MONEY & BANKING EXAM 1
6oopartsooofootheoofinancialoosystemoo-ooans--✔✔1.money
2.oofinancialooinstruments
3.oofinancialoomarkets
4.oofinancialooinstitutions
5.ooregulatoryooagencies
6.oocentraloobanks
~Constantlyooevolving
moneyoo-ooans--✔✔payooforoopurchases/storeoowealthoo
-usedootooobeoogold/silver,oothenoopaper,oothenooelectronicoofundsootransfers
financialooinstrumentsoo-ooans--
✔✔transferooresourcesoofromoosaversootoooinvestorsooandootoootransferootheooriskootoooth
oseoowhoooareoobestooequippedootooobearooitoo(stocks,oomortgages,ooinsuranceoopolicies)
-
originallyoocouldoobuyooindividualoostocksoothroughoostockbrokersoo(forootheoowealthyoob/
cooofoocost)-
todayoocanoodooomutualoofundsoo(pooloosavingsooofooaoolargeoonumberooofooinvestors)
financialoomarketsoo-ooans--
✔✔allowoousootooobuyooandooselloofinancialooinstrumentsooquickly/cheaply
-originallyoolocatedooinoocoffeehouses/taverns-
then=ooorganizedoomarketsoo(NYSE),ootoday=electronicoonetworks-
ooevenoosmallooinvestorsoocanooaffordootoooparticipate
financialooinstitutionsoo-ooans--
✔✔provideooaoomyriadooofooservices,ooincludingooaccessootoootheoofinancialoomarketsooa
ndoocollectionooofooinformationooaboutooprospectiveooborrowersootoooensureootheyooareoo
creditworthyoo(banks,oosecuritiesoofirms,ooandooinsuranceoocompanies)
-banksoousedootooobeoovaults-
then,ootheyooacceptedoodepositsooandoomadeooloans,oonow=ooaoosupermarketoo(hugeooa
ssortmentooofoofinancialooproductsooandooservicesooforoosale)
regulatoryooagenciesoo-ooans--
✔✔makeoosureoothatootheooelementsooofooaoofinancialoosystem-
includingooitsooinstruments,oomarkets,ooandooinstitutions-
operateooinooaoosafeooandooreliableoomanner
,(introducedooafterooGreatooDepression)-ooprovideoowide-rangingoofinancialooregulation-
rulesooforoooperationooofoofinancialooinstitutionsooandoomarkets-andoosupervision-
oversightoothroughooexaminationooandooenforcement-
ootheooevolutionooofooeverythingooelseoohasooalsooocausedoothisootoooevolve-
oousedootooovisitoobanks/countoomoney-
oonowootheyoolookooatootheoosystemsoothatooaoobankoousesootooomanageooitsoovariousooris
ks
centraloobanksoo-ooans--
✔✔monitorooandoostabilizeootheooeconomyoo(FederalooReserveooSystem)-
oobeganooasoolargeooprivateoobanksoofoundedoobyoomonarchsootooofinanceoowars
Dodd-FrankooWallooStreetooReformooandooConsumerooProtectionooActoo-ooans--
✔✔adoptedooinoo2010-oo(Dodd-FrankooAct)-
oolargestooUSooregulatoryoochangeoosinceootheoo1930s-
wentoofromooonlyooaoofewootooonow-oonearlyooeveryoocountryooinootheooworldoohasooone-
controlootheooavailabilityooofoomoneyooandoocreditootooopromoteoolowooinflation,oohighoogro
wth,ooandootheoostabilityooofootheoofinancialoosystem)-usedootooobeoomysteryoobutoonow-
