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EC223 (81)
Chapter 1

Chapter 1 EC223.docx

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Wilfrid Laurier University
Angela Trimarchi

EC223 Chapter 1 – Why Study Money, Banking, and Financial Markets Week 1 Why Study Financial Markets? -Financial markets – market in which funds are transferred from people who have an excess of available funds to people who have a shortage -Ex. Bond and stock markets -Well-functioning financial markets are a key factor in producing high economic growth and poorly performing financial markets are one reason that many countries in the world remain desperately poor The Bond Market and Interest Rates -A security is a claim on the issuer’s future income or assets -A bond is a debt security that promises to make payments periodically for a specified period of time -An interest rate is the cost of borrowing or the price paid for the rental of funds -There are many interest rates in the economy – mortgage interest rates, car loan rates, etc. -Because changes in interest rates have important effects on individuals, financial institutions, businesses, and the overall economy, it is important to explain fluctuations in interest rates that have been substantial over the past twenty years -Because interest rates have a tendency to move in unison, economists frequently lump interest rates together and refer to “the” interest rate The Stock Market -A common stock represents a share of ownership in a corporation -It is a security that is a claim on the earnings and assets of the corporation -It is a place where people get rich – and poor very quickly -The stock market is 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 -A higher price for a firm’s shares allows the firm to raise a larger amount of funds that can be used to buy production facilities and equipment Why Study Financial Institutions and Banking? Structure of the Financial System -The financial system comprises of many different types of private sector financial institutions, including banks, insurance companies, mutual funds finance companies, and investment banks, all of hich are heavily regulated by the government -Financial intermediaries – institutions that borrow funds from people who have saved and in turn make loans to others Financial Crises -Financial crises – major disruptions in financial markets that are characterized by sharp declines in asset prices and failures of many financial and non-financial firms -Financial crises have been a feature of capitalist economies for hundreds of years and are typically followed by the worst business-cycle downturns Banks and Other Financial Institutions -Banks – financial institutions that accept deposits and make loans. -Under the title of banks are chartered banks, trust and mortgage loan companies, and credit unions and EC223 Chapter 1 – Why Study Money, Banking, and Financial Markets Week 1 caisses populaires -Banks are the most important – most used Financial Innovation -We used to have to go to the bank and talk to the teller to take out money – but now we use ATMs -We now d
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