Monetary Economics (BEC 350) - Lecture 1: Financial Systems Basics

This set of vocabulary flashcards covers core definitions, principles, functions, and administrative details from the first lecture of Monetary Economics (BEC 350) regarding financial systems.

Economics

The study of how individuals and societies decide to allocate scarce resources left to them by previous generations and nature.

Money

Anything generally accepted in payment for goods and services or in the repayment of debts.

Financial Instrument (Asset)

The written legal obligation of one party to transfer something of value to another party at some future date, under certain conditions.

Financial Intermediary (Institution)

A firm that provides access to financial markets, both to savers (individuals and firms) who wish to purchase financial assets and borrowers who wish to issue them and to individuals wishing to trade risk.

Central Bank

The government agency that oversees the banking system and is responsible for the amount of money and credit supplied to an economy.

Financial Market

A place where financial instruments (assets) are bought and sold.

Primitive Securities

A class of assets used by savers/lenders to directly transfer resources to investors/borrowers.

Derivative Instruments

Assets that derive their value or payoff from the behavior of the underlying instrument, primarily used to shift risk.

Five Core Parts of the Financial System

Financial Instruments, Financial Markets, Financial Institutions, Money, and Central Banks.

Six Core Functions of the Financial System

Clearing and settling payments; pooling resources and subdividing shares; transferring resources across time and space; managing risk; providing information; and dealing with incentive problems.

Five Core Principles of the Financial System

Time has value; risk requires compensation; information is the basis for decisions; markets set prices and allocate resources; and stability improves welfare.

Functions of Financial Instruments

Means of payment, store of value, and trading of risk.

Functions of Money

Means of payment, store of value, unit of account, and standard of deferred payment.

Key Difference of Money

The monopoly power of the Central Bank to issue it.

Financial Intermediary Functions

Provisions of payment mechanisms, liquidity provision, maturity transformation, and risk transformation.

Financial Market Characteristics

Price discovery, providing a trading mechanism (such as auction or lottery), and execution of agreements (settlement function).

Financial Market Functions

Liquidity, information, and risk sharing.

Public Investors

Agents in financial markets including private individuals, trusts, pension funds, and insurance funds.

Problem Set Grading Penalty

$5$ points are subtracted from the problem set average for every set not turned in.

Test I Date

Week of MARCH $6$, administered in-class.

Test II Date

Week of JUNE $6$, administered in-class.

Course Textbook

The Economics of Money, Banking, and Financial Markets: European Edition by Mishkin, Matthews, & Giuliodori ($2013$).

Monetary Policy in Zambia

Declared $86\%$ of their currency no longer legal tender over the past two months.

Financial Assets vs. Goods Market

Goods and services represent current consumption, while financial assets represent future consumption.

Brokers

Agents in the financial market who act as intermediaries between buyers and sellers without holding inventory.

Dealers

Agents in the financial market who buy and sell assets for their own account to facilitate trading.