Why Study Money, Banking, And Financial Markets?

Transcription

Chapter 1Why StudyMoney, Banking,and FinancialMarkets?

Why Study Money, Banking, andFinancial 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 economyCopyright 2007 Pearson Addison-Wesley. All rights reserved.1-2

Financial Markets Markets in which funds are transferredfrom people who have an excess ofavailable funds to people who have ashortage of fundsCopyright 2007 Pearson Addison-Wesley. All rights reserved.1-3

The Bond Market and Interest Rates A security (financial instrument) is aclaim on the issuer’s 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 fundsCopyright 2007 Pearson Addison-Wesley. All rights reserved.1-4

Copyright 2007 Pearson Addison-Wesley. All rights reserved.1-5

The Stock Market Common stock represents a share ofownership in a corporation A share of stock is a claim on theearnings and assets of the corporationCopyright 2007 Pearson Addison-Wesley. All rights reserved.1-6

Copyright 2007 Pearson Addison-Wesley. All rights reserved.1-7

The Foreign Exchange Market The foreign exchange market is wherefunds are converted from one currencyinto another The foreign exchange rate is theprice of one currency in terms ofanother currency The foreign exchange marketdetermines the foreign exchange rateCopyright 2007 Pearson Addison-Wesley. All rights reserved.1-8

Copyright 2007 Pearson Addison-Wesley. All rights reserved.1-9

Banking and Financial Institutions Financial Intermediaries—institutions thatborrow funds from people who have savedand make loans to other people Banks—institutions that accept deposits andmake loans Other Financial Institutions—insurancecompanies, finance companies, pensionfunds, mutual funds and investment banks Financial Innovation—in particular, the adventof the information age and e-financeCopyright 2007 Pearson Addison-Wesley. All rights reserved.1-10

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 themoney supply to changes in aggregateeconomic activity and the price levelCopyright 2007 Pearson Addison-Wesley. All rights reserved.1-11

Copyright 2007 Pearson Addison-Wesley. All rights reserved.1-12

Money and Inflation The aggregate price level is theaverage price of goods and services inan economy A continual rise in the price level(inflation) affects all economic players Data shows a connection between themoney supply and the price levelCopyright 2007 Pearson Addison-Wesley. All rights reserved.1-13

Copyright 2007 Pearson Addison-Wesley. All rights reserved.1-14

Copyright 2007 Pearson Addison-Wesley. All rights reserved.1-15

Money and Interest Rates Interest rates are the price of money Prior to 1980, the rate of money growthand the interest rate on long-termTreasure bonds were closely tied Since then, the relationship is less clearbut still an important determinant ofinterest ratesCopyright 2007 Pearson Addison-Wesley. All rights reserved.1-16

Copyright 2007 Pearson Addison-Wesley. All rights reserved.1-17

Monetary and Fiscal Policy Monetary policy is the management of themoney supply and interest rates Conducted in the U.S. by the Federal ReserveBank (Fed) Fiscal policy is government spendingand taxation Budget deficit is the excess of expenditures overrevenues for a particular yearBudget surplus is the excess of revenues overexpenditures for a particular yearAny deficit must be financed by borrowingCopyright 2007 Pearson Addison-Wesley. All rights reserved.1-18

Copyright 2007 Pearson Addison-Wesley. All rights reserved.1-19

How We Will Study Money, Banking,and Financial Markets A simplified approach to the demandfor assets The concept of equilibrium Basic supply and demand to explain behaviorin financial markets The search for profits An approach to financial structure based ontransaction costs and asymmetric information Aggregate supply and demand analysisCopyright 2007 Pearson Addison-Wesley. All rights reserved.1-20

Copyright 2007 Pearson Addison-Wesley. All rights reserved.1-21

Copyright 2007 Pearson Addison-Wesley. All rights reserved.1-22

Copyright 2007 Pearson Addison-Wesley. All rights reserved.1-23

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 File Size: 1MBPage Count: 23