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Economics for Management Studies
Jack Parkinson

Lecture 1 Why study financial markets? 1. Financial markets channel funds from savers to investors. Thereby promoting economic efficiency 2. Financial markets are a key factor in producing economic growth 3. Financial markets affects personal wealth and behavior of business Financial securities - Assets • A security is a claim on the issuer’s future income or assets • A financial asset is any financial claim that is subject to ownership The bond markets & Interest rates • A bond is a debt security that promises periodic payments for a specified time (the bond market is where interest rates are determined) • An interest rate is the cost of borrowing (or the price paid on the rental of funds) • High interest rates could deter purchases, or investment, and encourage savings • Different interest rates have a tendency to move in unison, perhaps because of this correction of interest rates, economists frequently lump interest rates together and refer to “the” interest rate The stock market • Common stock represents a share of ownership in a corporation • A stock is security that is a claim on the earnings and assets of that corporation • Corporation issue & sell stock to the public to raise funds to finance their activities • The stock market is also an important factor in business investment decisions because the price of shares affects the amount of funds that can be raised by selling newly issued stock to finance investment spending (daily vote of confidence) • The stock market is a place where people get rich and poor quickly with considerable fluctuations in stock prices, which affect the size of people’s wealth (and their willingness to spend) Financial institutions and banking • Banks and other financial institutions are what make financial markets work • Financial intermediaries: institutions that channel funds from people who have saved to parties who wish borrow (indirect finance) • Financial crises: disruption of the financial markets that lead to decline in asset prices (can cause significant short-term disruptions in the real economy – non neutrality) • Banks: institutions that accept deposits and make loans (chartered banks, trust and mortgage loan companies, and credit unions & caisses populaires), these are the financial intermediaries that the average person interacts with most frequently • Other Financial Intermediaries: insurance companies, finance companies, pension funds, mutual funds and investment banks • Financial innovation: in particular, dramatic improvements information technology have led to new means of delivering financial services electronically (e-finance) and higher profits result from creative thinking • Changes in Rules & Regulations also influence how financial institutions behave and compete with each other, how we interact with them, how profitable they are, and how much benefit their customers gain (from their services) • Innovations impact the velocity of money (M*V = P*Y) Money and Monetary policy • Money: anything that is generally accepted in payment for goods and services or in the repayment of debts • Evidence suggests that
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