Summary
The Economics of Money, Banking and Financial Markets
European Edition
Frederick S. Mishkin, Kent Matthews & Massimo Guiliodori
Chapter 1: Why study money, banking and financial markets?
The Bond Market and Interest Rates:
Financial markets: markets in which funds are transferred from people who have an excess
of available funds to people who have a shortage. Well-functioning of the financial markets
is a key factor in producing high economic growth.
Security (or financial instrument): is a claim on the issuer’s future income or assets (any
financial claim or piece of property that is subject to ownership.
Bond: a debt security that promises to make payments periodically for a specified period of
time.
Interest rate: the cost of borrowing or the price paid for the rental of funds.
On a personal level interest rates can encourage or discourage consumer spending and
saving. On general level, it affects the economy by affecting businesses investment decisions.
The Stock Market:
Common stock (or stock): represents a share of ownership in a corporation. It is a security
that is a claim on the earnings and assets of the corporation.
The volatility in the stock market affects people’s willingness to spend. The stock market is
also an important factor in business investment decisions, because the price of shares affects
the amount of funds that can be raised by selling newly issued stock to finance investment
spending.
The Foreign Exchange Market:
Foreign exchange market: the market where one currency is bought and sold using another
currency.
Foreign exchange rate: the price at which the currency is exchanged for another currency.
Structure of the Financial System:
Financial intermediaries: institutions that borrow funds from people who have saved and in
turn make loans to others.
Financial Crises:
,Financial crises: major disruptions in financial markets that are characterized by sharp
declines in asset prices and the failures of many financial and non-financial firms.
During the financial crisis of 2008, the interconnectedness of the international financial
system meant that the financial crisis that began in the US was rapidly passed on to the rest
of the world, resulting in the global financial crisis and the onset of the ‘great recession’.
Banks and other Financial Institutions:
Banks: are financial institutions that accept deposits and make loans. Included under the
term banks are firms such as commercial banks, building societies (UK), mutual savings
banks and credit unions.
Financial Innovation:
e-finance: means of delivering financial services electronically.
Money and Business Cycle:
Money: anything that is generally accepted in payment for goods or services or in the
repayment of debts.
Aggregate output: total production of goods and services.
Unemployment rate: the percentage of the available labor force unemployed.
Business cycles: the upward and downward movement of aggregate output produced in the
economy.
Recessions: periods of declining aggregate output.
Monetary theory: the theory that relates changes in the quantity of money to changes in
aggregate economic activity and the price level.
Money and Inflation:
Inflation: a continual increase in the price level which affects individuals, businesses and the
government.
Monetary policy: the management of money and interest rates.
Central bank: the organization which is responsible for the conduct of a nation’s monetary
policy.
Fiscal Policy and Monetary Policy:
Fiscal policy: involves decisions about government spending and taxation.
Budget deficit: the excess of government expenditures over tax revenues for a particular
time period.
Budget surplus: when tax revenues exceed government expenditures.
,The government must finance any deficit by borrowing, which leads to a higher government
debt burden while a budget surplus leads to a lower government debt burden.
Chapter 2: An overview of the financial system
, Function of the Financial Markets:
Financial markets perform the essential economic function of channeling funds from
households, firms and governments that have saved surplus funds by spending less than
their income to those that have a shortage of funds because they wish to spend more than
their income.
Flow of funds through the financial system
In direct finance, borrowers borrow funds directly from lenders in financial markets by
selling them securities (also called financial instruments), which are claims on the borrower’s
future income or assets. Securities are assets for the person who buys them but liabilities for
the individual or firm that sells (issues) them.
Financial markets make it possible to transfer funds from funds from a person who saves
money to the person who has profitable investment opportunities (businesswise but also for
instance a study, house etc.). Therefore, financial markets are essential to promoting
efficient allocation of capital, which contributes to higher production and efficiency for the
overall economy.
Structure of financial markets.
Debt and Equity markets:
A firm or an individual can obtain funds in a financial market in two ways:
- Issue debt: a contractual agreement by the borrower to pay the holder of the
instrument fixed amounts euros at regular intervals (interest and principal payments)
until a specified date (maturity date).
A debt instrument is short-term if its maturity is less than a year and long-term if its
maturity is longer than one year.
- Issue equity: claims to a share in the net income and the assets of a business. Equities
often make periodic payments (dividends) to their holders and are considered long-
term securities because they have no maturity date.
