repayment of even more funds in the future. C) Borrowers are demanders of funds for consumer durables, houses, or business plant and equipment, promising to repay borrowed funds based on their expectation of having higher incomes in the future. D) The promises of repayment that borrowers give to savers are liabilities to the borrowers and assets to the savers. E) Financial markets issue claims on individual borrowers directly to savers. F)
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im3 - Chapter 3 Overview of the Financial System Overview...

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