Chapter 1 Textbook Notes PDF

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Chapter 1: Why Study Money, Banking and Financial SystemsWhy Study Financial Markets? Introduction  Financial markets are crucial to promoting greater economic efficiency  Well functioning financial markets are a key factor in producing high economic growth  Poor functioning financial markets are...

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Chapter 1: Why Study Money, Banking and Financial Systems Why Study Financial Markets? Introduction  Financial markets are crucial to promoting greater economic efficiency  Well functioning financial markets are a key factor in producing high economic growth  Poor functioning financial markets are one of the reasons that many countries in the world remain desperately poor  Activities in markets have direct effect on o Personal wealth o Behaviour of businesses and consumers o Cyclical performance of the economy Debt Markets and Interest Rates  Debt markets are referred to as bond markets since they enable corporations and governments to borrow money to finance their activities and because it is where interest rates are determined  Many interest rates are found in the economy o Mortgage interest rates o Car loan rates o Interest rates on many different types of bonds  Interest Rates o High interest rates mean cost of financing is high o Different interest rates have a tendency to move in unison but often differ substantially The Stock Market  A common stock represents a share of ownership in a corporation  Issuing and selling ais a way for corporations to raise funds to finance activities  Stock prices are extremely volatile  Fluctuations in stock prices affect the size of people’s wealth and willingness to spend  Price of shares affects the amount of funds that can be raised by selling newly issued stock to finance investment spending Why Study Financial Institutions and Banking Structure of the Financial System  Comprised of o Banks o Insurance companies o Mutual funds o Finance companies o Investment banks  Financial intermediaries are institutions that borrow funds from people who have saved and in turn make loans to people who need funds Banks and Other Financial Institutions  The term banks includes o Charted banks

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o Trust and loan companies o Credit unions o Caisses populaires Average person interreacts with most frequently

Financial Innovation  Financial innovation takes place in the improvements in information technology and how it has led to need financial products and the ability to deliver financial services electronically through what has become known as e-finance Financial Crises  Financial crises have been a feature of capitalist economies for hundred of years  August 2007, the United States economy was hit with a crises o Defaults in subprime residential mortgages led to major losses in financial institutions Why Study Money and Monetary Policy? Introduction  Money is linked to changes in economic variables that affect all of us and are important to the health of the economy Money and Business Cycles  In 1981-1982, aggregate output fell causing the unemployment rate to rise to 12%  Money plays an important role in generating business cycle  Rate of money growth declined before most recessions o Declines in the rate of money growth are not followed by a recession Money and Inflation  Aggregate price level has increased over the last decades  inflation

Chapter 1 Vocabulary Aggregate Output The total production of final goods and services in an economy Asset A financial claim or piece of property that is a store of value Banks Financial institutions that accept money deposits and make loans (such as commercial banks, trust and mortgage loan companies and credit unions and caisses populaires) Bond A debt security that promises to make periodic payments tot the holder for a specified period of time Business Cycle The upward and downward movement of aggregate output produced in an economy

Common Stock A security that is a claim on the earnings and assets of a company E-Finance A new means of delivering financial services electronically Financial Crises A major disruption in financial markets that is characterised by sharp declines in asset prices and the failures of many financial and nonfinancial firms Financial Innovation The introduction of new types of financial products in an economy Financial Intermediaries Institutions (such as banks, insurance companies, mutual funds, pension funds, and finance companies) that borrow funds from people who have saved and then make loans to others Financial Markets Markets in which funds are transferred from people who have a surplus of available funds to people who have a shortage of available funds Interest Rate The cost of borrowing or the price paid for the rental of funds (usually expressed as a percentage per year) Money (Money Supply) Anything that is generally accepted as payment for goods or services or in the repayment of debts Monetary Theory The theory that relates changes in the quantity of money to changes in economic activity Recessions A period during which aggregate output is declining Security A claim on a borrower’s future income that is sold by the borrower to the lender. Also called a financial instrument Stock A security that is a claim on the earnings and assets of a company Unemployment Rate The percentage of the labour force not working...