Money and Banking Chapter 1 (Possibly part of CH.2 also)

Banks face many risks. The ability to manage these risks ----------

drives profits/demands

money allows us to

escape bartering

Central banks use -------- to help guide the ------

financial markets / economy

Banks take risks because

they believe the government will save them (more regulations put into place)

what are the functions of money?

Medium of Exchange , unit of account, store of value

Barter system equation

N(N-1)/2 = # of prices in a barter system

YVETTE: Would it be correct to say that previously issued stocks and bonds are sold in primary markets? CHO: ----------- correct . The markets where new stocks and bonds are sold are called -----------.

No, it is not / primary market

ALEX: Are there any other financial assets? CLANCY: Yes. Let's try to identify them together: Art Checking accounts Land savings accounts

checking accounts and savings accounts

Bonds =

debt

Dollarization

Use another countries currency as money (Reaped inflation lead to dollarization)

Unit of account

Yardstick to compare prices of products

SAM: Would it be correct to say that even the Federal Reserve and the European Central Bank face potential losses? TERESA: --------- correct . Central banks --------------and thus ------ put the entire financial system at risk.

Yes, it is / can suffer losses / can

Official semi-dollarization

another countries currency is legal tender but the country also issues their own

What is money?

anything that is acceptable in exchange for goods and services

ALEX: But why is money considered a financial asset? CLANCY: Money is clearly an asset because by definition, it is ------------------------------

anything that is generally acceptable in exchange for goods and services

The push for risk can make banks --------------

do bad things

Legal Tender

assets accepted for repayment of debt to the government as well as private transactions

ALEX: Hi Clancy. The professor mentioned that in addition to money people also hold stocks and some other asset, which I forget. Can you please remind me, which one is that? CLANCY: That's right, Alex, the professor told us that in addition to money and stocks, people also hold such financial assets as ---------- .

bonds

The main regulators for monetary policies

central banks

rapid inflation leads to

dollarization

what is primary market for?

initial sale of security

What is the market for risk?

insurance market

systematic risk

large impact on economy

Financial assets (Intangible assets)

money, checking/saving acc, bonds, and stocks

ALEX: Also, I cannot see the difference between money and stocks. Could you explain it to me? CLANCY: Unlike money, stocks represent -----------------

part ownership

Stock =

part ownership

Inflation reduces the ------------- of money

purchasing power

risk can be

quantified

Uncertainty is hard to

quantify

Secondary market is for?

reselling/ buying

What do financial markets bring together

savers and borrowers

transfer purchasing power from past to future

store of value

YVETTE: Can you explain what financial markets do? CHO: Financial markets essentially bring ----- units together with --------

surplus (units together with) Deficit

What are interest rates?

the cost of borrowing

Why are checking and savings accounts considered financial assets ?

they are contractual claims on funds

currencies are not always considered money (true or false)

true

Medium of exchange

usable for buying/ selling goods and services (escape bartering)

Currency Substitutions

use of another currency in private transactions

YVETTE: Hi Cho. The professor was talking about the stock market and the market for mortgages. Can you help me understand whether the two markets are different or the same? CHO: The stock market and the market for mortgages are ---------- because --------------------------------------------

very different (because) stocks represent part ownership whereas mortgage is a debt instrument .

store of value

wealth is stored

SAM: Hi Teresa. I was surprised to learn today that the European Central Bank is the ------------ of the major central banks.

youngest