Money
To pay for purchases and store wealth
Financial instruments
To transfer resources from savers to investors and to transfer risk to those best equipped to bear it
Financial markets
To buy and sell financial insturments
Financial institutions
To provide access to financial markets, collect info, and provide services
Regulatory agency
To provide oversight for financial systems
Central banks
To monitor financial institutions and stabilize the economy
1. Time
2. Risk
3. Information
4. Markets
5. Stability
Five core principles of money and banking
Value
Time has _____
Compensation
Risk requires _______
Decisions
Information is the basis for _____
Prices
Allocate resources
Markets determine ______ and ______ ______
Welfare
Stability improves ______
Money
An asset that is generally accepted as payment for goods and services or repayment of debt
Income
A flow of earnings over tim
1. Means of payment
2. Unit of account
3. Store of value
Three functions of money
Payments system
A web of arrangements that allow for the exchange of goods and services,as well as assets
Commodity monies
Things with intrinsic value
Ex: silk and salt
Fiat money
High-quality paper, nicely engraved, with lots of special security
Debit card
Works same as a check.
Credit card
A promise by the bank to lend the cardholder money with which to make purchases.
Check
An instruction to the bank to take funds from your account and transfer them to another account
Electronic payments
Take the form of:credit/debut cards, ETFs, store-value cards, E-money
Debit cards
Work like a check-tells the bank to transfer funds from your account to another
Credit cards
A promise by a bank to lend the cardholder money to make a purchase. Do not represent money
Electronic funds transfer (ETF)
Movements of funds directly from one account to another
Automated clearinghouse transaction
Most common form of ETF
Market liquidity; funding liquidity
_____ and _____ are both needed to make financial markets function smoothly.
Liquidity
2007-2009 financial crisis led to a sudden loss of _____.
Interest rates
Economic growth
Inflation
Changes in the quantity of money are related to...
Inflation
The process of prices rising
Inflation rate
The measurement of the process of money rising
Too much money
Primary cause of inflation
M1
M2
Money aggregates
M1
Narrowest definition. Only the most liquid assets. Currency in the hands of the public.
M2
Broader definition. Includes assets not used as means of payment.
Indirect finance
Institution stands between lender and borrower
Direct finance
Borrowers sell securities directly to lenders in the financial market
Asset
Something of value that you own
Liability
Something you value
Financial instruments
Written legal obligation of one party to transfer something of value, usually money, to another party at some future date, under certain conditions
1. Act as a means of payment
2. Act as a store of value
3. Allow for the transfer of risk
Three functions of financial instruments
Standardization of financial instruments
Overcomes the potential costs of complexity.
Underlying instruments
Used by savers/lenders to transfer resources directly to investors/borrowers
Derivative instruments
Those where their value and layoffs are "derived" from the behavior of the underlying instruments