Chapter 1 Summary/Notes

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Economics for Management Studies
Jack Parkinson

Chapter 1: Why Study Money, Banking, and Financial Markets? WHY STUDY FINANCIAL MARKETS? N Financial Markets o Markets in which funds are transferred from people who have excess of available funds to people who have a shortage. o Crucial to promoting greater economic efficiency by channelling funds from people who do not have a productive use for them to those who do. o When functioning well, it serves as a key factor in producing high economic growth. o Poorly performing financial markets are one reason that many countries in the world remain desperately poor. o Activities in financial markets also have direct effects on personal wealth, the behaviour of businesses and consumers, and the cyclical performance of the economy. o i.e. bond and stock markets The Bond Market and Interest Rates N Security o Also known as a financial instrument. o o]K}LZ]ZZ[Z]L }K}ZZZ: N Assets o Any financial claim or piece of property that is subject to ownership. N Bond o A debt security that promises to make payments periodically for a specified period of time. N Bond Market o Especially important to economic activity because it enables corporations and governments to borrow to finance their activities. o Where interest rates are determined. N Interest Rates o The cost of borrowing. o The price paid for the rental of funds (usually expressed as a percentage of the rental of $100 per year). o i.e. mortgage interest rates, car loan rates, and interest rates on many different types of bonds o Have an impact on the overall health of the economy because they affect L}}Lo }LZKZ[ ]oo]L2LZZ}ZL}ZoZ}Z]LZZZ[]LZKL ]Z]}LZ: o ,]2Z]LZZ; Could deter you from buying a house because the cost of financing it would be high. Could encourage you to save because you can earn more interest income by putting aside some of your earnings as savings. May cause a corporation to postpone building a new plant that would ensure more jobs. 1
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