Purpose of financial markets and financial institutions is to connect the savers to the
borrowers. Wealthy countries have developed financial markets. If the savers hide their
money under the mattress, then they remove this money from the economy. Then banks
cannot inject the savings into an economy by lending to households and businesses.
Financial institutions accumulate and analyze information about borrowers and their ability
to repay loans, which lower the lending risk to a variety of borrowers, and increases
liquidity. Savers can easily convert their deposits into cash.
Many assets are technically not money, but the public can easily convert them into money.
Thus, some assets are good as money.
A central bank uses the money supply to affect its economy. Goal is to keep an economy
growing at a sustainable rate with a low unemployment rate and low inflation rate.
Three variables are inflation, GDP, and interest rates.
Inflation is continual increases in the average prices; GDP measures the total amount of
production of all goods and services within the economy. Finally, interest rates reflect the
borrower’s cost, but a benefit to the saver.
Real means economists removed the impact of inflation from the variable while nominal
means inflation still influences a variable.
Barter is inefficient because it does not allow people to specialize in the production of goods
and services. Furthermore, it requires a large number of exchange ratios. People would have
considerable search costs to find each other, and people could not store perishable products.
Money becomes a medium of exchange, store of value, unit of account, and standard of
deferred payment. Each function of money overcomes a problem with barter and allows
people to specialize in the production of goods and services.
Seigniorage allows governments to create value out of thin air by minting coins. Seigniorage
occurs when the face value of a coin exceeds the cost of minting the coin.
Debit cards are electronic. They allow customers access to their deposits from anywhere
within the United States and developed countries around the world. Checks allow people to
exchange money through exchanging deposits at a bank. Checks are useful for large
