Introduction and Overview of the Financial System

INTRODUCTION AND OVERVIEW OF THE FINANCIAL SYSTEM

Why study financial markets, instruments, and institutions? Financial markets are important in channeling funds from people who do not have a productive use for them to those who do, resulting in greater efficiency.Activities in financial markets have direct effects on individuals' wealth, the behavior of businesses, and the efficiency of our economy. Financial instruments (also called securities), such as bonds and stocks, are claims on the issuer's future income or assets (any financial claim or piece of property that is subject to ownership). They are important to economic activity because they enable individuals, corporations and governments to borrow to finance their activities.Financial institutions are what make financial markets work. Without them, financial markets would not be able to move funds from people who save to people who have productive investment opportunities. They thus also have important effects on the performance of the aggregate economy as a whole. The most important financial institution in the financial system is the central bank, the government agency responsible for the conduct of monetary policy, which in the Unites States is the Federal Reserve System (the Fed).

Roles and Functions of the Financial System Financial system refers to the collections of markets, institutions, laws, regulations, and techniques through which bonds, stocks, and other securities are traded, interest rates determined, finanical services are produced and delivered around the world. Its role is to determine both the cost of credit and how much credit will be available ro pay for the thousands of goods purchased daily. When credit becomes costly=spending falls, unemployment rises, economies growth slows down.

What is a financial system? System that allows the exchange of funds between lenders, investors, borrowers.

The Global economy and the financial system: Flows within the global economic system the flow of payments within the global economic system as a circular flow between producing units and consuming units.

The roles of markets in the global economic system to carry out the complex task of allocating scarce resources and producing goods and services. A market is an institution set up by society to allocate these resources, they are the channel through which buyers and sellers meet to exchange. It determines what goods and services will be produced and in what quantities.

The financial markets and the financial system: Channel for savings and investments Businesses save billions to build up their reserves for future contingencies and long term investment. Financial markets channel savings to those individuals and institutions needing more funds for spending than are provided by their current incomes. 4 types of savings: Personal,+ Business, +Government,+ Foreign=Total saving. The savings are set aside to support investment in 1 of 3 ways Investment in plant and equipment, Investment in inventories, Investment in housing. Investment is the key to growth. Those who supply funds to the market receive only promises in return for the loan of their money such as bonds, stocks however they expect a return of their money as well as extra income as a reward for their risk.

Functions performed by the global financial system and the financial markets-Seven functions (1)Saving function-it is a conduits for the public’s savings, low risk, profitable outlet into investment so that more can be produced therefore increasing the world standard of living. (2)Wealth function-a means to store, accumulated assets (stocks, bonds) until needed for future consumption. Built up over time by a combination of savings plus income earned on previously accumulated wealth. (3) Liquidity function- raising funds by converting financial assets into cash balance financial markets provide liquidity for savers who hold financial instruments but are in need of moneys. (4) Credit Function-providing a supply of credit to support both consumption and investment spending in the global economy. (5) Payment Function-checking accounts, credit cards, electronic means or payments