Financial Markets
markets in which funds are transferred form people who have an excess of available funds to people who have a shortage.
Security
(Financial instrument) is a claim on the issuer’s future income or assets
Assets
(any financial claim or piece of property that is subject to ownership)
Bond
Is a debt security that promises to make periodic payments for a specified period of time.
Interest rate
is the cost of borrowing or the price paid for the rental of funds.
Common stock
represents a share of ownership in a corporation. Issuing and selling to the public is a way for corporations to raise funds to finance their activities.
financial intermediaries
institutions that borrow funds from people who have saved and in turn make loans to other people.
- Banks: accept deposits and make loans
- other financial inst: insurance companies, finance companies, pension funds, mutual funds, and investment companies.
Financial innovation:
the development of new financial products and services.
- can be an important force for good by making the financial system more efficient
Financial crises:
Major disruptions in financial markets that are characterized by sharp declines in asset prices and the failures of many financial and nonfinancial firms.
Why study money and monetary policy?
- Money plays important role in generating business cycles.
- recession (unemployment) and expansion affects everyone.
- Monetary theory ties changes in the money supply to changes in aggregate economic activity and price level.
Money, Business Cycles, 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
Aggregate price level
The price level.
Inflation
A CONTINUAL INCREASE IN THE PRICE LEVEL, AFFECTS INDIVIDUALS, business and government. Top priority on policymaking agendas.
monetary policy
is the management of the money supply and interest rates.
- conducted in the US by the federal reserve system. (FED)
Fiscal policy
Deals with 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
- any deficit must be financed by borrowing.
Foreign exchange market
Where funds are converted from one currency to another
foreign exchange rate
is the price of one currency in terms of another.
- foreign exchange market determines rate.
Aggregate output
the most commonly reported measure, the gross domestic product (GDP) is the market value of all final goods and services produced in a country during a year.
Aggregate income
the total income of factors of production (land, labor and capital) from producing goods and services.
real vs nominal magnitudes
when the total value of final goods and services is calculated using current prices, the resulting GDP measure is referred to as nominal GDP. Nominal = that values are measured using current prices.
Aggregate price level
is a measure of average prices in the economy.
- 3 measures of the aggregate price level:
1. GDP deflator
2. PCE deflator
3. The consumer price INDEX (CPI)
