Introduction to Money, Banking, and Financial Markets PDF

Introduction Why Study Money, Banking, and Financial Markets? Why Study Money, Banking, and Financial Markets To examine how financial markets such as bond, stock and foreign exchange markets work To examine how financial institutions such as banks and insurance companies work To...

Introduction Why Study Money, Banking, and Financial Markets? Why Study Money, Banking, and Financial Markets To examine how financial markets such as bond, stock and foreign exchange markets work To examine how financial institutions such as banks and insurance companies work To examine the role of money in the economy Financial Markets A marketplace where buyers and sellers trade financial instruments, such as stocks, bonds, currencies, and derivatives. Investors, companies and governments raise capital, manage risks, and transfer assets over here. Financial Markets Markets in which funds are transferred from people who have an excess of available funds to people who have a shortage of funds Transfers funds from low-valued uses to higher-valued uses (promoting economic efficiency) Promotes economic growth Affect personal wealth Impacts the business cycle The Bond Market and Interest Rates A security (also called financial instrument) 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 Various kinds of interest rates The Stock Market Common stock represents a share of ownership in a corporation A share of stock is a claim on the earnings and assets of the corporation Claim on the earnings and assets of the corporation Common stock share of ownership in a corporation very volatile A place people can get rich/poor quickly The Foreign Exchange Market The foreign exchange market is where funds are converted from one currency into another The foreign exchange rate is the price of one currency in terms of another currency The foreign exchange market determines the foreign exchange rate  Banking and Financial Institutions Financial Intermediaries—institutions that borrow funds from people who have saved and make loans to other people Lowers transaction costs Reduces risk Adverse selection and Moral hazards Banks—institutions that accept deposits and make loans Bank decisions affect the size of the money supply Changes in the money supply affect the price level, inflation rate, level of output and the rate of economic growth Other Financial Institutions—insurance companies, finance companies, pension funds, mutual funds and investment banks Financial Innovation—in particular, the advent of the Money and Business Cycles Evidence suggests that money plays an important role in generating business cycles Recessions (unemployment) and booms (inflation) affect all of us Monetary Theory ties changes in the money supply to changes in aggregate economic activity and the price level Money and Inflation The aggregate price level is the average price of goods and services in an economy A continual rise in the price level (inflation) affects all economic players Data shows a connection between the money supply and the price level  Monetary and Fiscal Policy Monetary policy is the management of the money supply and interest rates Fiscal policy is government spending and taxation Budget deficit is the excess of expenditures over revenues for a particular year Budget surplus is the excess of revenues over expenditures for a particular year Any deficit must be financed by borrowing How We Will Study Money, Banking, and Financial Markets A simplified approach to the demand for assets The concept of equilibrium Basic supply and demand to explain behavior in financial markets The search for profits An approach to financial structure based on transaction costs and asymmetric information Aggregate supply and demand analysis ASSIGNMENT: Inflation trend from year 2010 up to present. how does inflation affects to your everyday living. Opening of bank account