Chapter 1

Introducing
Money, Banking,
and Financial
Markets
Introduction of Concepts

• Financial Markets/Institutions
– Bringing together of buyers and sellers of financial
securities to establish prices
– The formal setting/mechanism that brings buyers
and sellers together to value financial assets
– Provides a mechanism for those with excess
funds (savers) to lend to those who need funds
[borrowers]
– Includes banks, savings and loans, credit unions,
investment banks and brokers, mutual funds,
stock and bond markets

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Introduction of Concepts (Cont.)

• Money
– “Lubricant that greases the wheels of
economic activity”
– Not just limited to currency (bills and coins)
—also includes demand deposits
(checking accounts) issued by banks
– Plays a key role in influencing the behavior
of the economy as a whole and the
performance of financial institutions and
markets

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Introduction of Concepts (Cont.)

• Money (Cont.)
– More broadly the monetary economy
• Facilitates transactions within the economy
• Principal mechanism through which central
banks attempt to influence aggregate economic
activity
– Economic Growth
– Employment
– Inflation

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Introduction of Concepts (Cont.)

• Banking
– Banks and other financial intermediaries take
funds from one group (savers) and re-deploy
these funds by investing or lending (borrowers)
– Banks provide a place where individuals and
businesses can invest their funds to earn interest
with a minimum of risk
– Well-equipped to invest in the most challenging
types of financial investments—loans to
individuals and small businesses

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Introduction of Concepts (Cont.)

• Banking (Cont.)
– Banks serve as the principal caretaker of the
economy’s money supply, and along with other
financial intermediaries, provide important source
of funds
– Banks are intimately involved in how the central
bank of the United States (Federal Reserve)
[Fed] influences overall economic activity
– Monetary policy—the Fed directly influences the
lending and deposit creation activities of banks

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