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AN INTRODUCTION TO MONEY AND THE
FINANCIAL SYSTEM
CHAPTER 1
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THE FIVE PARTS OF THE FINANCIAL SYSTEM
MoneyFinancial InstrumentsFinancial MarketsFinancial InstitutionsCentral Bank
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Financial System The financial system is the system that allows
the transfer of money between savers (and investors) and borrowers
A financial system can operate on a global, regional or firm specific level
Financial systems are crucial to the allocation of resources in a modern economy
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What is Money ?Brainstorm concepts that come to
your minds when you think of “Money”
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Money Any object or record that is generally
accepted as payment for goods and services and repayment of debts in a given country or socio-economic context
Money originated as commodity money, but nearly all contemporary money systems are based on fiat money
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Financial InstrumentsTransfer resources from savers to
investors Transfer risk to those who are best
equipped to do it
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Financial MarketsWhere buyers and sellers come
together to buy and sell financial instruments quickly and cheaply
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Financial InstitutionsProvide a myriad of services,
including access to the financial markets and collection of information about prospective borrowers to ensure they are creditworthy
Banks, securities firms and insurance companies
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Canada’s Big Five Royal Bank of Canada (RBC) Toronto-Dominion Bank (TD) Bank of Nova Scotia (BNS) Bank of Montreal (BMO) Canadian Imperial Bank of Commerce
(CIBC)
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Central BankMonitor and stabilize the economy
Low and stable inflation rate Low unemployment rate Healthy economic
The Bank of CanadaThe Federal Reserve System (Fed)The Bank of Vietnam
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The Five Core Principles Of Money And Banking
Core Principle 1: Time has value Time affects the value of financial transactions How much you willing to pay today to achieve
a certain amount of money in the future How long you want to invest your money
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Core principle 2: Risk required compensation
Always assume there is risk involve in using and borrowing money
Therefore, risk requires compensation. Compensation is made in the form explicit payments
The higher the risk, the bigger the required payment
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Core principle 3: Information is the basis for decisions
Collection and processing of information Information is a key role to any financial
decision
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Core principle 4: Markets set prices and allocate resources
Financial markets are essential to the economy, channeling its resources and minimizing the cost of gathering information and making transaction
Why a better developed financial market will grow the country faster ?
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Core principle 5: Stability improves welfare
Reducing volatility reduces risk Fed and the European Central Bank
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Inflation Increase in the general level of prices Reduces purchasing power Inflation and deflation
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