1. An Introduction to Money and the Financial System
Chapter 1
An Introduction to Money and the Financial System

2. CONTENS 1.1 Why to study money, bank and financial system?
1.2 Five parts of the financial system
1.3 Five core principles of the financial system

3. §1.1 Why to study money, bank and financial system
1. Why Study Financial Markets?
Channel funds from savers to investors, thereby promoting economic efficiency
Affect personal wealth and behavior of business firms

4. Why to study 2. Why Study Banking and Financial Institutions?
Financial Intermediation
Helps get funds from savers to investors
Banks and Money Supply
Crucial role in creation of money
Financial Innovation

5. Why to study 3. Why Study Money and Monetary Policy?
Influence on business cycles, inflation, and interest rates

6. Bond Market

7. Stock Market

8. Foreign Exchange Market

9. Money and Business Cycles

10. Money and the Price Level

11. Money Growth and Inflation

12. Money Growth and Interest Rates

13. Fiscal Policy and Monetary Policy

14. §1.2 Five Parts of the Financial System
1. Money
To pay for purchases and store wealth
2. Financial Instruments
To transfer wealth from savers to investors and to transfer risk to those best equipped to bear it.

15. Five Parts of the Financial System
3. Financial Markets
Buy and sell financial instruments
4. Financial Institutions.
Provide access to financial markets
5. Central Banks
Monitor financial Institutions and stabilize the Economy

16. 1.3 Five Core Principles of Money and Banking
1. Time has Value
Time affects the value of financial instruments.
Interest payments exist because of time properties of financial instruments

17. Five Core Principles of Money and Banking
2. Risk Requires Compensation
In a world of uncertainty, individuals will accept risk only if they are compensated in some form.

18. §1.3 Five Core Principles of Money and Banking
3. Information is the basis for decisions
The collection and processing of information is the basis of foundation of the financial system.

19. Five Core Principles of Money and Banking
4. Markets set prices and allocate resources.
The “places” where buyers and sellers “meet” are the core of the economic system

20. Five Core Principles of Money and Banking
5. Stability improves welfare.
A stable economy reduces risk and improves everyone's welfare.

21. Appendix: Definitions
Aggregate Output
Gross Domestic Product (GDP) = Value of all final goods and services produced in domestic economy during year
Aggregate Income
Total income of factors of production (land, capital, labor) during year
Distinction Between Nominal and Real
Nominal = values measured using current prices
Real = quantities, measured with constant prices
Aggregate Price Level
nominal GDP
GDP Deflator =
real GDP
$10 trillion
GDP Deflator = = 1.11
$9 trillion
Consumer Price Index (CPI) price of “basket” of goods and services

22. Appendix: Definitions
Growth Rates and the Inflation Rate

23. Chapter 1
End of Chapter