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Money and Banking ECO 2115 Chapter 1 An introduction to Money and the Financial System

Instructor: Marc Prud’Homme. Money and Banking ECO 2115 Chapter 1 An introduction to Money and the Financial System. Introduction. You buy a coffee You pay your tuition fee You buy a bus pass Credit card transaction Rent. Money and Banking : Chapter 1. 2. Page. Introduction.

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Money and Banking ECO 2115 Chapter 1 An introduction to Money and the Financial System

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  1. Instructor: Marc Prud’Homme Money and BankingECO 2115Chapter 1An introduction to Money and the Financial System

  2. Introduction • You buy a coffee • You pay your tuition fee • You buy a bus pass • Credit card transaction • Rent Money and Banking : Chapter 1 2 Page

  3. Introduction • The five parts of the financial system • The five core principles of money and banking Money and Banking : Chapter 1 3 Page

  4. The five parts of the financial system • Money • To pay for purchases and store wealth • Financial Instruments • To transfer resources from savers to investors and to transfer risk to those best equipped to bear it. • Financial MarketsBuy and sell financial instruments. • Financial Institutions • Provide access to financial markets, collect information & provide services • Central Banks • Monitor Financial Institutions (FIs) and stabilize the economy Money and Banking : Chapter 1 4 Page

  5. The five core principles of M&B • Time has value • Risk requires compensation • Information is the basis for decisions • Markets determine prices and allocation resources • Stability improves welfare Money and Banking : Chapter 1 5 Page

  6. The five core principles of M&B • Time has value • Time affects the value of financial instruments • Interest payments exist of the time value of financial instruments Money and Banking : Chapter 1 6 Page

  7. The five core principles of M&B • Risk requires compensation • In a world of uncertainty, individuals will accept risk only if they are compensated in some form. Money and Banking : Chapter 1 7 Page

  8. The five core principles of M&B • Information is the basis for decisions • The collection and processing of information is the basis of foundation of the financial system. Money and Banking : Chapter 1 8 Page

  9. The five core principles of M&B • Marketsdetermine prices and allocate resources. • The “places” where buyers and sellers “meet” are the core of the economic system. Money and Banking : Chapter 1 9 Page

  10. The five core principles of M&B • Stabilityimproves welfare. • A stable economy reduces risk and improves everyone's welfare. Money and Banking : Chapter 1 10 Page

  11. Do your best not to tell people your: • - Date of birth • - Birthplace • - Your mother’s maiden name • - Your address Money and Banking : Chapter 1 11 Page

  12. Guard your Social Security Number: • - Don’t tell anyone unless you have to • - Remove it whenever you can Money and Banking : Chapter 1 12 Page

  13. Money and Banking : Chapter 1 13 Page

  14. Measuring economic activity • Gross Domestic Product (GDP): • The market value of final goods and services produced in a country during a year. Money and Banking : Chapter 1 14 Page

  15. Measuring economic activity • Real vs. Nominal GDP: • Need to distinguish changes in prices from changes in quantities • Real GDP uses base-year prices and isolates change in quantities • Nominal GDP = Prices x Real GDP • Real GDP = Nominal GDP / Prices • Statcan.gc.ca Money and Banking : Chapter 1 15 Page

  16. Chapter summary • A healthy and constantly evolving financial system is the foundation for economic efficiency and economic growth. • It has five parts: • Money is used to pay for purchases and to store wealth. • Financial instruments are used to transfer • resources and risk. Money and Banking : Chapter 1 16 Page

  17. Chapter summary • cont’d • It has five parts: • Financial markets allow people to buy and sell financial instruments. • Financial institutions provide access to the • financial markets, collect information, and • provide a variety of other services. • Central banks stabilize the economy. • resources and risk. Money and Banking : Chapter 1 17 Page

  18. Chapter summary • The core principles of money and banking • are useful in understanding all five parts • of the financial system. • Core Principle 1: Time has value. • Core Principle 2: Risk requires compensation. Money and Banking : Chapter 1 18 Page

  19. Chapter summary • cont’d • Core Principle 3: Information is the basis for decisions. • Core Principle 4: Markets determine prices and allocate resources. • Core Principle 5: Stability improves welfare. Money and Banking : Chapter 1 19 Page

  20. End of chapter Money and Banking : Chapter 1 20 Page

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