Chapter 1: Introduction

MONEY AND BANKING

AND FINANCIAL
MARKETS
Why Study Money, Banking, and Financial
Markets:
9

To examine how financial markets

work
To examine how financial
institutions such as banks and
insurance companies work
To examine the role of money in
the economy
 Introduction of Concepts
10

Financial Markets/Institutions
Bringing together of buyers and sellers of
financial securities to establish prices
The formal setting/mechanism that brings
buyers and sellers together to value financial
assets
Provides a mechanism for those with
excess funds (savers) to lend to those who
need funds [borrowers]
 Introduction of Concepts (Cont.)
11

Money
“Lubricant that greases the wheels of economic
activity”
Not just limited to currency (bills and coins)—
also includes demand deposits (checking
accounts) issued by banks
Plays a key role in influencing the behavior of
the economy as a whole and the performance of
financial institutions and markets
 Introduction of Concepts (Cont.)
12

Money (Cont.)
More broadly the monetary economy
Facilitates transactions within the economy
Principal mechanism through which central
banks attempt to influence aggregate economic
activity
Economic Growth
Employment
Inflation
 Introduction of Concepts (Cont.)
13

Banking
Banks and other financial intermediaries (insurance
companies, pension funds) take funds from one group
(savers) and re-deploy these funds by investing or
lending (borrowers)
Banks provide a place where individuals and businesses
can invest their funds to earn interest with a minimum of
risk
Well-equipped to invest in the most challenging types of
financial investments—loans to individuals and small
businesses
Flow of funds from lenders to borrowers
 Introduction of Concepts (Cont.)
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Banking (Cont.)
Banks serve as the principal caretaker of the economy’s
money supply, and along with other financial
intermediaries, provide important source of funds
Banks are intimately involved in how the central bank of
the United States (Federal Reserve) [Fed] influences
overall economic activity
The Monetary policy is the control of the money
supply while using the interest rate and others
instruments. The [Fed] directly influences the lending
and deposit creation activities of banks.