ootheyooserveootheoopublic-
ooexplainoorationaleooforoodecisionsoo(EuropeanooCentralooBank/USooFederalooReserve)
BaselooIIIoo-ooans--✔✔alsoooadoptedooinoo2010-
oothird,oomajorooupdateooofoostandardsooforoointernationallyooactiveoobanks-
namedooafterooswissoocitywherooetheyoomeet-
FiveooCoreooPrinciplesooofooMoneyooandooBankingoo-ooans--✔✔1.ooTime
2.ooRisk
3.ooInformation
4.ooMarkets
5.ooStability
CoreooPrincipaloo1:ooTimeoohasooValueoo-ooans--✔✔timeoohasooaooprice-
ooaffectsootheoovalueooofoofinancialootransactions-ifooyouootakeoooutooaooloan-
ooyouoopayoointerestootooocompensateootheoolenderooforootheootimeooduringoowhichooyouoo
useootheoofundsoo(itoohasooanooopportunityoocostootoootheoolender)
CoreooPrincipaloo2:ooRiskooRequiresooCompensationoo-ooans--
✔✔Dealingooeffectivelyoowithooriskoorequiresoothatooyouooconsiderootheoofulloorangeooofoo
possibilitiesooinooorderootoooeliminateoosomeoorisks,ooreduceooothers,oopayoosomeoneooto
ooassumeooparticularlyooonerousoorisk,ooandoojustooliveoowithoowhat'sooleft.ooNooooneoowill
ooassumeoorisksooforoofreeoo(carooinsurance,oohighoointerestooonooloanooifoothereooisooaooc
hanceootheoopersonoowon'toopay)
junkoobondsoo-ooans--✔✔bondsooaoocompany/
governmentoothatooisooonootheoovergeooofoobeingoounableootooopayooitsoobillsoomayoostilloo
beooableootoooissue-ooextremelyoohighoointerestoorateoodueootooorisk
,CoreooPrincipleoo3:ooInformationooisootheooBasisooforooDecisionsoo-ooans--
✔✔collectooinfooobeforeoomakingooaoodecision-
oomoreooimportantootheoodecisionoo=oomoreooinformation
ex:oolenderooandooborrowerooforoomortgage-
oowhenoolendersoofailootoooassessoocreditworthinessooproperly,ootheyooendooupoowithoobor
rowersoowhoooareoounableootooorepayooloansooinootheoofuture
CoreooPrincipleoo4:ooMarketsooDetermineooPricesooandooAllocateooResourcesoo-ooans--
✔✔Markets-oocoreooofooeconomicoosystem-ooplaceoo(physical/
virtual)oowhereoobuyersooandoosellersoomeet,oowhereoofirmsoogoootoooissueoostocksooando
obonds,ooandoowhereooindividualsoogoootoootradeooassets.oo-
financialoomarkets=ooessentialootoootheooeconomy-
ootheoobetteroodevelopedooaoocountry'soofinancialoomarkets,ootheoofasterootheoocountryoow
illoogrow.-
oofinancialoomarketsoogatherooinformationoofromooaoolargeoonumberooofooindividualoopartic
ipantsooandooaggregateooitoointoooaoosetooofoopricesoothatoosignalsoowhatooisoovaluableooa
ndoowhatooisoonot-
oobyooattachingoopricesootooodifferentoostocksoooroobonds,ootheyooprovideooaoobasisooforoot
heooallocationooofoocapital-oofinancialoomarketsoodooonotooariseoobyoothemselves-
oorequireoorulesooinooorderootoooworkooproperly-
ooforoopeopleootoooparticipate,ootheyoomustooperceiveooitooasoofair.
