Podcast
Questions and Answers
Which of the following best describes the primary function of financial markets?
Which of the following best describes the primary function of financial markets?
- To serve as a tool for increasing the money supply.
- To provide a venue for governments to regulate economic activity.
- To facilitate the transfer of funds from those with excess funds to those with a need for funds. (correct)
- To ensure all citizens have equal access to financial resources.
How do interest rates primarily impact economic activity?
How do interest rates primarily impact economic activity?
- They solely affect government spending habits.
- They determine the value of foreign currencies.
- They influence consumers' willingness to spend and save, as well as businesses' investment decisions. (correct)
- They only impact the stock market's performance.
What is the fundamental role of common stock in a corporation?
What is the fundamental role of common stock in a corporation?
- It guarantees a fixed rate of return to the investor.
- It represents a debt owed by the corporation to its shareholders.
- It is a short-term loan from investors to the corporation.
- It signifies ownership in the corporation, entitling the holder to a share of the residual earnings and assets. (correct)
What is the main function of the foreign exchange market?
What is the main function of the foreign exchange market?
Which of the following is NOT a typical function of financial intermediaries?
Which of the following is NOT a typical function of financial intermediaries?
How can financial innovation impact the financial system?
How can financial innovation impact the financial system?
What is the defining characteristic of a financial crisis?
What is the defining characteristic of a financial crisis?
What role does money play in business cycles?
What role does money play in business cycles?
How does a continual increase in the money supply typically affect the aggregate price level?
How does a continual increase in the money supply typically affect the aggregate price level?
What is the relationship between money growth and interest rates?
What is the relationship between money growth and interest rates?
What is the main difference between monetary policy and fiscal policy?
What is the main difference between monetary policy and fiscal policy?
What is a budget deficit?
What is a budget deficit?
How does a country's choice of exchange rate policy affect its monetary policy?
How does a country's choice of exchange rate policy affect its monetary policy?
What are capital controls?
What are capital controls?
Why is it important to study international finance?
Why is it important to study international finance?
Flashcards
Financial Markets
Financial Markets
Markets where funds are transferred between those with excess funds and those needing funds.
Security (Financial Instrument)
Security (Financial Instrument)
A claim on the issuer's future income or assets.
Bond
Bond
A debt security that promises periodic payments over a specified time.
Interest Rate
Interest Rate
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Common Stock
Common Stock
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Foreign Exchange Market
Foreign Exchange Market
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Foreign Exchange Rate
Foreign Exchange Rate
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Financial Intermediaries
Financial Intermediaries
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Financial Innovation
Financial Innovation
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E-finance
E-finance
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Financial Crises
Financial Crises
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Money
Money
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Monetary Theory
Monetary Theory
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Business Cycle
Business Cycle
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Monetary Policy
Monetary Policy
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Study Notes
- Financial markets facilitate the transfer of funds from entities with excess capital to those in need.
Types of Financial Markets
- Bond Market
- Stock Market
- Foreign Exchange Market
The Bond Market and Interest Rates
- A security represents a claim on the issuer's future income or assets.
- A bond is a debt security with periodic payments over a specified time.
- The bond market enables businesses and governments to borrow for financing activities.
- An interest rate is the cost of borrowing funds.
- Interest rates influence consumer spending/saving and business investment decisions, impacting the economy's health.
The Stock Market
- Common stock signifies ownership in a corporation.
- A share of stock represents a claim on the corporation's residual earnings and assets.
- Corporations issue stock to raise funds for financing activities.
The Foreign Exchange Market
- The foreign exchange market enables the transfer of funds between countries using foreign exchange rates.
- A foreign exchange rate is the value of one currency in terms of another.
Financial Institutions and Banking
- Financial intermediaries borrow funds from savers and lend to those who need funds.
- Banks accept deposits and provide loans.
- Other financial Institutions include insurance companies, finance companies, pension funds, mutual funds and investment companies
- Financial institutions are regulated by the government.
- Financial innovation involves developing new financial products and services.
- E-finance enables electronic delivery of financial services, like ATM and online banking.
- Financial crises involve major disruptions in financial markets, asset price declines, and firm failures.
Money and Monetary Policy
- Money, as a payment for goods, services, or debt repayment, influences business cycles.
- Monetary theory links money supply changes to economic activity and the price level.
- Business cycles (upward and downward trends) affect output, employment, and growth.
Money, Business Cycles, and Inflation
- The aggregate price level is the average price of goods/services in an economy.
- A continuous increase in the money supply raises the price level causing inflation.
- There is a correlation between money supply and the price level.
Money and Interest Rates
- Interest rates represent the price of money.
- The rate of money growth is a determinant of interest rates.
Fiscal Policy and Monetary Policy
- Monetary policy involves managing the money supply and interest rates.
- In the U.S., the Federal Reserve System (Fed) conducts monetary policy.
- Fiscal policy concerns government spending and taxation.
- A budget deficit occurs when expenditures exceed revenues.
- A budget surplus occurs when revenues exceed expenditures.
- Deficits are financed through borrowing.
International Finance
- Financial markets are increasingly integrated globally.
- The international financial system impacts domestic economies.
- Exchange rate policy affects monetary policy.
- Capital controls impact domestic financial systems and economic performance.
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