Chapter 1 The Basics

What this Course is about Economics is about how society uses its scarce resources to satisfy its unlimited wants –Decides What How For whom –Branches Macroeconomics: the whole economy Microeconomics: individual units Terms –Money is anything generally acceptable as payment –Saving is income not spent on consumption: future consumption Finance is about how the financial system coordinates the flow of funds from lenders (savers) to borrowers –Finance deals with the raising and using of money by individuals, firms, governments, and foreign investors how individuals manage money how the financial system coordinates and channels the flow of funds from lenders to borrowers how new funds may be created by financial intermediaries during the borrowing process

The Financial Process FED → National Economy → Economic Indicators → Financial Markets Financial Economics: Markets, Instruments, Institutions and Regulation –Financial markets are markets for buying and selling financial instruments –Financial institutions serve as go-betweens for savers and borrowers (Banks) Reduce transactions costs due to economies of scale –Financial intermediaries are institutions that borrow from lenders for the purpose of lending to borrowers Direct finance is when lenders lend funds directly to borrowers. –Stock market –Bond market Indirect finance is when borrowers borrow from financial intermediaries that have acquired the funds to lend from lenders –banks –savings and loan associations –credit unions –Financial Regulation

Financial system: a network of markets and institutions to bring savers and borrowers together –Financial instruments: IOUs between savers and borrowers –Financial services: risk sharing, liquidity and information Risk sharing reduces risk. Liquidity: the ease at which something can be turned into cash Provides information Players: households, businesses, and governments

Federal Reserve System (Fed): the central bank of the United States that regulates the financial system and determines monetary policy. –Monetary policy is all of the efforts by the Fed to promote the overall health and stability of the financial system. Business cycle: short run economic fluctuations –Phases of the business cycle Peak: highest level of economic activity Contraction (recession): at least 6 mos. of falling GDP –Slowdown –Recession Trough: lowest level of economic activity Expansion (recovery): at least 6 mos. of rising GDP –Recovery –Prosperity