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Level 66

Global Financial System in Perspective

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The financial system
Its primary task is to move scarce loanable funds from those who save to those who borrow to buy goods and services and to make investments in new equipment and facilities so that the gl…
produces and distributes
The system of financial institutions and markets
Determines both the amount and cost
The financial system of money and capital markets
markets perform?
Generating and allocating savings, stimulating the accumulation of wealth, providing liquidity for spending, providing a mechanism for making payments, supplying credit to aid in the purchase of goods and services, providing risk-protection services, and suppl…
Types of Financial Markets within the Global Financial System
money markets, capital markets, open markets, negotiated markets. There are primary versus secondary markets. Additional types of financial markets are spot markets, and futures, forward, or option markets.
The Money Market versus the Capital Market
money markets, supplying short-term loans (credit) of
Open versus Negotiated Markets
Open markets, where anyone may participate
Primary versus Secondary Markets
Primary Markets new financial instruments are traded in. secondary markets are where existing instruments are exchanged.
Spot versus Futures, Forward, and Option Markets
A spot market is one in which assets are traded for immediate delivery. (usually within one or two business days). A futures or forward market, on the other hand, is designed to trade contracts cal…
Credit, the Common Commodity
One unifying factor is the fact that the basic commodity being traded in most financial
Speculators perform an important function in the markets by leveling out asset prices, buying those they believe are underpriced and
Arbitrageurs buy assets in markets where assets seem to be undervalued and sell in those markets where assets appear to be overvalued. They help to maintain consistent prices between markets, aiding other buyers in fin…
The Dynamic Financial System
Among the most prominent dynamic trends are service innovation, improvements in communications technology, and increasingly intense competition to find and hold new customers.
financial system
The collection of markets, individuals, institutions, laws, regulations, and techniques through which bonds, stocks, and other securities are traded, financial services are produced and delivered, and interest rates are determined.
An institutional mechanism for trading goods, services, and financial assets.
financial market .
An institutional mechanism created by society to channel savings and other financial services to those individuals and institutions willing to pay for them
Name 3 Leakages
Expenditures on capital goods or on inventories of goods or raw materials that are used to produce other goods and services, causing future production and income to rise.
Accumulated assets held by an economic unit as a result of saving.
net wealth
Total assets minus total liabilities held by an economic unit.
financial wealth
Portion of the wealth held by society or by an individual economic unit in the form of stocks, bonds, and other financial assets.
net financial wealth
Portion of wealth held in financial assets less total debt owed.
lThe quality or capability of any asset to be sold quickly with little risk of loss and possessing a relatively stable price over time.
A loan of funds in return for a promise of future payment.
money market
The institution set up by society to channel temporary surpluses of cash into temporary loans of funds, one year or less to maturity.
capital market
The institution that provides a channel for the borrowing and lending of long-term funds (over one year).
open markets
Institutional mechanisms created by society to make loans and trade securities in which any individual or institution can participate.
negotiated markets
Institutional mechanisms set up by society to make loans and trade securities in which the terms of trade are set by direct bargaining between a lender and a borrower.
primary markets
Institutional mechanisms set up by society to trade newly issued loans and securities.
secondary markets
Institutional mechanisms set up by society to trade or exchange loans and securities that have already been issued.
Individuals and institutions who seek out what they believe are mispriced assets in the hope of scoring exceptional gains from trading those assets.
Chapt. 2
Financial Assets, Money,
What is a financial asset?
It is a claim against the income or wealth of a business firm, household, or unit of government, represented usually by a certificate, receipt, computer record file, or other legal document, and usually create…
Characteristics of Financial Assets
They promise future returns to their owners and serve as a store of value. Their value rests on faith. They cannot be depreciated because they do not wear out like physical goods. physical. It's Condi…
Types of Financial Assets
They generally fall into four categories: money, equities, debt securities, and derivatives.
How Financial Assets Are Created
In general, if any economic unit wishes to add to its holdings of assets but lacks the necessary resources to do so, it can raise additional funds by issuing financial liabilities (borrowing)—provided that a b…
Any asset held
Financial Assets and the Financial System
One of the most important contributions of the global financial system to our daily lives is in permitting businesses, households, and governments to adjust their financial position from that of net borrower (DBU) to…
What Is Money?
It's the most important financial asset in the economy. All forms of money in use today are claims against some institution, public or private. Money today includes savings accounts at banks, credit unions, and money market funds.
The Functions of Money
It serves as a standard of value (or unit of account ) monetary unit, a medium of exchange, Sotre of value, It's the only perfectly liquid asset for all the goods and services we might wish to trade.
The Value of Money and Other Financial Assets and Inflation
The value of money—its purchasing power —changes due to inflation, defined as a
price indexes
Today most economists measure inflation using popular price indexes, such as the
The Evolution of Financial Transactions
Financial systems are never static. the transfer of funds from savers to borrowers
Classifying Financial Institutions
One of the most important distinctions is between depository institutions (commercial banks, savings and loan associations, savings banks, and credit unions); contractual institutions (insurance companies and pension funds); and investment institutions (mutual
Shares of common or preferred stock, with each share representing a certificate of ownership in a business corporation.
debt securities
Financial claims against the assets of a business firm, individual, or unit of government, represented by bonds and other contracts evidencing a loan of money.
deficit-budget unit (DBU)
An individual, business firm, or unit of government whose current expenditures exceed its current receipts of income, forcing it to become a net borrower in the money and capital markets.
surplus-budget unit (SBU)
An individual, business, or unit of government whose current income receipts exceed its current expenditures and, therefore, is a net lender of funds to the money and capital markets.
balanced-budget unit (BBU)
An individual, business firm, or unit of government whose current expenditures equal its current receipt of income.
real value
The purchasing-power inflation-adjusted price of assets, services, or other items held or available for sale.
nominal value
The price of assets or other purchasable items measured in terms of their current market price or face value; the price of assets or other items not adjusted for the effects of inflation.
secondary securities
Financial claims, such as deposits, issued by a financial intermediary to raise loanable funds.