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Chapter 1

Introducing Money, Banking, and Financial Markets

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Learning Objectives

• See the importance of money, banking, and financial markets

• Understand possible careers that use the skills and knowledge gained through studying this topic

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Introduction of Concepts

• Financial Markets/Institutions– Bringing together of buyers and sellers of financial securities

to establish prices

– The formal setting/mechanism that brings buyers and sellers together to value financial assets

– Provides a mechanism for those with excess funds (savers) to lend to those who need funds [borrowers]

– Includes banks, savings and loans, credit unions, investment banks and brokers, mutual funds, stock and bond markets

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Introduction of Concepts (Cont.)

• Money– “Lubricant that greases the wheels of economic

activity”– Not just limited to currency (bills and coins)—also

includes demand deposits (checking accounts) issued by banks

– Plays a key role in influencing the behavior of the economy as a whole and the performance of financial institutions and markets

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Introduction of Concepts (Cont.)

• Money (Cont.)– More broadly the monetary economy

• Facilitates transactions within the economy

• Principal mechanism through which central banks attempt to influence aggregate economic activity

– Economic Growth

– Employment

– Inflation

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Introduction of Concepts (Cont.)

• Banking– Banks and other financial intermediaries take funds from one

group (savers) and re-deploy these funds by investing or lending (borrowers)

– Banks provide a place where individuals and businesses can invest their funds to earn interest with a minimum of risk

– Well-equipped to invest in the most challenging types of financial investments—loans to individuals and small businesses

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Introduction of Concepts (Cont.)

• Banking (Cont.)– Banks serve as the principal caretaker of the economy’s

money supply, and along with other financial intermediaries, provide important source of funds

– Banks are intimately involved in how the central bank of the United States (Federal Reserve) [Fed] influences overall economic activity

– Monetary policy—the Fed directly influences the lending and deposit creation activities of banks