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Study Guide

ECON 2035- Final Exam Guide - Comprehensive Notes for the exam ( 36 pages long!)


Department
Economics
Course Code
ECON 2035
Professor
G.Arnold
Study Guide
Final

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LSU
ECON 2035
Final EXAM
STUDY GUIDE

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Chapter 1: Introducing Money and The Financial System
I. Components of the Financial System
A. Financial Assets
1. Money: anything that is generally accepted as payment for a good
or service. Money Supply: The total quantity of money in the
economy
2. Stocks (equities): Financial securities that represent partial
ownership of a corporation
3. Bonds: Financial security issued by a corporation or government
that represents a promise to repay a fixed amount of money
4. Foreign Exchange: Units of foreign currency
5. Securitized loans: are loans that have been converted into
securities, which banks can sell on financial markets. The process of
converting a non-tradable loan into a tradable security is called
securitization.
B. Financial Institutions
1. Financial Intermediaries: A financial firm that borrows funds
from savers and lends funds to borrowers, ex: commercial banks.
a. There are several non-bank financial intermediaries such as:
investment banks, insurance companies, pension funds, mutual
funds, and hedge funds (see pages 8 & 9 in your text)
2. Financial Markets: places for buying and selling securities
a. Financial markets can be either primary market or
secondary market.
b. Primary market: where securities are sold for the first time
i. Example: Initial Public Offering- when a company
sells (issues) stock for the first time
c. Secondary market: where investors buy and sell existing
securities
i. Example: New York Stock Exchange- brokers buy &
sell previously issued stock
C. The Federal Reserve & Other Regulators
1. Regulators
a. Securities & Exchange Commission: regulates financial
markets
b. Federal Deposit Insurance Corporation: insures deposits in
banks
c. Office of the Comptroller of the Currency: regulates federally
chartered banks
d. Federal Reserve System: the central bank for the U.S.
e. The Consumer Finance Protection Bureau: created by
Congress in response to the financial crisis of 20072009 to
protect consumers from fraud or deceptive practices in
financial markets
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2. The Federal Reserve System
a. 12 Federal Reserve district banks, each district has one
president (see page 12 in text)
b. Board of Governors has 7 members, one of which is the
chair. The board of governors is located in D.C.
c. FOMC meeting: Meeting occurs 8 times a year. All 7 board of
governors, the New York District Bank President, and 4 other
district bank presidents vote on monetary policy. Specifically,
they determine the federal funds rate: the interest rate banks
charge each other for loans.
II. Services provided by Financial System
A. Risk Sharing: allows savers to spread and transfer risk.
B. Liquidity: the ease with which an asset can be exchanged for money.
C. Information: facts about borrowers and expectations of returns on
financial assets.
III. 2007-2009 Financial Crisis
A. Origins
1. Bubble: an unsustainable increase in the price of a class of asset
2. Housing Bubble: New home sales and new home prices rose
rapidly, then had a steady decline (see figure 1.3)
3. Decline in housing prices lead to many defaulting on mortgages,
driving down the value of mortgage-backed securities, which caused
banks to suffer heavy losses. Banks began restricted credit to all but
the safest borrowers.
B. Response
1. Troubled Asset Relief Program: treasury provided funds to banks
in exchange for stock (partial ownership).
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