Money Summary - Chapter 1: Why Study Money, Banking and...

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Chapter 1: Why Study Money, Banking and Financial Markets The Bond Market and Interest Rates Security (Financial instrument) – a claim on the issuer’s future income or assets Bond – A debt security that promises to make payments periodically for a specified period of time Interest Rates – The cost of borrowing The Stock Market Common Stock (Stock) – a share of ownership in a corporation o A security (claim on future earnings and assets of the company) o Can be used to finance projects Stock Market o A financial market where stocks are traded Structure of the Financial Market Financial intermediaries o An institution that borrows money from people who save then lends them as loans to others o Banks (Commercial Banks, Savings and Loans Associations, Mutual Saving Banks) – Accepts deposits and makes loans Financial Innovations o New innovations has improved the financial structure by increasing efficiency E.g. ATM (Automatic Telling Machine) and e-finance allows money to be transferred, deposited, and withdrawn easily. Why Study Money and Monetary Policy Aggregate Output – Total amount of goods and services Unemployment Rate – The percentage of the available labor force unemployed Business Cycle – the upward (increasing) or downward (decreasing) movement of aggregate output o Declining aggregate output – Recession o Increasing aggregate output – Boom The rate of money growth declines before each recession suggesting a relationship between money and the business cycle. However, recessions do not always follow a decline in money growth. Aggregate Price Level (Price Level) – The average price of goods and services in an economy Inflation – A continual increase in the price level / Inflation Rate – the rate which price level changes Monetary Policy – the management of money and interest rates controlled by the central bank (e.g. the FED) Fiscal Policy – Involves decisions about government spending and taxation Budget Surplus – Tax revenue exceeds government spending Budget Deficit – Government spending exceeds tax revenue Why Study International Finance? The foreign exchange market – converts currency of a country to that of another, used to move funds between countries Foreign exchange rate – the price of a country’s currency in terms of another
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Chapter 2: An Overview of the Financial System Function of Financial Markets Allocates money from people who have excess money to those who have a shortage of funds Allows the movement of funds from people with no investment opportunities to those who have them Efficient Allocation of Capital Direct Finance Borrowers borrow directly from lenders by selling securities (financial instruments)
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This note was uploaded on 02/13/2012 for the course ECON 101 taught by Professor Teerana during the Spring '11 term at Thammasat University.

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Money Summary - Chapter 1: Why Study Money, Banking and...

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