CoreooPrincipleoo5:ooStabilityooImprovesooWelfareoo-ooans--
✔✔stabilityooisooaoodesirableooquality-
ooinstabilityoobroughtoousoocloserootoooaoocollapseoo(2008)-
oorelatedootooocoreooprincipleoo2-
reducingoovolatilityooreducesoorisk.oowhileoomanyoocanooeliminateooriskooonootheirooown,oo
someoocanooonlyoobeooreducedoobyoogovernmentoopolicymakersoo(likeoobusinessoocycleo
ofluctuations)-
moneytaryoopolicymakersoocanoomoderateootheoodownswingsoobyoocarefullyooadjustingooi
nterestoorates.ooCentraloobanksooalsooohaveoopowerfulootoolsootooosteadyoofragileoofinanci
aloosystemsooandootooorepairoooroosupportoodysfunctionaloomarkets-
primaryoofunctionooofoocentraloobanks(workootoookeepooinflationoolowooandoostableooandoot
oookeepoogrowthoohighooandoostable)
GDPoo-ooans--✔✔mostoocommonlyoousedoomeasureooofooeconomicooactivity-
inooorderootoooseeooifooeconomyooisoogrowing-
oolookooatoowhetherooGDPooisoogrowingooandootheoorateooofootheoogrowth-
ootooocompareoowell-beingooinootwooocountries-
oolookooatooGDPooperoopersonooinooeachoocountryoo(peroocapitaooGDP)-ooGDP-
ootheoomarketoovalueooofoofinaloogoodsooandooservicesooproducedooinooaoocountryooduring
ooaooyear
formulaooforoorealooGDPoo-ooans--✔✔RealooGDPoo=oo(nominalooGDPoo/
oopriceooindex)ooxoo100
, Moneyooredefinedoo-ooans--
✔✔anooassetoothatooisoogenerallyooacceptedooasoopaymentooforoogoodsooandooservicesoo
oroorepaymentooofoodebt
Incomeoo-ooans--✔✔aooflowooofooearningsoooverootime
wealthoo-ooans--
✔✔theoovalueooofooassetsoominusooliabilitiesoo(money=oneooofootheseooassets)
Moneyooasooaoomeansooofoopaymentoo-ooans--✔✔asooaoomeansooofoopayment-
oootherooalternativesoodon'tooworkootooowelloo(likeoobartering,oowhereooyouoorelyooonooaoo"
doubleoocoincidence"ooofoowants)
-
moneyoofinalizesoopaymentsoosooothatoobuyersooandoosellersoohaveoonooofurtherooclaimoo
onooeachother.
-
increaseooinoobothootheoonumberooofootransactionsooandootheoonumberooofoopotentialoobu
yersooandoosellersoo(vastoomajorityooofoowhomooneverooseeooeachooother)ooarguesooforoos
omethingoothatoomakesoopaymentoofinalooandoowhoseoovalueooisooeasilyooverified.
MoneyooasooaooUnitooofooAccountoo-ooans--✔✔standardooofoovalue
moneyooisootheoounitooofooaccountoothatooweoouseootoooquoteoopricesooandoorecordoodebts
-relativeoopricesoomatter-oooneooproductoobeingoohigheroothanootheoopriceooofooanother-
-usedootoooquoteooprices
MoneyooasooaooStoreooofooValueoo-ooans--
✔✔foroomoneyootooofunctionooasooaoomeansooofoopayment,ooitoohasootooobeooaoostoreooofo
ovalue-ooitoomustooretainooitsooworthoofromoodayootoooday-
oohasootooobeoodurableooandoocapableooofootransferringoopurchasingoopoweroofromoooneoo
dyayootoootheoonext-
oopaperoocurrencyoodoesoodegradeoowithoouseoo($1oobills=oolifespanooofoo71oomonths)-
oobutooregardlessooofooitsoophysicaloocondition,oousuallyooacceptedooatoofaceoovalue-
oonotootheooonlyoostoreooofoovalueoo(wealthoocanoobeooheldooinoolotsooofoootherooforms-
