ALBURO, MARY JEAN S.

BSBA FM
TASK 2 02-16-21

1. Identify the purpose of financial markets and financial institutions.

 A financial market is a market that brings buyers and sellers together to
trade in financial assets such as stocks, bonds, commodities, derivatives,
currencies etc. The primary goal of a financial market is to set global trade
prices, to raise capital and to transfer liquidity and risk. It is a place where
supply meets demand, so they offer a huge level of liquidity. Financial
markets are not so much physical locations as they are mechanisms for
the ultimate investors in real assets to channel savings.

 A Financial institutions are critical organizations that have an important

role to play in the economy. Such institutions include commercial banks,
savings and credit societies as well as investment institutions and together
they help individuals, businesses and other organizations use their
finances properly.
2. Which advantages do financial institutions provide when compared to the financial?
Markets? Financial markets facilitate the movement of funds from those who save
money to those who invest money in capital assets. Term financial institution is a broad
phrase referring to organizations which act as agents, brokers, and intermediaries in
financial transactions. Agents and brokers contract on behalf of others; intermediaries
sell for their own account. Financial institutions facilitate and improve the distribution of
funds, money, and capital in several respects: Payments mechanism.
3. Why is liquidity important in defining the money supply for a country with
sophisticated financial markets?
Liquidity is people can easily convert an asset I nto cash with little transaction costs.
Market liquidity is important, but mainly because it affects how quickly you can open and
close positions. A seller will quickly find a buyer in a liquid market without having to cut
the asset price to make it attractive. Generally, high levels of liquidity offer significant
benefits to our financial system and the economy as a whole through higher financial
asset prices and a more efficient means to channel funds between savers and
borrowers.
4. Define monetary policy.
The macroeconomic policy laid down by the central bank is monetary policy. It includes
money supply and interest rate management and is the demand-side economic policy
that a country's government uses to achieve macroeconomic goals such as inflation,
consumption, growth and liquidity. Monetary policy has two basic objectives: to promote
"maximum" sustainable output and employment and to promote "maximum" sustainable
output and employment. “Stable” prices.
5. Which three variables of the economy can central banks influence?
 Variable 1: Inflation
Inflation impact the economy when prices for energy, food, commodities, and
other goods and services rise. Rising prices, referred to as inflation, have an
effect on the cost of living, the cost of doing business, borrowing money,
mortgages, yields on corporate and government bonds, and every other aspect
of the economy. Although the value of money is strengthened by inflation, a low
rate of inflation is not necessarily a problem because it could indicate growth in
the economy.

 Variable 2: business cycle

It implies strong economic growth for the economy, and economists measure the
size of the economy by the Gross Domestic Product.GDP is the final value,
normally a year, of the goods and services produced within the country's
geographical boundaries over a specified period of time. An important indicator of
a country's economic performance is the GDP growth rate.

 Variable 3: Interest rates

It reflect the cost of borrowing money. Interest is the cost of lending money that is
typically expressed as a percentage of the loan annually. The rate your bank or
building society will pay you for borrowing your money is efficient for savers. The
money you earn from your savings is known as interest. And usually people
borrow a money to buy a car, house or etc. and they have interest to pay the
money that they borrow.
6. Please define the following terms: inflation, gross domestic product, and interest
rates.
 Inflation is the decrease in a given currency's buying power over time. The rise in
the general level of prices, often expressed as a percentage, means that the
currency unit is effectively buying less than the gradual, steady rise in the prices
of goods and services in the previous period.

