Chapter 1
Introducing
Money,
Banking, and
Financial
Markets
Copyright © 2009 Pearson Addison-Wesley. All rights reserved.
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
Copyright © 2009 Pearson Addison-Wesley. All rights reserved.
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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
Copyright © 2009 Pearson Addison-Wesley. All rights reserved.
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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
Copyright © 2009 Pearson Addison-Wesley. All rights reserved.
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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
Copyright © 2009 Pearson Addison-Wesley. All rights reserved.
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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
Copyright © 2009 Pearson Addison-Wesley. All rights reserved.
1-6
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
Copyright © 2009 Pearson Addison-Wesley. All rights reserved.
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