oostocks,oobonds,oohouses,oocars,ooetc)-
oomanyooareoopreferredootooomoneyoo(ex:oostocksooofferoopotentialooforooappreciationooino
onominaloovalue)
liquidityoo-ooans--
✔✔aoomeasureooofootheooeaseoowithoowhichooanooassetoocanoobeooturnedoointoooaoomean
sooofoopayment-
oo(aoobondooisoomuchoomoreooliquidoothanooaoohouseoob/cooitooisoocheaper/
easierootooosell)
weooholdoomoneyoobecauseooitooisooliquid
6oopartsooofootheoofinancialoosystemoo-ooans--✔✔1.money
2.oofinancialooinstruments
3.oofinancialoomarkets
4.oofinancialooinstitutions
5.ooregulatoryooagencies
6.oocentraloobanks
~Constantlyooevolving
moneyoo-ooans--✔✔payooforoopurchases/storeoowealthoo
-usedootooobeoogold/silver,oothenoopaper,oothenooelectronicoofundsootransfers
financialooinstrumentsoo-ooans--
✔✔transferooresourcesoofromoosaversootoooinvestorsooandootoootransferootheooriskootoooth
oseoowhoooareoobestooequippedootooobearooitoo(stocks,oomortgages,ooinsuranceoopolicies)
-
originallyoocouldoobuyooindividualoostocksoothroughoostockbrokersoo(forootheoowealthyoob/
cooofoocost)-
todayoocanoodooomutualoofundsoo(pooloosavingsooofooaoolargeoonumberooofooinvestors)
financialoomarketsoo-ooans--
✔✔allowoousootooobuyooandooselloofinancialooinstrumentsooquickly/cheaply
-originallyoolocatedooinoocoffeehouses/taverns-
then=ooorganizedoomarketsoo(NYSE),ootoday=electronicoonetworks-
ooevenoosmallooinvestorsoocanooaffordootoooparticipate
financialooinstitutionsoo-ooans--
✔✔provideooaoomyriadooofooservices,ooincludingooaccessootoootheoofinancialoomarketsooa
ndoocollectionooofooinformationooaboutooprospectiveooborrowersootoooensureootheyooareoo
creditworthyoo(banks,oosecuritiesoofirms,ooandooinsuranceoocompanies)
-banksoousedootooobeoovaults-
then,ootheyooacceptedoodepositsooandoomadeooloans,oonow=ooaoosupermarketoo(hugeooa
ssortmentooofoofinancialooproductsooandooservicesooforoosale)
regulatoryooagenciesoo-ooans--
✔✔makeoosureoothatootheooelementsooofooaoofinancialoosystem-
includingooitsooinstruments,oomarkets,ooandooinstitutions-
operateooinooaoosafeooandooreliableoomanner
,(introducedooafterooGreatooDepression)-ooprovideoowide-rangingoofinancialooregulation-
rulesooforoooperationooofoofinancialooinstitutionsooandoomarkets-andoosupervision-
oversightoothroughooexaminationooandooenforcement-
ootheooevolutionooofooeverythingooelseoohasooalsooocausedoothisootoooevolve-
oousedootooovisitoobanks/countoomoney-
oonowootheyoolookooatootheoosystemsoothatooaoobankoousesootooomanageooitsoovariousooris
ks
centraloobanksoo-ooans--
✔✔monitorooandoostabilizeootheooeconomyoo(FederalooReserveooSystem)-
oobeganooasoolargeooprivateoobanksoofoundedoobyoomonarchsootooofinanceoowars
Dodd-FrankooWallooStreetooReformooandooConsumerooProtectionooActoo-ooans--
✔✔adoptedooinoo2010-oo(Dodd-FrankooAct)-
oolargestooUSooregulatoryoochangeoosinceootheoo1930s-
wentoofromooonlyooaoofewootooonow-oonearlyooeveryoocountryooinootheooworldoohasooone-
