The United States has imposed has created banking regulations to prevent unnecessary damage to confidence and liquidity in the financial system. The regulations are meant to prevent things like bank runs, credit crunches, and financial crises.
The McFadden Act (1927 – 1994) was appealed by the Riegle-Neal Interstate Banking and Branching Efficiency Act. The Act made national banks competitive against state-chartered banks by letting national banks add more branches to the extent permitted by state law.
Risk is the uncertainty of an asset’s return over a given period of time. Risk perception is the individual judgment people make about the severity of a risk and may vary from person to person.
In financial markets, people trade financial securities, commodities, and instruments at prices that reflect supply and demand. There are two types of Financial Markets – the primary market and the secondary market. All well-developed markets have standardized financial instruments.
The exchange rate of a currency is the price a currency expressed in terms of another currency. For example, $1 is worth €0.82 (07/15/12). The foreign exchange market is a market where people exchange currencies for other currencies.
The Efficient Market Hypothesis (EMH) is an application of ‘Rational Expectations Theory’ where people who enter the market, use all available & relevant information to make decisions. The only caveat is that information is costly and difficult to get.
A bond is a type of financial instrument. Bonds are debt that firms and governments can issue to raise money and they earn interest.
A Yield Curve is a graph of the yields (interest rates) of bonds with different maturities. Short terms bonds generally have a lower yield because they are most liquid.
The intrinsic value approach or the fundamental analysis of stocks prices is equal to the dividend over the interest rate. This approach is based on predictions of future cash flows and profitability.
The interest rate risk structure for interest rates is called the Risk Premium or Risk Spread. It is the extra interest that a risky asset must pay relative to a risk-less asset since investors demand compensation for taking on higher risk.
The goal of Financial Institutions is to provide access to financial markets, a.k.a. financial intermediaries (they serve as middlemen) and indirect finance. Most financial institutions are regulated by the government.
Bimetallism is a monetary standard in which the value of the monetary unit is equivalent to a certain quantity of gold and to a certain quantity of silver. Such a system establishes a fixed rate of exchange between the two metals.
Intrinsic Value Theory (also known as the Theory of Objective Value) is any theory of value in economics which holds that the value of an object, good or service, is intrinsic or contained in the item itself.
The Lipstick Effect is the theory that when facing an economic crisis or the economy is in a recession, consumers will be more willing to buy less costly luxury goods. For example, instead of buying expensive fur coats, women will instead purchase expensive lipstick or luxury cologne.
Global labor arbitrage is where, as a result of the removal or reduction of barriers to international trade, jobs move to nations where labor and the cost of doing business (such as environmental regulations) are inexpensive.
The concept of Asymmetric Information centers around a situation in which there is unequal knowledge between each party to a transaction, that one party has better information than the other party. This type of asymmetry creates an imbalance in a transaction.
The Theory of Storage describes features observed in commodity markets. Here are some basic terminology that needs to be understood to understand the Theory of Storage.
The Money Supply (MS) is the total cash in circulation and bank account deposits. Changes in the supply of money affect the rate of inflation, the exchange rate, and the business cycle.
Monetary Policy involves the country’s central bank controlling the interest rate and money supply. Monetary policy affects Aggregate Demand (AD), and an expansionary monetary policy increases AD, while a contractionary monetary policy decreases AD.
Market Failures occur when there is a misallocation of resources, which results in distortions in the market. This distortion creates an inefficiency in the market.
Financial Instruments are tradeable assets (claim) for people who hold them and liabilities (obligation) for the issuer. Securities such as bonds, stocks, bank loans are examples of financial instruments.
Banks involved in commercial lending provide a wide range of financing packages for international trade, commonly called trade finance. Trade finance not only assists the buyer in financing its purchase but also provides immediate cash to the seller for the sale.
The Natural Rate of Unemployment (NRU) is the rate of unemployment after the labor market is in equilibrium, when real wages have found their free-market level and when the aggregate supply of labor balanced with the aggregate demand for labor.
Game theory is the study of rational behavior in situations involving interdependence. Game Theory is a formal way to analyze the interaction among a group of rational individuals who behave strategically.
Barriers to Entry are designed to prevent potential competitors from entering the market. Some barriers to entry are placed by the government, while others could be related to cost. These barriers result in different market structures such as monopolies or oligopolies (a few firms).
The Securities and Exchange Commission (SEC) in the United States financial system is a regulatory body that monitors the financial system, exchange, and securities market. Securities are types of financial instruments created in financial markets.
The Pigou effect is an economics term that refers to the stimulation of output and employment. Increasing consumption causes this because of a rise in real balances of wealth, particularly during deflation.
When borrowers borrow funds directly from the financial market without using a third-party service, such as a financial intermediary, it is called direct finance.
Money is anything that is generally accepted as payment. Ex: cash or checking account. A double coincidence of wants is necessary to facilitate the trade of goods and services.
Trade around the world is becoming increasingly barrier-free, but there are still many people who think that free trade is bad for the economy.
There are three different Theories of Efficiency that we are going to focus on. The first Theory of Efficiency is Pareto efficiency or Pareto optimality. The second is the Kaldor–Hicks improvement, and lastly the Zero-profit condition or Zero Profit Theorem.
A firm or individual’s decision for allocating its wealth amongst assets is known as the Theory of Asset Demand or Portfolio-Choice Theory.
The Aggregate Demand and Aggregate Supply Equilibrium provides information on price levels, real GDP, and changes to unemployment, inflation, and growth as a result of new economic policy.
The Phillips Curve showed that there was a trade-off between the inflation rate and the unemployment rate. Alban Phillips based the original work on data from the UK from 1861-1957.
Durable goods are those goods that don’t wear out quickly and last over a long period. While non-durable goods or soft goods are those goods that have a short life cycle.
The Harrod Domar model shows the importance of saving and investing in a developing economy. The model was developed independently by Roy F. Harrod and Evsey Domarin 1939.