Economics 3229 Final Study Guide

Midterm 1 Study Guide

Chapter 1: Why Study Money, Banking, and Financial Markets?

Financial Markets: markets in which funds are transferred from people who have an excess of available funds to people who have a shortage

-crucial to promoting greater economic efficiency by channeling funds from people who do not have a productive use for them to those who do

Security (Financial Instrument): a claim on the issuer’s future income or assets

Assets: any financial claim or piece of property that is subject to ownership

Bond: a debt security that promises to make payments periodically for a specified period of time

-the bond market is especially important to economic activity because it enables corporations and governments to borrow to finance their activities and because it is where interest rates are determined

Interest Rate: the cost of borrowing or the price paid for the rental of funds

-usually expressed as a percentage of the rental of $100 per year

-high interest rates may deter you from buying a car or house because the cost of financing would be too high

-high interest rates could also encourage you to save because you can earn more interest income by setting aside some of your earnings as savings

-interest rates have an impact on the overall health of the economy because they not only affect consumers’ willingness to spend or save but also businesses’ investment decisions

Common Stock: represents a share of ownership in a corporation

-a security that is a claim on the earnings and assets of the corporation

-a way for corporations to raise funds to finance their activities

-the most widely followed financial market in almost every country that has one

Foreign Exchange Market: the market in which one country’s currency can be converted into a different country’s currency

Foreign Exchange Rate: the price of one country’s currency in terms of another’s

-a strong U.S. dollar means that U.S. goods exported abroad will cost more in foreign...