controlootheooavailabilityooofoomoneyooandoocreditootooopromoteoolowooinflation,oohighoogro
wth,ooandootheoostabilityooofootheoofinancialoosystem)-usedootooobeoomysteryoobutoonow-
ootheyooserveootheoopublic-
ooexplainoorationaleooforoodecisionsoo(EuropeanooCentralooBank/USooFederalooReserve)
BaselooIIIoo-ooans--✔✔alsoooadoptedooinoo2010-
oothird,oomajorooupdateooofoostandardsooforoointernationallyooactiveoobanks-
namedooafterooswissoocitywherooetheyoomeet-
FiveooCoreooPrinciplesooofooMoneyooandooBankingoo-ooans--✔✔1.ooTime
2.ooRisk
3.ooInformation
4.ooMarkets
5.ooStability
CoreooPrincipaloo1:ooTimeoohasooValueoo-ooans--✔✔timeoohasooaooprice-
ooaffectsootheoovalueooofoofinancialootransactions-ifooyouootakeoooutooaooloan-
ooyouoopayoointerestootooocompensateootheoolenderooforootheootimeooduringoowhichooyouoo
useootheoofundsoo(itoohasooanooopportunityoocostootoootheoolender)
CoreooPrincipaloo2:ooRiskooRequiresooCompensationoo-ooans--
✔✔Dealingooeffectivelyoowithooriskoorequiresoothatooyouooconsiderootheoofulloorangeooofoo
possibilitiesooinooorderootoooeliminateoosomeoorisks,ooreduceooothers,oopayoosomeoneooto
ooassumeooparticularlyooonerousoorisk,ooandoojustooliveoowithoowhat'sooleft.ooNooooneoowill
ooassumeoorisksooforoofreeoo(carooinsurance,oohighoointerestooonooloanooifoothereooisooaooc
hanceootheoopersonoowon'toopay)
junkoobondsoo-ooans--✔✔bondsooaoocompany/
governmentoothatooisooonootheoovergeooofoobeingoounableootooopayooitsoobillsoomayoostilloo
beooableootoooissue-ooextremelyoohighoointerestoorateoodueootooorisk
,CoreooPrincipleoo3:ooInformationooisootheooBasisooforooDecisionsoo-ooans--
✔✔collectooinfooobeforeoomakingooaoodecision-
oomoreooimportantootheoodecisionoo=oomoreooinformation
ex:oolenderooandooborrowerooforoomortgage-
oowhenoolendersoofailootoooassessoocreditworthinessooproperly,ootheyooendooupoowithoobor
rowersoowhoooareoounableootooorepayooloansooinootheoofuture
CoreooPrincipleoo4:ooMarketsooDetermineooPricesooandooAllocateooResourcesoo-ooans--
✔✔Markets-oocoreooofooeconomicoosystem-ooplaceoo(physical/
virtual)oowhereoobuyersooandoosellersoomeet,oowhereoofirmsoogoootoooissueoostocksooando
obonds,ooandoowhereooindividualsoogoootoootradeooassets.oo-
financialoomarkets=ooessentialootoootheooeconomy-
ootheoobetteroodevelopedooaoocountry'soofinancialoomarkets,ootheoofasterootheoocountryoow
illoogrow.-
oofinancialoomarketsoogatherooinformationoofromooaoolargeoonumberooofooindividualoopartic
ipantsooandooaggregateooitoointoooaoosetooofoopricesoothatoosignalsoowhatooisoovaluableooa
ndoowhatooisoonot-
oobyooattachingoopricesootooodifferentoostocksoooroobonds,ootheyooprovideooaoobasisooforoot
heooallocationooofoocapital-oofinancialoomarketsoodooonotooariseoobyoothemselves-
oorequireoorulesooinooorderootoooworkooproperly-
ooforoopeopleootoooparticipate,ootheyoomustooperceiveooitooasoofair.
