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8/13/2019 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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