Banking Paper

Stephanie Miller

ECO 305

Term Paper

11-20-2012

Everyone knows about financial instruments, financial markets and financial institutions. However, they may only know examples of them rather than knowing them by these particular names. No matter how people know these items they are at the heart of the market economy. Their development and management helps determine the success of private and public economic activities. One important role they play is in the creation of money and credit. The second important role they play is management of money and credit. The third important role they play is the determination of interest rates, yields, inflation and how these affect the value and volume of money and the availability of credit. These market economy components need to be backed by something this is where the Federal Reserve comes into play.

In order to understand these market economy components they must first be defined. “ A financial instrument is a document  that has a monetary value or represents a legally enforceable (binding) agreement between two or more parties regarding a right to payment of money,” (“Financial Instrument”,2012). Some examples of financial instruments that I remember discussing in class are bonds, and futures or options contracts. “A financial market is a market in which financial assets are traded. In addition to enabling exchange of previously issued financial assets, financial markets facilitate borrowing and lending by facilitating the sale by newly issued financial assets,” (“Basic Terms”, 2012). Some examples of financial markets we discussed in class are the New York Stock Exchange, and the United States government bond market. “A financial institution is an institution whose primary source of profits is through financial asset transactions.” (Tesfatsion, L. (2012 March5)). In class we discussed some examples of financial institutions some of them are commercial banks, and insurance companies.

Now that we have looked at the...