Warm Up Exercises
E2–1 What does it mean to say that individuals as a group are net suppliers of funds for financial institutions?
For financial institutions, the key suppliers of funds and the key demanders of funds are individuals, businesses, and governments. The savings that individual consumers place in financial institutions provide these institutions with a large portion of their funds. Individuals not only supply funds to financial institutions but also demand funds from them in the form of loans. However, individuals as a group are the net suppliers for financial institutions: They save more money than they borrow.
What do you think the consequences might be in financial
markets if individuals consumed more of their incomes and thereby reduced the supply of funds available to financial institutions?
If individuals consumed more financial institutions would have less to invest in the economy. Lack of investment in the economy could lead to loss of jobs and much needed investment into businesses and infrastructure.
E2–2 You are the chief financial officer (CFO) of Gaga Enterprises, an edgy fashion design firm. Your firm needs $10 million to expand production. How do you think the process of raising this money will vary if you raise it with the help of a financial institution versus raising it directly in the financial markets?
As a CFO if I raise the money with the help of a financial institution I will be in a better position to get loan rates that are lower and cheaper with possibly better terms than if I raised it in the financial markets.
E2–3 For what kinds of needs do you a think firm would issue securities in the money market versus the capital market?
If a firm is investing in itself and would like to have a situation where they need money for a short period of time they will issue securities. Some of those needs could be any expense they may have that is considered short term. Some of those needs could be short...
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