CoreooPrincipleoo5:ooStabilityooImprovesooWelfareoo-ooans--
✔✔stabilityooisooaoodesirableooquality-
ooinstabilityoobroughtoousoocloserootoooaoocollapseoo(2008)-
oorelatedootooocoreooprincipleoo2-
reducingoovolatilityooreducesoorisk.oowhileoomanyoocanooeliminateooriskooonootheirooown,oo
someoocanooonlyoobeooreducedoobyoogovernmentoopolicymakersoo(likeoobusinessoocycleo
ofluctuations)-
moneytaryoopolicymakersoocanoomoderateootheoodownswingsoobyoocarefullyooadjustingooi
nterestoorates.ooCentraloobanksooalsooohaveoopowerfulootoolsootooosteadyoofragileoofinanci
aloosystemsooandootooorepairoooroosupportoodysfunctionaloomarkets-
primaryoofunctionooofoocentraloobanks(workootoookeepooinflationoolowooandoostableooandoot
oookeepoogrowthoohighooandoostable)
GDPoo-ooans--✔✔mostoocommonlyoousedoomeasureooofooeconomicooactivity-
inooorderootoooseeooifooeconomyooisoogrowing-
oolookooatoowhetherooGDPooisoogrowingooandootheoorateooofootheoogrowth-
ootooocompareoowell-beingooinootwooocountries-
oolookooatooGDPooperoopersonooinooeachoocountryoo(peroocapitaooGDP)-ooGDP-
ootheoomarketoovalueooofoofinaloogoodsooandooservicesooproducedooinooaoocountryooduring
ooaooyear
formulaooforoorealooGDPoo-ooans--✔✔RealooGDPoo=oo(nominalooGDPoo/
oopriceooindex)ooxoo100
, Moneyooredefinedoo-ooans--
✔✔anooassetoothatooisoogenerallyooacceptedooasoopaymentooforoogoodsooandooservicesoo
oroorepaymentooofoodebt
Incomeoo-ooans--✔✔aooflowooofooearningsoooverootime
wealthoo-ooans--
✔✔theoovalueooofooassetsoominusooliabilitiesoo(money=oneooofootheseooassets)
Moneyooasooaoomeansooofoopaymentoo-ooans--✔✔asooaoomeansooofoopayment-
oootherooalternativesoodon'tooworkootooowelloo(likeoobartering,oowhereooyouoorelyooonooaoo"
doubleoocoincidence"ooofoowants)
-
moneyoofinalizesoopaymentsoosooothatoobuyersooandoosellersoohaveoonooofurtherooclaimoo
onooeachother.
-
increaseooinoobothootheoonumberooofootransactionsooandootheoonumberooofoopotentialoobu
yersooandoosellersoo(vastoomajorityooofoowhomooneverooseeooeachooother)ooarguesooforoos
omethingoothatoomakesoopaymentoofinalooandoowhoseoovalueooisooeasilyooverified.
MoneyooasooaooUnitooofooAccountoo-ooans--✔✔standardooofoovalue
moneyooisootheoounitooofooaccountoothatooweoouseootoooquoteoopricesooandoorecordoodebts
-relativeoopricesoomatter-oooneooproductoobeingoohigheroothanootheoopriceooofooanother-
-usedootoooquoteooprices
MoneyooasooaooStoreooofooValueoo-ooans--
✔✔foroomoneyootooofunctionooasooaoomeansooofoopayment,ooitoohasootooobeooaoostoreooofo
ovalue-ooitoomustooretainooitsooworthoofromoodayootoooday-
oohasootooobeoodurableooandoocapableooofootransferringoopurchasingoopoweroofromoooneoo
dyayootoootheoonext-
oopaperoocurrencyoodoesoodegradeoowithoouseoo($1oobills=oolifespanooofoo71oomonths)-
oobutooregardlessooofooitsoophysicaloocondition,oousuallyooacceptedooatoofaceoovalue-
oonotootheooonlyoostoreooofoovalueoo(wealthoocanoobeooheldooinoolotsooofoootherooforms-
oostocks,oobonds,oohouses,oocars,ooetc)-
oomanyooareoopreferredootooomoneyoo(ex:oostocksooofferoopotentialooforooappreciationooino
onominaloovalue)
liquidityoo-ooans--
✔✔aoomeasureooofootheooeaseoowithoowhichooanooassetoocanoobeooturnedoointoooaoomean
sooofoopayment-
oo(aoobondooisoomuchoomoreooliquidoothanooaoohouseoob/cooitooisoocheaper/
easierootooosell)
weooholdoomoneyoobecauseooitooisooliquid