The Economics of Money, Banking and Financial Markets
European Edition
Frederick S. Mishkin, Kent Matthews & Massimo Guiliodori
Chapter 1: Why study money, banking and financial markets?
The Bond Market and Interest Rates:
Financial markets: markets in which funds are transferred from people who have an excess
of available funds to people who have a shortage. Well-functioning of the financial markets
is a key factor in producing high economic growth.
Security (or financial instrument): is a claim on the issuer’s future income or assets (any
financial claim or piece of property that is subject to ownership.
Bond: a debt security that promises to make payments periodically for a specified period of
time.
Interest rate: the cost of borrowing or the price paid for the rental of funds.
On a personal level interest rates can encourage or discourage consumer spending and
saving. On general level, it affects the economy by affecting businesses investment decisions.
The Stock Market:
Common stock (or stock): represents a share of ownership in a corporation. It is a security
that is a claim on the earnings and assets of the corporation.
The volatility in the stock market affects people’s willingness to spend. The stock market is
also an important factor in business investment decisions, because the price of shares affects
the amount of funds that can be raised by selling newly issued stock to finance investment
spending.
The Foreign Exchange Market:
Foreign exchange market: the market where one currency is bought and sold using another
currency.
Foreign exchange rate: the price at which the currency is exchanged for another currency.
Structure of the Financial System:
Financial intermediaries: institutions that borrow funds from people who have saved and in
turn make loans to others.
Financial Crises:
,Financial crises: major disruptions in financial markets that are characterized by sharp
declines in asset prices and the failures of many financial and non-financial firms.
During the financial crisis of 2008, the interconnectedness of the international financial
system meant that the financial crisis that began in the US was rapidly passed on to the rest
of the world, resulting in the global financial crisis and the onset of the ‘great recession’.
Banks and other Financial Institutions:
Banks: are financial institutions that accept deposits and make loans. Included under the
term banks are firms such as commercial banks, building societies (UK), mutual savings
banks and credit unions.
Financial Innovation:
e-finance: means of delivering financial services electronically.
Money and Business Cycle:
Money: anything that is generally accepted in payment for goods or services or in the
repayment of debts.
Aggregate output: total production of goods and services.
Unemployment rate: the percentage of the available labor force unemployed.
Business cycles: the upward and downward movement of aggregate output produced in the
economy.
Recessions: periods of declining aggregate output.
Monetary theory: the theory that relates changes in the quantity of money to changes in
aggregate economic activity and the price level.
Money and Inflation:
Inflation: a continual increase in the price level which affects individuals, businesses and the
government.
Monetary policy: the management of money and interest rates.
Central bank: the organization which is responsible for the conduct of a nation’s monetary
policy.
Fiscal Policy and Monetary Policy:
Fiscal policy: involves decisions about government spending and taxation.
Budget deficit: the excess of government expenditures over tax revenues for a particular
time period.
Budget surplus: when tax revenues exceed government expenditures.
,The government must finance any deficit by borrowing, which leads to a higher government
debt burden while a budget surplus leads to a lower government debt burden.
Chapter 2: An overview of the financial system
, Function of the Financial Markets:
Financial markets perform the essential economic function of channeling funds from
households, firms and governments that have saved surplus funds by spending less than
their income to those that have a shortage of funds because they wish to spend more than
their income.
Flow of funds through the financial system
In direct finance, borrowers borrow funds directly from lenders in financial markets by
selling them securities (also called financial instruments), which are claims on the borrower’s
future income or assets. Securities are assets for the person who buys them but liabilities for
the individual or firm that sells (issues) them.
Financial markets make it possible to transfer funds from funds from a person who saves
money to the person who has profitable investment opportunities (businesswise but also for
instance a study, house etc.). Therefore, financial markets are essential to promoting
efficient allocation of capital, which contributes to higher production and efficiency for the
overall economy.
Structure of financial markets.
Debt and Equity markets:
A firm or an individual can obtain funds in a financial market in two ways:
- Issue debt: a contractual agreement by the borrower to pay the holder of the
instrument fixed amounts euros at regular intervals (interest and principal payments)
until a specified date (maturity date).
A debt instrument is short-term if its maturity is less than a year and long-term if its
maturity is longer than one year.
- Issue equity: claims to a share in the net income and the assets of a business. Equities
often make periodic payments (dividends) to their holders and are considered long-
term securities because they have no maturity date.
