ECMC48 Chapter 1.docx

3 Pages

Economics for Management Studies
Course Code
Jack Parkinson

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Chapter 1: Why Study Money, Banking, and Financial Markets 1. Financial Markets a) Function: Channel funds from savers (those who have an excess of available funds) to investors (people who have a shortage), thereby promoting economic efficiency b) As a key factor in producing economic growth and affect personal wealth and behavior of businesses c) Financial Securities (financial instrument) is a claim on the issuer’s future income or asset; financial asset is any financial claim that is subject to ownership i. Bond is a debt security that promises periodic payments for a specified time (in the bond market, interest rates are determined) 1. Interest rate, cost of borrowing 2. High interest rates could deter purchases, or investment and encourage savings 3. Different interest rates tend to move in unison 4. ST interest rates tend to fluctuate more and are lower on average than others ii. Stock Market 1. Common stock represents a share of ownership in a corporation 2. Stock, a claim on the earnings and assets of that corporation 3. Corporations issue & sell stock to the public to raise funds to finance their activities 4. Factor in business investment→price of shares affect the amount of funds that can be raised 5. Considerate fluctuations in stock prices→affect the size of people’s wealth and willingness to spend 2. Financial institutions and banking a) Financial Intermediaries – institutions that channel funds from people who have saved to who wish borrow (Indirect Finance) [Financial Crises – Non neutrality – disruption of the financial markets that lead to decline in asset prices (can cause significant short-term disruptions in the real economy] b) Bank – institutions that accept deposits and make loans (chartered banks, trust and mortgage loan companies, and credit unions & caisses populaires), these are the financial intermediaries that the average person interacts with most frequently c) Other Financial Intermediaries – insurance companies, finance companies, pension funds, mutual funds and investment banks i. Financial Innovation – in particular, dramatic improvements in information technology have led to new means of delivering financial services electronically (e-finance) and higher profits result from creative thinking ii. Changes in Rules & Regulations also influence how financial institutions behave and compete with each other, how we interact with them, how profitable they are, and how much benefit their customers gain (from their services) iii. These innovations impact the velocity of money (MxV = PxY) 3. Money a) Money – anything that is generally accepted in payment for goods and services or in the repayment of debts b) Money and Monetary Policy i. Evidence suggests that money plays an important role in generating busi
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