ECON 2411 Lecture Notes - Lecture 1: Federal Reserve System, Federal Funds Rate, Monetary Policy

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2 Oct 2018
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Chapter 1
Financial markets
o markets in which funds are transferred from people with an excess of available
funds to those with a shortage
Security
o claim on the issuer’s future income
Asset
o financial claim or piece of property that is subject to ownership
Bond
o debt security that promises to make payments periodically for a specific period of
time
Interest rate
o cost of borrowing, or the price paid for the rental of funds
Common stock
o represents a share of ownership in a corporation
Financial intermediaries
o borrow funds from people who saved and in turn make loans to others
Financial crises
o major disruption in financial markets characterized by sharp declines in asset prices
and the failures of financial and non-financial firms
Banks
o financial institutions that accept deposits and make loans
E-finance
o ability to deliver financial services electronically
Aggregate price level
o average price of goods and services in an economy
Inflation
o continual increase in price level
Inflation rate
o rate of change of the price level
Monetary policy
o management of money and interest rates
Central bank
o responsible for the conduct of a nations monetary policy
Federal Reserve System
o United states central bank
Fiscal policy
o decisions about govt. spending and taxation
Budget deficit
o excess of govt. expenditures over tax revenues
Budget surplus
o tax revenues exceed govt. spending
GDP
o measure of aggregate output
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The Bond and Stock Markets
o The Bond Market and Interest Rates
o A bond is a debt security that promises to make payments periodically for a
specific period of time.
o The bond market is especially important to economic activity because it
enables corporations and governments to borrow to finance their activities
and because it is where interest rates are determined.
o The Stock Market
o Common stock represents a share of ownership in a corporation. It is a
security that is a claim on the earnings and assets of the corporation.
o Issuing stock and selling it to the public is a way for corporations to raise
funds to finance their activities
o Stock market is the most widely followed financial market.
o Stock market is also an important factor in business investment decisions
because the price of shares affects the amounts of funds that can be raised by
selling newly issued stock
The Structure of the Financial System
o The financial system is comprised of many different types of private sector financial
institutions like banks, insurance companies, mutual funds, finance companies and
investment banks (all regulated by the govt.)
o Use of financial intermediaries to make loans
Business cycles, Money supply, interest rates and inflation
o Business Cycles
o the upward and downward movement of aggregate output produced in the
economy.
Ex. If output is rising, finding a good job will be easier, and vice versa
o Money Supply(money)
o Anything that is generally accepted in payment for goods/services or in the
repayment of debts
o Inflation
o A continual increase in the price level. A continuing increase in the money
supply can be an important factor causing inflation.
o Interest rates
o The cost of borrowing, or the price paid for the rental of funds.
o Interest rates have an impact on the overall health of the economy because
they affect not only consumer’s willingness to spend or save, but also
businesses investment decisions.
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Chapter 2
Liabilities
o IOU or a debt for the individual or firm that buys them
Capital
o wealth, either financial or physical, employed to produce more wealth
Maturity
o the number of years until the instruments expiration date
Short term
o maturity of less than a year
Long term
o maturity is 10 years or longer
Intermediate term
o between 1 and 10 years
Equities
o claims to share in the net income and the assets of a business
Dividends
o periodic payments made by equities
Primary market
o financial market in which new issues of a security (bond or stock) are sold to initial
buys by corporations bowing the funds
Secondary market
o financial market in which securities that have previously been issued can be resold
Brokers
o agents of investors who match buyers with sellers of securities
Dealers
o link buyers and sellers by buying and selling securities at stated prices
Liquid
o quickness a financial instrument can be converted to cash
Exchanges
o buyers and sellers meet in one central location to conduct trades
Over the counter market
o dealers at different locations stand ready to buy and sell securities to anyone who
comes to them and will accept their prices
Money market
o financial market where only short-term debt instruments are traded
Capital market
o market where longer-term debt instruments and equity instruments are traded
Default
o the party issuing the debt instrument is unable to make interest payments or pay off
the amount owed at maturity
Currency
o paper money or coins
Federal funds rate
o interest rate on federal funds loans
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