Financial Systems Flashcards
Financial assets vs. Non financial assets
Financial: piece of paper giving owner the right to future income from the seller
Non financial: the actual thing that can create income in the future, often but not always physical
Liquidity
Ease at which something can be transformed to cash
What first test financial system do?
Match savers w/ investors in physical assets (people w/ money w/ people who need it)
Reduce & Allocate risk (diversification): riskier investments = higher returns so don’t put all your eggs in one basket
Link b/w savings & investments
Provide & Allocate liquidity: although everyone wants liquidity the preferences of these vary & less liquid investments tend to have ahigher return
What is the link between savings & investments?
Y= C+I+G