chapter 1: introduction

Question 1

1. Why Study Money Banking and Financial Markets?

Answer 1

To examine:

• how financial markets such as bond and stock markets work
• how institutions such as banks, investment and insurance companies work
• the role of money in the economy

Question 2

2. An Overview of the Financial System

Answer 2

• several players and their wealth
• Financial Markets
• Financial transfers
• Assets
• Risk profile (Stocks Versus Bonds)
• Money and Interest Rates

Question 3

3. What is Money?/ why study money?

Answer 3

• Evidence suggests that money plays an important role in generating business cycles.
• Recessions (unemployment) and expansions affect all of us.
• Monetary theory ties changes in the money supply to changes in aggregate economic activity and the price level.

Question 4

Macro economics recognizes several players in the economy:

Answer 4

• Households (provides money, invest)
• Firms, non-financial firms (short/ long term debt)
• Government (have a financial need)
• Abroad

Question 5

Distribution of wealth over the world

Answer 5

• About 65% of the wealth is held in North-America and Europe
• Net-wealth of households is used to finance financial needs of firms and governments
• Financial markets make these transfers possible

Question 6

Financial Markets

Answer 6

are markets in which funds are transferred from people and firms who have an excess of available funds to people and firms who have a need of funds.

From those that “Have” to those that “Have not”

Question 7

Financial flows:

Answer 7

financial transfers from economic players with excess funds to players with financial needs

Question 8

Increasing economic efficiency:

(financial transfer) -> leeds to

Answer 8

• Fund transfer

- Risk transfer

Question 9

Fund transfer:

Answer 9

capital that would not have a productive use are now invested in usefull projects

Question 10

Risk transfer:

Answer 10

passing on of risk, diversification of risk

you could lose a lot of money

Question 11

Financial transfers can occur because…

Answer 11

because of the creation of financial assets/instruments other than money.

Question 12

Assets are devided into

Answer 12

• real assets

- Financial assets = financial instruments (securities)

Question 13

Financial assets = financial instruments (securities)

Answer 13

• Claim on a future financial cash flow
• Instrument that is being issued (created) by an issuer (borrower), that is bought/invested in by an investor (lendor) who wants to use its money productively.
• Cash can be seen as a financial asset
• Security: a (tradable) investment instrument such as stocks, bonds, financial derivatives, ….

Question 14

Stocks use

Answer 14

• represent the capital of a firm (equity)
• When the firm creates value through making profit, the equity (and thus the value of the stocks) will increase.
• When there are losses: the value of the equity (and the value of the stocks) decreases.

Question 15

a bond

Answer 15

s a fixed-income instrument that represents a loan made by an investor to a borrower

Question 16

Financial intermediaries:

Answer 16

institutions that borrow funds from people who have saved and in turn make loans to other people.

Question 17

Financial innovation:

Answer 17

the development of new financial products and services.
• Can be an important force for good by making the financial system more efficient
• E-finance

Question 18

E-finance

Answer 18

the ability to deliver financial services electronically

Question 19

Financial crises:

Answer 19

major disruptions in financial markets that are characterized by sharp declines in asset prices and the failures of many financial and
non-financial firms.

Question 20

Banks:

Answer 20

accept deposits and make loans, the money you have on your saving account is used by the bank for investments

Question 21

Other financial institutions

Answer 21

insurance companies, finance companies, pension funds, mutual funds and investment companies