Financial Intermediaries and Currency Exchange Concepts

Financial intermediary

An institution that accepts money from savers and lends it to borrowers, acting as a broker.

How do financial intermediaries obtain funds to lend?

They pay savers to give them money.

Two key functions of financial intermediaries

Allow borrowers to purchase what they need; Provide savers with opportunities to earn more money.

Financial asset

A receipt showing the amount of money invested in a financial intermediary.

Investment bank

Which is NOT a depository institution?

Interest spread

The difference between the interest charged to borrowers and paid to savers.

Checking account (demand deposit)

An account that allows check writing.

Savings account

A type of account that earns a small amount of interest but does not allow check writing.

Time deposit account

An account where money is deposited for a specific period to earn interest.

Finance company

An institution that provides loans for durable goods.

Pension fund

A fund that collects and invests money for retirement.

Securities

Financial assets like government debt and corporate stocks/bonds.

Why do people invest in securities?

They don't need short-term access to the money and want it to earn more.

Diversification

Reducing investment risk by spreading funds across various assets.

Typical currency arrangement in most countries

Each country has its own currency.

Importers' payment requirement

Pay in the other country's currency when purchasing from foreign businesses.

Foreign exchange market

Where major traders can exchange currencies.

Currency exchange contact for individuals in the U.S.

A bank.

Management of currency values by major world economies

They allow currency values to change with the market.

Reason NOT for currency fluctuations

Interest rates from the Federal Reserve.

Major exception to market-based currency valuation

China.

Response to changing exchange rates

By shifting where they make purchases.

Effect of another currency strengthening compared to the U.S. dollar

Their products become more expensive in the U.S.

Effect on U.S. products when a foreign currency strengthens

U.S. products become less expensive in that country.

Effect of another currency weakening compared to the U.S. dollar

Their products become less expensive in the U.S.

Comparative advantage

Producing goods more efficiently or cheaply than others.

Determination of what a country imports or exports

Comparative advantage.

Effect of major exchange rate changes on trade

By affecting the consumer price of products.