Money and Banking Test 1 Review 2

An asset that is generally accepted as payment for goods and services or repayment of debt

Money used in exchange for goods & services

Money used to quote prices

Used to move purchasing power into the future

Objects with intrinsic value

Value comes from government decree (or fiat)

Instructions to the bank to shifts funds from your
account to that of the person or firm whose name is
written in the “Pay to the Order of” line.

Electronic message to your bank to transfer funds
immediately, like a check

Deferred payment
– Issuer makes payment for you
– You have to pay it back

Which of the following is happening to the future of money?

The rate at which the general price level is increasing over time

The measure of the inflation process

A measure of the ease an asset can be turned into a means of payment (Money).

Narrowest definition
Only most liquid assets

Broader definition Includes assets not used as means of payment.

When inflation is ____, money growth helps
forecast inflation.

When inflation is ____, the relationship between it and money growth is not as close.

Answers the question: "How much more would it cost for people to purchase today the same basket of goods and services that they actually bought at some fixed time in the past?“

It is the Fixed Weight Index

GDP or Personal Consumption Expenditure

Half way between fixed weight and a Deflator.

Institution stands between lender and borrower.

Borrowers sell securities directly to lenders in the financial markets

A written legal obligation of one party to
transfer something of value, usually money, to another party at some future date, under certain conditions

Uses of Financial Instruments:

Overcome the costs of complexity, makes them easier to understand

Summarize essential information about issuer. Eliminate expense of collecting information

Used to transfer resources
Examples: stocks and bonds

Value derived from underlying instruments
Examples: Futures and options

True/false: The size, timing, likelihood payment is made, and conditions under which payment is made all affect the value of financial instruments

Financial Instrument A requires a large payment, you make the payment sooner, a payment is likely to be made, and you need the instrument badly.

Financial Instrument B requires a small payment, you will make the payment later, a payment is not likely to be made, and you don't need the instrument badly.

Which financial instrument is more valuable?

Examples of stores of values for Financial Instruments:

Financial Instruments used to transfer risk

Places where financial instruments
are bought and sold.

Roles of Financial Markets include:

Buy and Sell Newly Issued Securities

Trade Existing Securities

Physical location where trading takes place

Networks of dealers connected electronically

Electronic networks where buyers and sellers interact directly.

Financial claims are bought and sold for immediate
cash payment

Financial claims based on underlying instruments are bought and sold for payment at a future date

Well functioning markets have:

Financial Institutions:

Assets for a Financial Institution

Take deposits and make loans

Accept premiums, pay out based on events

Invest contributions, provide payments
to retirees

Proved access to financial markets

Raise funds in financial markets, make loans

Raise funds in financial markets, make loans,
provide guarantees.