The Role of Money and Financial Markets
Money: is any item or verifiable record accepted as payment for goods and services and repayment of debts.
Medium of Exchange: intermediary instrument or system used to facilitate the purchase and sale of goods and services between parties.
Unit of Account: Used to value goods and services, record debts, and make calculations.
Store of Value: Retains its value, or purchasing power, and does not depreciate.
Standard of Deferred Payment: Money is used to settle debts.
Durability: Long-lasting.
Portability: Easy to carry.
Divisibility: Can be divided into smaller units.
Uniformity: All forms of money are identical.
Acceptability: Widely accepted as a form of payment.
Limited Supply: Must be in limited supply to retain value.
Barter System: Exchange of goods and services without money.
Commodity Money: Money with intrinsic value (e.g., gold, silver).
Fiat Money: Money without intrinsic value but accepted by the government.
Digital Money: Electronic form of money (e.g., cryptocurrencies).
Fractional Reserve Banking: Banks keep a fraction of deposits as reserves and lend out the rest.
Money Multiplier Effect: The process by which banks create money through lending.
Financial Markets: Platforms where buyers and sellers trade financial assets.
Facilitate the raising of capital.
Promote investment and economic growth.
Allow risk management through diversification.
Money Markets: Short-term borrowing and lending.
Capital Markets: Long-term securities (stocks and bonds).
Foreign Exchange Markets: Currency trading.
Derivatives Markets: Contracts based on the value of underlying assets.
Commercial Banks: Accept deposits, provide loans, and offer financial services.
Investment Banks: Assist in raising capital, provide advisory services, and facilitate mergers and acquisitions.
Retail banking: also known as consumer banking or personal banking, is banking that provides financial services to individual consumers rather than businesses.
Insurance Companies: Provide risk management through insurance.
Pension Funds: Manage retirement savings.
Mutual Funds: Pool funds from investors to buy securities.
Hedge Funds: Invest in a variety of assets to achieve high returns.
Financial instruments: are assets that can be traded, or they can also be seen as packages of capital that may be traded.
Equities: Stocks representing ownership in a company.
Provide capital to firms and potential returns to investors.
Debt Instruments: Bonds and loans representing a promise to repay borrowed funds.
Allow entities to borrow funds and investors to earn interest.
Derivatives: Contracts whose value is derived from underlying assets.
Used for hedging risks and speculation.
Nominal Interest Rates: The stated interest rate without adjusting for inflation.
Real Interest Rates: The interest rate adjusted for inflation.
Fixed Interest Rates: Rates that remain the same for a set period.
Variable Interest Rates: Rates that can change based on market conditions.
Supply and Demand for Money: Interest rates are influenced by the supply of and demand for money.
Central Bank Policies: Central banks set benchmark interest rates.
Inflation Expectations: Higher expected inflation can lead to higher interest rates.
Consumption and Investment: Lower interest rates encourage borrowing and spending; higher rates encourage saving.
Exchange Rates: Higher interest rates can attract foreign investment, affecting exchange rates.
Inflation and Deflation: Central banks use interest rates to control inflation.
Capital Formation: Financial markets facilitate the accumulation of capital.
Efficient Resource Allocation: They ensure funds are allocated to the most productive uses.
Asset Prices: Financial markets influence asset prices, which can affect inflation.
Wealth Effect: Changes in asset prices can influence consumer spending and investment.
Exchange Rates: The price of one currency in terms of another. Exchange rates affect the competitiveness of exports and imports.
Supply and Demand
Currency Demand: If a country’s exports increase, foreign demand for its currency rises, leading to an appreciation.
Currency Supply: High levels of imports increase the supply of a currency in the foreign exchange market, potentially leading to depreciation.
Interest Rates: Higher interest rates offer better returns on investments in a country’s currency, attracting foreign investors and increasing demand for that currency, leading to appreciation.
Inflation Rates- Higher inflation erodes a currency's value, leading to depreciation. Countries with lower inflation rates see their currency appreciate as their purchasing power increases relative to other currencies.
Economic and Political Stability- Stable countries are more attractive to investors.
Regulation: refers to the laws and rules governing the operation of financial markets.
Protect Consumers: Ensure fairness and transparency.
Prevent Crises: Reduce the risk of financial crises.
Maintain Stability: Ensure the stability of the financial system.
Prevents fraud and protects consumers.
Ensures the integrity of financial markets.
Promotes confidence in the financial system.
