Money Banking and financial Securities

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Chapter 1

Why Study

Money, Banking,

and FinancialMarkets?


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Copyright 2007 Pearson Addison-Wesley. All rights reserved. 1-2

Why Study Money, Banking, and

Financial Markets

To examine how financial marketssuch as bond, stock and foreignexchange markets work

To examine how financial institutionssuch as banks and insurancecompanies work

To examine the role of money inthe economy


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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


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The Bond Market and Interest Rates

A security (financial instrument) is aclaim on the issuers future incomeor assets

A bond is a debt security that promisesto make payments periodically for aspecified period of time

An interest rate is the cost of borrowingor the price paid for the rental of funds


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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


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Banking and Financial Institutions

Financial Intermediariesinstitutions that

borrow funds from people who have savedand make loans to other people

Banksinstitutions that accept deposits and

make loans

Other Financial Institutionsinsurancecompanies, finance companies, pension

funds, mutual funds and investment banks Financial Innovationin particular, the advent

of the information age and e-finance


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Money and Business Cycles

Evidence suggests that moneyplays an important role in generatingbusiness cycles

Recessions (unemployment) and booms(inflation) affect all of us

Monetary Theory ties changes in the

money supply to changes in aggregateeconomic activity and the price level


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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 themoney supply and the price level


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Monetary and Fiscal Policy

Monetary policy is the management of the

money supply and interest rates Conducted in the U.S. by the Federal Reserve

Bank (Fed)

Fiscal policy is government spendingand taxation

Budget deficit is the excess of expenditures overrevenues for a particular year

Budget surplus is the excess of revenues overexpenditures for a particular year

Any deficit must be financed by borrowing


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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 ontransaction costs and asymmetric information

Aggregate supply and demand analysis


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Documents

Money Banking and financial Securities