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ECON 1000 (181)
Chapter 8

Chapter 8.docx

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Department
Economics
Course
ECON 1000
Professor
Troy Joseph
Semester
Winter

Description
Chapter 8 2. The Stock Market • Stock: claim 2 partial ownership in a firm • Equity Finance: sale of stock 2 raise money • Debt Finance: sale of bonds • Stocks offer the holder higher risk and potentially higher return than bonds • Prices at which shares trade on stock exchanges determined by supply & demand 4 the stock in these companies • Stock Index: computed as an average of a group of stock prices Financial Intermediaries • Financial Intermediaries: financial institutions through which savers can indirectly provide funds 2 borrowers o 2 MOST IMPORTANT FINANCIAL INTERMEDIARIES 1. Banks 2. Mutual funds 1. Banks • Facilitate purchases of G&S by allowing people 2 write cheques against their deposits  banks help create a special asset that people can use as a medium of exchange • Medium of exchange: an item people can easily use 2 engage in transactions 2. Mutual Funds • Mutual Fund: institution that sells shares 2 the public & uses the proceeds 2 buy portfolio of stocks & bonds • If value of portfolio rises, shareholder benefits • if value of portfolio falls, shareholder suffers the loss • primary advantage mutual funds  allows people w/ small amounts of money 2 diversify • second advantage  mutual funds give ordinary people access 2 skills of professional money managers Chapter 8 Saving & Investment in the National Income Accounts Some Important Identities • Y = C + I + G + NX • ASSUMING ECONOMY IS CLOSED…. • Closed Economy: does not interact with other economies, does not engage in international trade in G&S or in international borrowing and lending • b/c closed economy does not engage in international trade, imports & exports = 0 • Y = C + I + G •
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