Financial MarketsFinancial MarketsMarkets in which funds are transferred from people who have an excess of available funds to people who have a shortage.Why Study Financial Markets?- Promote economic efficiency by channeling funds from savers to investors (individuals that will put funds to productive use)- Impact the personal wealth of consumers- Impact the behavior of businessesExamples of financial marketsBond market – A bond is a debt security that promises to make payments periodically for a specified period of time. The market where interest rates are determined.Why do we care about interest rates?Interest rates tend to move in unison, however, interest rates on different types of bonds can vary substantially.See figure 1 page 3.Stock market – The stock market is themost widely followed financial market. A share of stock is a share of ownership in a corporation. How do changes in the stock market affectbusiness investment decisions?How can changes in the stock market affect consumer decisions to spend?Stock market prices are often volatile.See figure 2 page 5.Why Study Financial Institutions?- Financial intermediaries – institutions that channel funds from savers to investors- Financial crises – major disruptions in financial markets that are characterized by sharp declines in asset prices and the failures of many financial and nonfinancial firms- Financial innovationMoney – anything that is generally accepted in payment for goods and/or services or in the repayment of debts.Business cycle – the up and down movement of aggregate output in the economy.How does the money growth rate relate to the business cycle?See figure 3 page 8.Price level – the average price of goods and services in an economy.Inflation – the continual increase in the price level.How does the money growth rate relate to inflation?See figure 4 page 9 and figure 5 page 10.Monetary policy – the management of the money supply and interest rates.What organization in the U.S. is responsible for conducting monetary policy?Fiscal policy – decisions about governmentspending and taxation.What group in the U.S. is responsible for conducting fiscal policy?What is a budget deficit?What is a budget surplus?Foreign Exchange Market – the market where one currency is converted into another currency.How can exchange rate fluctuations affect U.S. consumers and businesses?If you plan to travel to Europe next summer, do you want a weak dollar or a strong dollar? Why?Gross domestic product (GDP) – the market value of all final goods and services produced in a country during a specified time period (usually a year).Nominal GDP – GDP calculated using current prices.Real GDP – GDP calculated using constant prices.Growth rate – percentage change in a variable[(ending – beginning)/beginning] x
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