Introduction to Macroeconomics and Finance

Basic Macro Concepts

• Nominal GDP is calculated using current prices.
• Real GDP is calculated using constant prices, usually a benchmark year.
• Inflation is the percentage increase in the price level of an economy, creating a difference between nominal and real measures.
• Two measures of aggregate price levels are the GDP deflator and the Consumer Price Index (CPI).

Basic Financial Concepts

• Financial markets transfer funds from those with excess funds to those needing them.
• A security (financial instrument) is a claim on future income, like stocks and bonds.
• A share (stock) is a claim on a corporation's residual earnings.
• A bond is a debt security promising periodic payments.
• Interest rate is the cost of borrowing or rental price of funds.

Financial Intermediation, Innovation, and Crises

• Financial intermediaries borrow funds from savers and lend to borrowers.
• Banks accept deposits and make loans.
• Other financial institutions include insurance companies, finance companies, pension funds, and mutual funds.
• Financial innovation creates new financial products, like ATMs, tele-banking, and online banking, often improving efficiency.
• Collateralised Debt Obligations (CDOs) are an example of transferring risks.
• Financial crises include sharp declines in asset prices and sudden failures of firms.

Fiscal Policy and Monetary Policy

• Monetary policy manages the money supply and interest rates, conducted by central banks.
• Fiscal policy involves government spending and taxation.

Structure of Financial Markets

• Debt markets use bonds, mortgages, and loans.
• Equity markets involve stocks and shares.
• Primary markets underwrite securities, while secondary markets bring liquidity and price discovery.
• Exchanges (e.g., NYSE, LSE) and OTC markets facilitate trading.
• Money markets handle short-term instruments, while capital markets involve longer-term ones.

Function of Financial Intermediaries

• Financial intermediaries lower transaction costs by acting as intermediaries.
• They offer economies of scale and scope.
• They also provide liquidity services.
• Intermediaries reduce investor risk and deal with asymmetric information problems.

Money and its functions

• Money is anything generally accepted as payment for goods or services, or debt repayment.
• This includes currency (paper bills and coins) as one type of mone.
• Wealth are assets that store value, while income is a flow of earnings.

Measuring Money

• Monetary aggregates measure liquidity.
• M1 includes currency, traveler's checks, demand deposits, and other checkable deposits.
• M2 includes M1 plus small denomination time deposits, savings deposits, money market deposit accounts, and money market mutual fund shares.

Regulation of the Financial System

• Regulations aim to reduce adverse selection and moral hazard problems.
• They also monitor financial intermediaries, enforce regulations.

This quiz covers essential macroeconomic concepts such as GDP calculations, inflation, and price levels. Additionally, it delves into basic financial principles, including the role of financial markets and instruments like stocks and bonds. Test your understanding of these foundational topics in economics and finance.