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© The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin
Chapter 1
An Introduction to Money
and the Financial System
Dr. J...
1-2
Introduction
• The Five Parts of the Financial System
• The Five Core Principles of Money
and Banking
1-3
Five Parts of the Financial System
1. Money
To pay for purchases and store wealth
2. Financial Instruments
To transfer...
1-4
Five Core Principles of
Money and Banking
1. Time has value
2. Risk requires compensation
3. Information is the basis ...
1-5
Five Core Principles of
Money and Banking
1. Time has value
– Time affects the value of financial
instruments
– Intere...
1-6
Five Core Principles of
Money and Banking
2. Risk requires compensation
– In a world of uncertainty, individuals will
...
1-7
Five Core Principles of
Money and Banking
3. Information is the basis for decisions
– The collection and processing of...
1-8
Five Core Principles of
Money and Banking
4. Markets determine prices
and allocate resources
– The “places” where buye...
1-9
Five Core Principles of
Money and Banking
5. Stability improves welfare.
– A stable economy reduces risk and
improves ...
1-10
• Do your best not to tell people your
– Date of birth
– Birthplace
– Your mother’s maiden name
– Your address
• Guar...
1-11
Measuring Economic Activity
• Gross Domestic Product:
The market value of final goods and services
produced in a coun...
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Chapter 1 - Introduction to Money and the Financial System

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Chapter 1 - Introduction to Money and the Financial System

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Chapter 1 - Introduction to Money and the Financial System

  1. 1. © The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin Chapter 1 An Introduction to Money and the Financial System Dr. John V. Padua
  2. 2. 1-2 Introduction • The Five Parts of the Financial System • The Five Core Principles of Money and Banking
  3. 3. 1-3 Five Parts of the Financial System 1. Money To pay for purchases and store wealth 2. Financial Instruments To transfer resources from savers to investors and to transfer risk to those best equipped to bear it. 3. Financial Markets Buy and sell financial instruments 4. Financial Institutions. Provide access to financial markets, collect information & provide services 5. Central Banks Monitor financial Institutions and stabilize the economy
  4. 4. 1-4 Five Core Principles of Money and Banking 1. Time has value 2. Risk requires compensation 3. Information is the basis for decisions 4. Markets determine prices and allocation resources 5. Stability improves welfare
  5. 5. 1-5 Five Core Principles of Money and Banking 1. Time has value – Time affects the value of financial instruments – Interest payments exist because of time properties of financial instruments
  6. 6. 1-6 Five Core Principles of Money and Banking 2. Risk requires compensation – In a world of uncertainty, individuals will accept risk only if they are compensated in some form.
  7. 7. 1-7 Five Core Principles of Money and Banking 3. Information is the basis for decisions – The collection and processing of information is the basis of foundation of the financial system.
  8. 8. 1-8 Five Core Principles of Money and Banking 4. Markets determine prices and allocate resources – The “places” where buyers & sellers “meet” are the core of the economic system
  9. 9. 1-9 Five Core Principles of Money and Banking 5. Stability improves welfare. – A stable economy reduces risk and improves everyone's welfare.
  10. 10. 1-10 • Do your best not to tell people your – Date of birth – Birthplace – Your mother’s maiden name – Your address • Guard your Social Security Number – Don’t tell anyone unless you have to – Remove it whenever you can
  11. 11. 1-11 Measuring Economic Activity • Gross Domestic Product: The market value of final goods and services produced in a country during a year. • Real vs. Nominal GDP: – Need to distinguish changes in prices from changes in quantities – Real GDP uses base-year prices Isolates change in quantities. – Nominal GDP = Prices x Real GDP

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