Fin370 Chapter Study Q's

Topics: Economics, Money market, Investment Pages: 4 (922 words) Published: June 10, 2010

A. 14-1What is financial markets? What function do they perform? How would an economy be worse off without them?

According to the text, “financial markets are various institutions and procedures that facilitate transactions in all types of financial claims, aka securities” Therefore, a financial market is not exactly a physical place like a bank or investment firm, although it can be. And the financial claims or securities are not essentially a physical thing you can hold in your hand. The trading of securities can take place over the phone or internet. The “financial markets exist in order to allocate the supply of savings in the economy to the demanders of those savings”. The markets exist because there is a supply and demand need in the economy. The supply is the need to invest money and the demand is the need to borrow money. “The wealth of the economy would be less without the financial markets.” In a sense, financial markets help control and stabilize the country’s economy with the supply and demand of goods and services and exchange of securities and investments. According to the Federal Reserve Bank of San Francisco, financial markets play an important role in the accrual of capital and the production of goods and services. FSRB states that “the price of credit and returns on investment provide signals to producers and consumers—financial market participants. Those signals help direct funds (from savers, mainly households and businesses) to the consumers, businesses, governments, and investors that would like to borrow money by connecting those who value the funds most highly (i.e., are willing to pay a higher price, or interest rate), to willing lenders”. [ (Econ, 2005) ]

B. 14-3 Distinguish between the money and capital markets.

Money markets are part of the financial markets and deals with short-term investments. The definition in the text states “the money market refers to all institutions and...
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