Chapter 1.doc


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Chapter 1.doc

  1. 1. Money and Banking Chapter 1: Why Study Money, Banking, and Financial Markets? - Financial Markets: (stock, bonds, foreign exchange…) - Financial institutions: (banks, insurance companies…) - How financial markets affect our daily life? - How financial markets affect our economy? - The effect on other economies? The importance of Money in the economy. 1
  2. 2. 1- Why Study Financial Markets? Markets in which funds are transferred: (excess funds – shortage of funds) A- Bonds and Stock markets: channeling funds from savers to investors, thereby promoting economic efficiency. - The bond market and the interest rate: A security (financial instrument): a claim on the issuer’s future income or assets. A bond is debt security that promises to make payments periodically for a specific period of time. Governments and corporations use bonds to finance (borrow) their activities, therefore, it affects the interest rate: The interest rate is the cost of borrowing funds. The effect of the level of interest rate on the personal level and on the economy. 2
  3. 3. B-The Stock Market: A stock is a share of ownership in a corporation. It is a security (claim on earnings and assets) Issuing a stock and selling it to finance a firm’s activity. 2-The Foreign Exchange Market: To convert funds from one currency to another, we use the FEM. Foreign exchange rate: the price of one country’s currency in terms of another’s is determined in the FEM. What are the results of fluctuations on the economy? Affects the consumers and the private sector: - Weaker KD leads to more expensive foreign goods - Stronger KD means more expensive exports 3
  4. 4. 2- Why Study Banking and Financial Institutions? - Banks and other financial institutions are what make financial institutions work. - Without them, cannot move funds from people with excess funds to people with shortage of funds. Allocations towards productive investment opportunities. A- Structure of the Financial System: Transactions are made through Financial Intermediaries: institutions that borrow funds from people who have excess funds and in turn make loans to people with shortage of funds. B- Banks and other Financial Institutions: How they manage their assets and liabilities to make profits? Why they are regulated? What are the financial innovations? (ATM, banking online) 4
  5. 5. 3- Why Study Money and Monetary Policy? Money (Money Supply): is anything that is generally accepted in payment for goods and services or in the repayment of a debt. - What is the role/effect of money in the economy? - Historical view A- Money and Business Cycle: A positive relation? B- Money and Inflation: Aggregate price level – Inflation rate A positive relation? C- Money and Interest Rate: A clear relation? D- Conduct of Monetary Policy: Money affects many economic variables, its important to the wellbeing of the economy and the people. Therefore, Monetary policy: the management of money and interest rates (quantity of money), is conducted by the central bank. 5