The first half of the chapter is an overview of how institutions such as banks, bond markets, and stock markets actually allocate saving to productive uses. The second half of the chapter focuses on the role of money in modern economies. | Money, Prices, and the Financial System Chapter 20 McGraw-Hill/Irwin Copyright © 2015 by McGraw-Hill Education (Asia). All rights reserved. Learning Objectives Describe the role of financial intermediaries such as commercial banks in the financial system Differentiate between bonds and stocks and show why their prices are inversely related to interest rates Explain how the financial system improves the allocation of saving to productive uses Discuss the three functions of money and how the money supply is measured Analyze how the lending behavior of commercial banks affects the money supply Explain how a central bank controls the money supply and how control of the money supply is related to inflation in the long run Money in Economics The term "money" in economics has a specific meaning different from every day use To an economist: Your paycheck is income The income you don't spend is saving The increase in the value of your stock is a capital gain When your house appreciates, your . | Money, Prices, and the Financial System Chapter 20 McGraw-Hill/Irwin Copyright © 2015 by McGraw-Hill Education (Asia). All rights reserved. Learning Objectives Describe the role of financial intermediaries such as commercial banks in the financial system Differentiate between bonds and stocks and show why their prices are inversely related to interest rates Explain how the financial system improves the allocation of saving to productive uses Discuss the three functions of money and how the money supply is measured Analyze how the lending behavior of commercial banks affects the money supply Explain how a central bank controls the money supply and how control of the money supply is related to inflation in the long run Money in Economics The term "money" in economics has a specific meaning different from every day use To an economist: Your paycheck is income The income you don't spend is saving The increase in the value of your stock is a capital gain When your house appreciates, your wealth increases The Allocation of Saving A successful economy allocates its saving to the most productive investments The interest on deposits is one important reason people put their saving in banks The financial system improves the allocation of saving: Provides information to savers about the possible uses of their funds Help savers share the risks of individual investment projects Risk sharing makes funding possible for projects that are risky but potentially very productive Banking System Financial intermediaries are firms that extend credit to borrowers using funds raised from savers Thousands of commercial banks accept deposits from individuals and businesses and make loans Banks and other intermediaries specialize in evaluating the quality of borrowers Principle of Comparative Advantage Banks have a lower cost of evaluating opportunities than an individual would Banks pool the saving of many individuals to make large loans Banking System Banks gather information about potential
