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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increasing efficiency E.g. ATM (Automatic Telling Machine) and e-finance allows money to be transferred, deposited, and withdrawn easily.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
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