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University of Toronto Scarborough
Economics for Management Studies
Jack Parkinson

Chapter 1 *Why study financial market? - Financial market: markets in which funds are transferred from people who have excess of available funds to people who have a shortage - Financial Market channel funds from savers to investorspromote economic efficiency - It affects personal wealth and behaviour of business - Well-functioning financial markets are a key factor in producing high economic growth *The bond market and interest rates - Security(Financial Instrument): a claim on the issuer’s future income or assets - Assets: any financial claim or piece of property that is subject to ownership - Bond: a debt security that promises to make payments periodically for a specified period of time - The bond market is where interest rates are determined - Interest Rate: the cost of borrowing or the price paid for the rental of funds (Mortgage, car loan interests…) the price over time of borrowing money - Higher Interest Ratedeter purchases or investment, and encourage savings deter (prevent) you from buying a car or house & encourage you to save - Interest rates have an impact on the overall economy because they affect not only consumers’ willingness to spend or save but also businesses’ investment decisions - Short-term interest rates tend to fluctuate more and are lower on average than others - Prior to 1980, the rate of money growth and the interest rate on long-term bonds were closely tied together *The Stock Market - Common Stock(Stock): represents a share of ownership in a corporation - Stock: A security that is a claim on the earnings and assets of the corporation - Issue & sell stocksa way for corporation to raise funds to finance activities - Stock Market: where the earnings of corporation(share of stock) are traded  A place where people get rich and poor quickly with considerable fluctuations in stock prices - Stock prices are extremely volatile(unstable) - 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 *Why study financial institutions and banking? - Banks and other financial institute are what make financial markets work - Without them, financial markets would not be able to move funds from people who save to people who have productive investment opportunities ECMC48 Ch1---1 *Structure of the Financial System - Financial institutions: banks, insurance companies, mutual funds, finance companies, investment banks…(regulated by government) - Financial Intermediaries: institutions that borrow funds from people who have saved and in turn make loans to others (Indirect Finance) - Financial Crises: major disruptions in financial markets that are characterized by sharp declines in asset prices and failure of many financial and nonfinancial firmscan cause significant shor term disruptions in the real economy(non neutrality) *Bank and Other Financial Institutions - Banks: financial institutions that accept deposits and make loans - Including chartered banks, trust, mortgage loan companies, credit unions, caisses popularities *Financial Innovation - Dramatic improvements in information technology have led to new means of delivering financial services electronically and higher profits result from creative thinking - ATM(automated teller machine) - E-Finance: delivering financial services electronically - The innovations impact the velocity of money (MV=PY) *Why study money and monetary policy? - Money: anything that is generally accepted in payment
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