Chapter 1 Flashcards
(23 cards)
Define the Financial Markets and what are the main markets.
Financial Markets: transfer funds from people who have an excess of available funds to people (and firms) with a shortage
Main financial markets: bond markets, interest rates, and stock markets
Define a security
A security (or a financial instrument) is a claim on the issuer’s future income or assets
- Relates to the bond market
Define a Bond
Bond: a debt security that promises to make payments periodically for a specified period of time
Define an interest rate
Interest rate: the (promised) price paid for the rental of funds (hence the issuer’s cost of funds)
Define a Stock
A stock is a share of ownership in a corporation
- Gives claim to the corporation’s earnings and assets
What does the value of a stock in the stock market reflect?
The value of stocks in the stock market reflects both the company’s assets and expectations regarding their future growth
What role do financial institutions play in financial markets?
FIs assist in the transfer of funds from savers to people and firms with investment opportunities, ideally productive investment opportunities
What do banks do? (2) And give examples of kinds of banks
Accept deposits and make loans
chartered banks, trust and mortgage loan companies, and credit unions and caisses populaires
What are some other financial institutions other than banks? (6)
Other FIs: insurance companies, finance companies, pension funds, mutual funds, investment banks, brokerage firms
What does financial innovation look like and what is the goal?
in financial markets is the development of new financial products and services
- As with innovation in any sector, it is an important force for good by making the financial system more efficient
Define E-finance
Delivering financial services electronically
Define money and who influences monetary policy in Canada.
Money: anything generally accepted as payment for goods or services, or to repay debts
Monetary policy influences the economy
Central role of Bank of Canada
Define a financial crisis and what are some features?
Financial crises: major disruptions in financial markets
- sharp declines in asset prices and the failures of
many financial and nonfinancial firms
Features:
- Are a feature of economies throughout history
- Can be followed by severe business cycle downturns
What economic variables does money indirectly affect?
Money indirectly, but strongly affects a wide variety of other economic variables:
Business Cycles
Inflation
Interest Rates
Define the business cycle and what is one thing it affects. And what is one that is believed to play a role in the business cycle
Business cycles are the upward and downward movement of aggregate output in the economy
Affect the unemployment rate (percentage of the available labour force that is unemployed)
Evidence suggests money supply plays a role in business cycles
Define Aggregate price level
Aggregate price level: the average price of goods and services in an economy
Define inflation and what explains it.
Inflation an increase in the aggregate price level
Affects individuals, businesses, and the government
What explains inflation?
Inflation rate (percentage change of the price level) is affected by the growth rate of the money supply
These two rates were closely related until 1980 when things became less clear but still an important determinant
Prior to 1980, the rate of money growth and the interest rate on long-term bonds were closely tied
Since then, the relationship is less clear but still an important determinant of interest rates
Define Monetary policy and who controls it?
Monetary policy involves managing the money supply and interest rates
Conducted by the Bank of Canada using a variety of tools
Define fiscal policy. Who is responsible for it and how do they do it?
Fiscal policy involves setting government expenditures and tax revenue
Conducted by the government (Federal, Provincial)
A budget deficit is spending in excess of revenue
A budget surplus is spending less than revenue
*Slide 24
Define the foreign exchange markets.
The foreign exchange market is where funds are converted from one currency into another
What is an exchange rate and where is it determined?
The exchange rate is the price of one currency in terms of another currency
Determined in the foreign exchange market
