MGEC71H3 Chapter Notes - Chapter 1: Foreign Exchange Market, Money Supply, Price Level

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Published on 25 Jun 2012
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
issuers 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
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
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 investmentprice of shares affect the
amount of funds that can be raised
5. Considerate fluctuations in stock pricesaffect the size of
peoples 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
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Document Summary

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. 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) These innovations impact the velocity of money (mxv = pxy: money, money anything that is generally accepted in payment for goods and services or in the repayment of debts, money and monetary policy. Evidence suggests that money plays an important role in generating business cycles (movements in aggregate real output. Recessions (unemployment) and booms (inflation) changes in aggregate economic activity lead to: monetary theory relates changes in the quantity of money (supplied) to changes in aggregate sr real economic activity and the price level.

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