Reduces the risk of financial crises
Money: is any item or verifiable record accepted as payment for goods and services and repayment of debts.
Medium of Exchange: intermediary instrument or system used to facilitate the purchase and sale of goods and services between parties.
Unit of Account: Used to value goods and services, record debts, and make calculations.
Store of Value: Retains its value, or purchasing power, and does not depreciate.
Standard of Deferred Payment: Money is used to settle debts.
Durability: Long-lasting.
Portability: Easy to carry.
Divisibility: Can be divided into smaller units.
Uniformity: All forms of money are identical.
Acceptability: Widely accepted as a form of payment.
Limited Supply: Must be in limited supply to retain value.
Barter System: Exchange of goods and services without money.
Commodity Money: Money with intrinsic value (e.g., gold, silver).
Fiat Money: Money without intrinsic value but accepted by the government.
Digital Money: Electronic form of money (e.g., cryptocurrencies).
Fractional Reserve Banking: Banks keep a fraction of deposits as reserves and lend out the rest.
Money Multiplier Effect: The process by which banks create money through lending.
Financial Markets: Platforms where buyers and sellers trade financial assets.
Facilitate the raising of capital.
Promote investment and economic growth.
Allow risk management through diversification.
Money Markets: Short-term borrowing and lending.
Capital Markets: Long-term securities (stocks and bonds).
Foreign Exchange Markets: Currency trading.
Derivatives Markets: Contracts based on the value of underlying assets.
Commercial Banks: Accept deposits, provide loans, and offer financial services.
Investment Banks: Assist in raising capital, provide advisory services, and facilitate mergers and acquisitions.
Retail banking: also known as consumer banking or personal banking, is banking that provides financial services to individual consumers rather than businesses.
Insurance Companies: Provide risk management through insurance.
Pension Funds: Manage retirement savings.
Mutual Funds: Pool funds from investors to buy securities.
Hedge Funds: Invest in a variety of assets to achieve high returns.
Financial instruments: are assets that can be traded, or they can also be seen as packages of capital that may be traded.
Equities: Stocks representing ownership in a company.
Provide capital to firms and potential returns to investors.
Debt Instruments: Bonds and loans representing a promise to repay borrowed funds.
Allow entities to borrow funds and investors to earn interest.
Derivatives: Contracts whose value is derived from underlying assets.
Used for hedging risks and speculation.
Nominal Interest Rates: The stated interest rate without adjusting for inflation.
Real Interest Rates: The interest rate adjusted for inflation.
Fixed Interest Rates: Rates that remain the same for a set period.
Variable Interest Rates: Rates that can change based on market conditions.
Supply and Demand for Money: Interest rates are influenced by the supply of and demand for money.
Central Bank Policies: Central banks set benchmark interest rates.
Inflation Expectations: Higher expected inflation can lead to higher interest rates.
Consumption and Investment: Lower interest rates encourage borrowing and spending; higher rates encourage saving.
Exchange Rates: Higher interest rates can attract foreign investment, affecting exchange rates.
Inflation and Deflation: Central banks use interest rates to control inflation.
Capital Formation: Financial markets facilitate the accumulation of capital.
Efficient Resource Allocation: They ensure funds are allocated to the most productive uses.
Asset Prices: Financial markets influence asset prices, which can affect inflation.
Wealth Effect: Changes in asset prices can influence consumer spending and investment.
Exchange Rates: The price of one currency in terms of another. Exchange rates affect the competitiveness of exports and imports.
Supply and Demand
Currency Demand: If a country’s exports increase, foreign demand for its currency rises, leading to an appreciation.
Currency Supply: High levels of imports increase the supply of a currency in the foreign exchange market, potentially leading to depreciation.
Interest Rates: Higher interest rates offer better returns on investments in a country’s currency, attracting foreign investors and increasing demand for that currency, leading to appreciation.
Inflation Rates- Higher inflation erodes a currency's value, leading to depreciation. Countries with lower inflation rates see their currency appreciate as their purchasing power increases relative to other currencies.
Economic and Political Stability- Stable countries are more attractive to investors.
Regulation: refers to the laws and rules governing the operation of financial markets.
Protect Consumers: Ensure fairness and transparency.
Prevent Crises: Reduce the risk of financial crises.
Maintain Stability: Ensure the stability of the financial system.
Prevents fraud and protects consumers.
Ensures the integrity of financial markets.
Promotes confidence in the financial system.
Reduces the risk of financial crises
