Summary: The economics of money, banking & financial markets, European edition
Frederic S. Mishkin, Kent Matthews, Massimo Giuliodori
Chapter 1, 2, 3, 4, 5, 6, 7, 8, 10, 13, 14, 15, 16, 17, 18, 19 and 24
Radboud University, economie & bedrijfseconomie 2018/2019, written by Kelly
Part 1 Introduction
Chapter 1 Why study money, banking and financial markets?
Financial markets are markets in which funds are transferred from people who have an excess of
available funds to people who have a shortage. Well-functioning financial markets are a key factor in
producing high economic growth.
The bond market and interest rates
A security (also called a 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). A bond is a debt security that
promises to make payments periodically for a specified period of time. An interest rate is the cost of
borrowing or the price paid for the rental of funds. The interest rate on 10-year bonds follows the
same pattern as long-term government bonds that have no maturity date. These types of bonds are
referred to as consols.
The stock market
A common stock (typically just called a 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 stock market, in which
claims on the earnings of corporations (shares of stock) are traded, is the most widely followed
financial market. Stock prices are extremely volatile. The considerable fluctuations in stock prices
affect the size of people’s wealth and as a result may affect their 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 firms by selling newly issued stock to finance
investment spending.
The foreign exchange market
When funds are transferred from one country to another, they have to be converted from the
currency of the country of origin into the currency of the country they are going to. This conversion
takes place in the foreign exchange market. This is the market where one currency is bought and
sold using another currency. The price at which one currency is exchanged for another is known as
the foreign exchange rate. The indirect quote is a way of expressing the exchange rate (foreign
currency per unit of domestic). The advantage of using this way is that a rise presents an appreciation
and a fall is depreciation.
Why study financial institutions and banking?
Structure of the financial system
Persons would lend to companies indirectly through financial intermediaries, institutions that
borrow funds from people who have saved and in turn make loans to others.
Financial crises
At times, the financial system seizes up and produced 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. The interconnectedness of the international financial system meant that the
financial crisis that began in the United States was rapidly passed on to the rest of the world,
resulting in the global financial crisis and the onset of the ‘great recession’.
