Chapter 01 An Introduction to Money and the Financial System
Chapter 1
An Introduction to Money and the Financial System
Chapter Overview
Chapter 1 introduces students to the five parts of the financial system and to the five core
principles that will be used throughout the text as each topic is covered. The organization
of the text is also discussed.
Reading this chapter will prepare students to:
Comprehend that a healthy and constantly evolving financial system is the
foundation for economic efficiency and economic growth;
Define the six parts of the financial system, which are:
o Money, which is used to pay for purchases and to store wealth.
o Financial instruments, which are used to transfer resources and risk.
o Financial markets, which allow people to buy and sell financial
instruments.
o Financial institutions, which allow people access to the financial markets,
collect information, and provide a variety of other sources.
o Government regulatory agencies, which are responsible for making sure
that the elements of the financial system operate in a safe and reliable
manner.
o Central banks, which stabilize the economy.
Apply five core principles of money and banking, which are:
o Core Principle 1: Time has value.
o Core Principle 2: Risk requires compensation.
o Core Principle 3: Information is the basis for decisions.
o Core Principle 4: Markets determine prices and allocate resources.
o Core Principle 5: Stability improves welfare.
Important Points of the Chapter
This section of the instructor’s manual will highlight key points made in each chapter;
these may be the “big questions” (and their answers) raised in the chapter introduction, or
may be “timeless lessons” that students will use well into the future.
Application of Core Principles
A key feature of the text is the distillation of 5 core principles, which are defined in this
chapter and used as organizing themes throughout the rest of the book. While the 5
principles will be fully treated in the chapter outline below, it is worth listing them here;
they are:
1-1
, Chapter 01 An Introduction to Money and the Financial System
1) Time has value.
2) Risk requires compensation.
3) Information is the basis for decisions.
4) Markets set prices and allocate resources.
5) Stability improves welfare.
Students and instructors should look for the icons in the text that signal that a core
principle is being applied.
Teaching Tips/Student Stumbling Blocks
Students should note that they will be asked to apply the core principles to
different topics; see the problems at the end of this chapter for examples.
You may wish to present the list of five core principles often in your
presentations.
It also might be helpful for students to create a reference list of the five core
principles and keep it in a handy spot; the inside front cover of their class
notebook, perhaps.
It will be helpful to find out if the students in your class have already taken
statistics or not; it will help you plan how you will cover Chapter 5 (which
includes discussion of concepts like the mean, expected value, variance, and
standard deviation).
Have students use a spreadsheet to keep track of the purchases they make in a
week, indicating the types of transactions, amounts, and methods of payment.
Collect and, if possible, combine the spreadsheets to point out trends or patterns.
For example, does method of payment change with size of transaction? Is cash
used more often by some students than others (due to, for example, whether or not
the person lives on campus)?
Features in this Chapter
This instructor’s manual will provide, on a chapter-by-chapter basis, brief summaries
(and page references) for the four types of inserts found in the chapters of the text. The
four types of inserts (and their general descriptions) are:
Your Financial World: These inserts provide basic guidelines for applying
economic theory to the bread-and-butter financial decisions that you make nearly
every day.
The first “Your Financial World” insert appears in this chapter. Titled “Guard
Your Identity,” it explains how little personal information thieves need to steal
someone’s identity. Students are also urged to check their financial statements for
unfamiliar charges or cash withdrawals. Finally, information is provided about
government resources to help prevent identity theft.
1-2
Chapter 1
An Introduction to Money and the Financial System
Chapter Overview
Chapter 1 introduces students to the five parts of the financial system and to the five core
principles that will be used throughout the text as each topic is covered. The organization
of the text is also discussed.
Reading this chapter will prepare students to:
Comprehend that a healthy and constantly evolving financial system is the
foundation for economic efficiency and economic growth;
Define the six parts of the financial system, which are:
o Money, which is used to pay for purchases and to store wealth.
o Financial instruments, which are used to transfer resources and risk.
o Financial markets, which allow people to buy and sell financial
instruments.
o Financial institutions, which allow people access to the financial markets,
collect information, and provide a variety of other sources.
o Government regulatory agencies, which are responsible for making sure
that the elements of the financial system operate in a safe and reliable
manner.
o Central banks, which stabilize the economy.
Apply five core principles of money and banking, which are:
o Core Principle 1: Time has value.
o Core Principle 2: Risk requires compensation.
o Core Principle 3: Information is the basis for decisions.
o Core Principle 4: Markets determine prices and allocate resources.
o Core Principle 5: Stability improves welfare.
Important Points of the Chapter
This section of the instructor’s manual will highlight key points made in each chapter;
these may be the “big questions” (and their answers) raised in the chapter introduction, or
may be “timeless lessons” that students will use well into the future.
Application of Core Principles
A key feature of the text is the distillation of 5 core principles, which are defined in this
chapter and used as organizing themes throughout the rest of the book. While the 5
principles will be fully treated in the chapter outline below, it is worth listing them here;
they are:
1-1
, Chapter 01 An Introduction to Money and the Financial System
1) Time has value.
2) Risk requires compensation.
3) Information is the basis for decisions.
4) Markets set prices and allocate resources.
5) Stability improves welfare.
Students and instructors should look for the icons in the text that signal that a core
principle is being applied.
Teaching Tips/Student Stumbling Blocks
Students should note that they will be asked to apply the core principles to
different topics; see the problems at the end of this chapter for examples.
You may wish to present the list of five core principles often in your
presentations.
It also might be helpful for students to create a reference list of the five core
principles and keep it in a handy spot; the inside front cover of their class
notebook, perhaps.
It will be helpful to find out if the students in your class have already taken
statistics or not; it will help you plan how you will cover Chapter 5 (which
includes discussion of concepts like the mean, expected value, variance, and
standard deviation).
Have students use a spreadsheet to keep track of the purchases they make in a
week, indicating the types of transactions, amounts, and methods of payment.
Collect and, if possible, combine the spreadsheets to point out trends or patterns.
For example, does method of payment change with size of transaction? Is cash
used more often by some students than others (due to, for example, whether or not
the person lives on campus)?
Features in this Chapter
This instructor’s manual will provide, on a chapter-by-chapter basis, brief summaries
(and page references) for the four types of inserts found in the chapters of the text. The
four types of inserts (and their general descriptions) are:
Your Financial World: These inserts provide basic guidelines for applying
economic theory to the bread-and-butter financial decisions that you make nearly
every day.
The first “Your Financial World” insert appears in this chapter. Titled “Guard
Your Identity,” it explains how little personal information thieves need to steal
someone’s identity. Students are also urged to check their financial statements for
unfamiliar charges or cash withdrawals. Finally, information is provided about
government resources to help prevent identity theft.
1-2
