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Questions and Answers
What is the definition of money according to economists?
What is the definition of money according to economists?
Money always maintains its value regardless of inflation.
Money always maintains its value regardless of inflation.
False
What is the primary function of money as a medium of exchange?
What is the primary function of money as a medium of exchange?
What is the role of financial markets?
What is the role of financial markets?
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______ are short-term debt instruments of the government issued in 1, 3, and 6 months.
______ are short-term debt instruments of the government issued in 1, 3, and 6 months.
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What are the functions of financial intermediaries?
What are the functions of financial intermediaries?
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Which of the following are types of depository institutions?
Which of the following are types of depository institutions?
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Depository institutions primarily raise funds through selling stocks and bonds.
Depository institutions primarily raise funds through selling stocks and bonds.
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Credit Unions are small cooperatives lending institutions that acquire funds from deposits (shares) and primarily make __________ loans.
Credit Unions are small cooperatives lending institutions that acquire funds from deposits (shares) and primarily make __________ loans.
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What is the main reason for government regulation of financial markets?
What is the main reason for government regulation of financial markets?
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Match the following investment intermediaries with their primary activities:
Match the following investment intermediaries with their primary activities:
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Study Notes
Introduction to Money and Payments System
- Money is anything that is generally accepted in payment for goods or services or in the repayment of debts.
- Functions of money:
- Medium of exchange: facilitates economic efficiency by minimizing time spent in exchanging goods and services.
- Unit of account: measures value in the economy.
- Store of value: a repository of purchasing power over time.
- Standard for deferred payments: facilitates credit transactions.
Evolution of Payments System
- Commodity money: made up of precious metals or another valuable commodity.
- Paper money: carried a guarantee that it was convertible into coins or a fixed quantity of precious metal.
- Fiat money: paper money decreed by governments as legal tender, but not convertible into coins or precious metal.
- Electronic payments: enabled by technological advancements.
- E-money: money that exists in electronic form (e.g. debit cards, smart cards, e-cash).
Measuring Money
- The problem of measuring money: what makes money, money is that people believe it will be accepted by others when making payments.
- Money aggregates:
- M1: paper money and coins in the hands of the non-public, demand deposits, and traveler's checks.
- M2: includes M1, small denomination time deposits, and certificates of deposits.
- M3: includes M2, large denomination time deposits, and repurchase agreements.
Financial Markets
- Financial markets: channel funds from those with surplus funds to those with a shortage of funds.
- Importance of financial markets:
- Promotes economic efficiency and economic welfare.
- Allows funds to be channeled to people who have investment opportunities but lack enough funds.
Structure of Financial Markets
- Determined by:
- What it issues: debt and equity markets.
- How it is issued: primary and secondary markets.
- Way it is organized: exchanges and over-the-counter markets.
- Maturity of securities: money markets and capital markets.
Financial Market Instruments
- Money market instruments:
- Treasury bills: short-term debt instruments of the government.
- Negotiable Bank Certificates of Deposit: debt instrument sold by a bank to depositors.
- Commercial Paper: short-term debt instrument issued by large banks and well-known corporations.
- Bankers' Acceptances: bank drafts, a promise of payment similar to a check.
- Repurchase Agreements (Repos): short-term loans with maturity of less than 2 weeks.
- Capital market instruments:
- Stocks: claim on the net income and assets of a firm.
- Mortgages: loan to households/firms for purchasing housing, land, or other real structures.
- Corporate Bonds: long-term bonds issued by corporations with strong credit ratings.
- Convertible Bonds: allowing the holder to convert them into a specified number of shares of stock at any time up to the maturity date.
- Government Securities: long-term debt instruments issued by the government to finance deficits.
Financial Intermediaries
- Form: indirect way of channeling funds.
- Functions:
- Reduce transaction costs.
- Risk sharing/asset transformation: allows for diversification.
- Overcome asymmetric information problems.
- Types of financial intermediaries:
- Depository institutions: commercial banks, savings and loan associations, mutual savings banks, and credit unions.
- Contractual savings institutions: pension funds, insurance companies, and government retirement funds.
- Investment intermediaries: finance companies, mutual funds, and investment banks.
Regulation of Financial System
- Reasons for regulation:
- To increase the information available to investors.
- To ensure the soundness of the financial system.
- Types of regulations:
- Restriction on entry.
- Disclosure.
- Restriction on assets and activities.
- Deposit insurance.
- Limit on competition.
- Restrictions on interest rates.
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Description
Learn about the concept of money, its functions, and the evolution of payment systems. Understand the role of money in facilitating economic efficiency and transactions.
