Final Review EC223.docx

Why Study Money Banking and Financial Markets Financial Markets Financial marketsmarket in which funds are transferred from people who have an excess of available funds to people who have a shortageEx Bond and stock marketsThe Bond Market and Interest Rates The Bond Market is where interest rates are determinedThe Bond Market also enables corporations and governments to borrow to finance their activitiesA security is a claim on the issuers future income or assetsA bond is a piece of paper certifying that someone who has borrowed money promises to pay it back at some future dateit is nothing more than an IOUAn interest rate is the cost of borrowing or the price paid for the rental of fundsBecause changes in interest rates have important effects on individuals financial institutions businesses and the overall economy it is important to explain fluctuations in interest rates that have been substantial over the past twenty years The Stock Market A common stock represents a share of ownership in a corporationEquity is ownership in a company and can take the form of stocks or sharesA higher price for a firms shares allows the firm to raise a larger amount of funds that can be used to buy production facilities and equipment Structure of the Financial System The financial system comprises of many different types of private sector financial institutions including banks insurance companies mutual funds finance companies and investment banks all of which are heavily regulated by the governmentFinancial intermediariesinstitutions that borrow funds from people who have saved and in turn make loans to others Financial Crises Financial crisesmajor disruptions in financial markets that are characterized by sharp declines in asset prices and failures of many financial and nonfinancial firms Banks and Other Financial Institutions Banksfinancial institutions that accept deposits and make loansUnder the title of banks are chartered banks trust and mortgage loan companies and credit unions and caisses populaires Financial Innovation We study financial innovation because it shows us how creative thinking on the part of financial institutions can lead to higher profits Money and Interest Rates Moneyanything that is generally accepted in payment for goods or services or in the repayment of debtsFiscal Policy and Monetary Policy Monetary Policythe management of money supply and interest ratesThe organization responsible for the conduct of a nations monetary policy is the central bankCanadas central bank is the Bank of Canada Fiscal policyinvolves decisions about government spending and taxationBudget deficitthe excess of government expenditures over tax revenues for a particular time periodIf TG 0 there is a budget deficit or public dissaving Budget surplusarises when tax revenues exceed government expendituresIf TG 0 there is a budget surplus or public saving Budget deficits may result in financial crisis an increase in the growth rate of the countrys money supply a higher rate of inflation and higher interest rates The Foreign Exchange Market For funds to be transferred from one country to another they have to be converted from the currency in the country of origin into the currency of the country to which they are goingForeign exchange marketwhere this conversion takes place and it is instrumental in moving funds between countriesForeign exchange ratethe price of one countrys currency in term of anothers is determinedWe express the exchange rate as units of foreign currency per Canadian dollarWhen the exchange rate increases so that a Canadian dollar buys more units of foreign currency we say that the Canadian dollar has had an appreciationA decline in the exchange rate is associated with a depreciation of the Canadian dollarCanadian dollar Consumer Canadian businesses Canadian jobs Weak Dislike Foreign goods are expensive Like Excel Strong Like Foreign goods are cheaper Dislike DecreaseBusiness Cycles The Business Cyclethe pattern of ups and downs in overall economic activity Trenda repeated movement in a time series variableThe four phases of the business cycle are peak recession trough and expansion Peaks and troughs are considered the turning points of the business cycle A recession is at least two quarters of negative output growth