 Gross domestic product is the final value of the goods and services produced
within the geographic boundaries of a country during a specified period of time,
normally a year. GDP growth rate is an important indicator of the economic
performance of a country. Gross Domestic Product, is defined as the total market
value of all final goods and services produced within a country in a given period.
  An interest rate is defined as the proportion of an amount loaned which a lender
charges as interest to the borrower, normally expressed as an annual
percentage. It is the rate a bank or other lender charges to borrow its money, or
the rate a bank pays its savers for keeping money in an account.
7. Identify the difference between real and nominal.
 Nominal GDP is a macroeconomic assessment of the value of goods and
services using current prices in its measure. Nominal GDP is also referred to as
the current dollar GDP. Real GDP takes into consideration adjustments for
changes in inflation. This means that if inflation is positive, real GDP will be lower
than nominal, and vice versa. Without a real GDP adjustment, positive inflation
greatly inflates GDP in nominal terms.
 If inflation is experienced by the economy, or companies produce more goods and
services over a year, then nominal GDP increases. When real GDP increases, it
means that companies have produced more goods and services in society, while
inflation does not affect real GDP.
8. Which problems does a barter economy suffer from?
 Double Coincidence of Wants:
Owning to lack of generally acceptable medium of exchange, a difficult problem of
double coincidence of wants was faced by the persons who wanted to sell and buy
goods. For exchange of goods persons desiring to exchange goods must specifically
want those goods what others offers in exchange. Thus, an individual who wants to
have a good he must locate another person who offers to give up the good wanted by
him and who is willing to accept in exchange the good offered by him.
 Lack of a Standard Unit of Account:
A barter economy lacked not only a common medium of exchange but also a standard
unit of account in which prices could be measured and quoted. In the absence of a
common unit of account, the number of exchange ratios (that is, prices of goods ex -
pressed in terms of each other) between goods would be very large. For example, two
cows for one horse, one cow for two quintals of wheat, one pen for three pencils and so
on. Thus, lack of a standard unit of account with which to measure values of different
goods and services made exchange or trade difficult.
 Lack of Information:
Another problem found in the barter system was that in it traders required a good deal
of information for exchange of goods. For example, if Amit wants to have a saw in
exchange of a wooden table which he has made.
 Business people would have trouble writing contracts for future payments of
Goods and services under a barter
9. How do the functions of money overcome the problems associated with barter?
Money overcomes the shortcomings of barter system in the following
manner: Money solves the problem of double coincidence of wants. For example, if a
person needs wheat in exchange of tea, then he/she must search for a person who is
ready to trade wheat for tea. Money made the need for such searches redundant.
10. What is seignior age?
Seignior age is the difference in face value of money, such as a $0.25 quarter coin, and
the cost to produce it. Seignior age may be counted as positive revenue for a
government when the money it creates is worth more than it costs to produce. Profit
made by a government by issuing currency, especially the difference between the face
value of coins and their production costs.
11. Differentiate between the different payments systems.
 A commodity is a basic good that is interchangeable with other goods of the
same type used in trade. Commodities are being used most often in the
production of other goods or services as inputs. Commodities must also comply
with specified minimum standards, also known as the base grade, when traded
on an exchange.
 A valid currency by virtue of a government declaration alone, fiat money is not
supported by any commodity, such as gold, but by the bearer's faith alone. In this
regard, fiat money does not have any intrinsic value, unlike currencies backed by
gold or silver example is paper money and much coinage. An example of fiat
money is the U.S. dollar.

 A check is a written, dated, and signed instrument that directs a bank to pay a
specific sum of money to the bearer. Once a check is accepted by sellers, they
present the check for payment to a bank. Checks, therefore, have three
advantages. First, cash is not carried by people and businesses. Second,
evidence of a business transaction is provided by the check. Finally, in large
transactions, such as buying a house and cars, checks are convenient.

 Electronic Funds one of example of this is debit cards that we can use to pay it
in grocery or to purchase a good or services. A debit card lets you spend money
from your checking account without writing a check. When you pay with a debit
card, the money comes out of your checking account immediately. There is no
bill to pay later.
12. Differentiate between the transaction approach and liquidity approach of defining the
Money supply.
 Transaction approach only those commodities will be included in money which
are just "Medium of Exchange". Thus all those goods which facilitate the sale or
 purchase of goods, or which facilitate the transaction of goods and services can
be given the name of money. Hence, in the light of such approach to be money a
commodity must have the quality of medium of exchange. As a result, the coins
and currency notes which are issued by central bank and govt. and cheques of
demand deposits which are issued by commercial banks will be called money.
They are considered as money because they can be used to purchase goods
and services.

 Liquidity approach money is not just a medium of exchange, it is something more

than that. Normally all those goods which are medium of exchange also possess
the quality of store of value. As the currency notes and demand deposits are not
only medium of exchange, but they also serve as store of value. However, there
are certain goods which have the quality of store of value, but they cannot be
used as a medium of exchange, as the case of saving and time deposits of
commercial banks. The like deposits cannot be withdrawn from banks readily and
they cannot be used for transactions. Therefore, these deposits represent just
store of value.
13. Identify the differences between M1, M2, M3, and L.
M1, M2 and M3 are measurements of the United States money supply, known as the
money aggregates. M1 includes money in circulation plus checkable deposits in banks.
M2 includes M1 plus savings deposits (less than $100,000) and money market mutual
funds. M3 includes M2 plus large time deposits in banks.L: The broadest measure of
liquidity that define L for liquidity as the broadest measure of the money supply and
include all liquid assets. The Federal Reserve no longer tracks. L is very close to M4 +
Bankers' Acceptance.
14. Judge whether credit cards should be a form of money.
Credit card is not a form of money. The reason is that money is what we pay for goods
and services whereas credit card is a store of wealth lent by the bank.. In fact you are
taking a loan from the bank which has issued you the credit card.